For investors looking at socially responsible investing, the one question that never seems to go away is: Do you have to sacrifice performance to invest in SRI mutual funds?

In seeking to answer this question within a specific fund category, another issue emerges. That is, to what extent is performance likely to vary among competing SRI offerings?

In the Canadian Equity category, for instance, there are currently 10 distinct SRI fund mandates available to small investors. These funds employ SRI screens that are either positive or negative in terms of evaluating the suitability of potential holdings. To varying degrees, the managers of the funds factor in environmental, social and governance (ESG) criteria in making their picks. They may also actively pursue shareholder-engagement activities directed at the management of the companies that they hold.

Within the Canadian Equity category, this group of funds includes a pair offered by Ethical Funds: Ethical Canadian Index and Ethical Canadian Stock. Three funds -- iShares CDN Jantzi Social Index, Meritas Jantzi Social Index and RBC Jantzi Canadian Equity -- each employ SRI screening by Toronto-based Jantzi Research Inc., though they have structural and other differences.

There are five other SRI funds (not counting multiple versions) in the same category, sponsored by as many different firms. These funds are:

• Acuity Social Values Canadian Equity
• Desjardins Environment
• Inhance Canadian Equity
• PH&N Community Values Canadian Equity
• Vancity Circadian Canadian Equity

When holdings and sector exposures are broadly similar, it is less likely that there will be dramatic differences in performance. Based on the latest holdings data collected by Morningstar, there are strong similarities between most SRI-mandated funds in the Canadian Equity category.

With a couple of exceptions, the holdings of SRI funds tend to be dominated by the same large-cap Canadian stocks that non-SRI funds also hold. For instance, EnCana Corp. (ECA/TSX) is among the top holdings in all 10 SRI funds we looked at, while Royal Bank of Canada (RY/TSX), Toronto-Dominion Bank (TD/TSX), Potash Corp. of Saskatchewan Inc. (POT/TSX) and Research in Motion Ltd. (RIM/TSX) were in the top holdings of nine of the 10 funds.

Also, most funds have similar sector weightings as the S&P/TSX Composite Index, tilted heavily toward financial services and energy. As of March 31, when the index held 28% in financial services, 26% in energy and 22% in industrial goods, only two of the 10 SRI mandates had substantially different weightings.

Nonetheless, significant differences in performance may emerge between competing SRI funds. Over the three years ended March 31, for example, the performance rankings of the 10 distinct Canadian funds ranged from top quartile for RBC Jantzi Canadian Equity to fourth quartile for the Acuity, Inhance and Vancity offerings, with the rest of the pack either outperforming or underperforming the category median by narrower margins. The top-performing Desjardins fund returned a compound annual 5.1%, while the Acuity fund lagged all others with an annualized 4% loss.

Differences in performance over various short-term or multi-year horizons may be attributable to one or more of the following factors:

Industry sector weightings

Acuity Social Values was one of two funds whose recent holdings stood out from the pack. Its 20% weighting in energy was six percentage points lower than the S&P/TSX index, and its 12% in financial services was less than half of the benchmark weighting.

The greater the deviations from the market's sector weightings, the greater the likelihood that a fund's performance will be significantly different from the market benchmark and its peer group. The growth-style Acuity fund was a fourth-quartile performer in the past two calendar years, but finished in the top quartile from 2001 to 2003.

The other recent non-conformist in terms of sector weightings was Ethical Canadian Stock, holding 25% in industrial goods, 21% in financial services and 19% in energy. Compared to its peers, this fund also had a higher-than-average exposure to income trusts and cash.

Divestment versus engagement

Some SRI-screened funds will divest or refuse to invest if a company fails to meet their screening criteria. Others, by contrast, prefer to pursue a shareholder-engagement strategy.

Ethical Funds, for one, believes that you can't change a company you don't own. Subsequently, with the exception of a few specific exclusions -- weapons manufacturing, nuclear power and tobacco -- the Vancouver-based firm prefers instead to work with companies in an effort to improve their ESG records, while remaining invested.

Recently, Ethical Canadian Stock's top holdings have included Goldcorp Inc. (G/TSX) and Barrick Gold Corp. (ABX/TSX). These two gold mining companies have drawn criticism from the SRI community for their environmental records and treatment of indigenous peoples.

At last report, these two stocks appeared in the top 10 of only one other SRI equity fund, Ethical Canadian Index. Accordingly, the returns of both of the Ethical funds will tend to be more affected by the gold mining sector than those of their peers.

Unconventional stock picks

Acuity Social Values Canadian Equity also stands out from the rest. Although the fund invests mostly in Canadian companies, its top holding is Centamin Egypt Ltd. (CEE/TSX), an Australian-based gold miner working mostly in Egypt.

The Acuity fund is the only Canadian equity SRI fund invested in Centamin, which has been on the rise of late on speculation that the company will be producing gold later this year, contributing to the fund's year-to-date return of 3.7%, which made it the top performer during that period among its SRI peers.

Fees and expenses:

Currently, the average management-expense ratio for the 10 SRI mandates in the Canadian Equity category is right in line with the median MER of 2.32%.

The high-cost provider is the Acuity fund, whose MER is a steep 2.95%, while the cheapest is the 0.50% charged by iShares CDN Jantzi Social Index, an exchange-traded fund that is listed on the Toronto Stock Exchange.

Active versus more passive approaches may play a role in MERs. For instance, though it has an MER that is more than 1.5 percentage points higher than that of the iShares ETF, the RBC fund is actively managed by RBC Asset Management Inc. and uses the Jantzi index as a negative screen.

Of course, there are reasons for investing in SRI that go beyond returns. "A lot of SRI clients simply want a better world," says Sucheta Rajagopal, a financial advisor with Hampton Securities Ltd. in Toronto who specializes in SRI.

She believes that as disclosure increases and more information becomes available on ESG issues, SRI funds will outperform because equity investors will be willing to pay a premium for companies that score high on social responsibility.

But in the absence of any discernible performance advantage for SRI at present, Rajagopal cites victories such as the recent "say on pay" campaign, which has convinced a number of companies, including all of Canada's big banks, to agree to resolutions that will allow shareholder advisory votes on executive compensation. "It's currently a non-financial bonus for investing in SRI as opposed to investing in other kinds of funds, but that's very meaningful and I think people make all sorts of decisions (to invest) for reasons other than purely financial ones," Rajagopal says.

Note: This article orginally appeared on 23 April at Morningstar.ca

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