Morningstar Magazine - December 2017/January 2018 - 64

Investors

Domini Impact International
Equity Fund DOMIX
Category

Foreign Large Value

Expense Ratio

1.46%

Morningstar Rating

QQQQQ

5-Yr Annlzd Return

11.00%

5-Yr % Rank in Cat

Steve Lydenberg, and a year later launched
an index fund to track the benchmark. (That index
fund was the passive precursor of the
actively managed Domini Impact Equity Fund
DSEFX, also subadvised by Wellington,
as is the third fund in the series, Domini Impact
Bond Fund DSBFX.) Today, the firm manages
$2 billion out of a loft in Manhattan's Soho
neighborhood, but will soon relocate to a larger
space in the financial district.

in business," which includes employees and
shareholders, as well as suppliers.
Some 200 businesses are deemed fundamentally
misaligned with Domini's standards and are
thus ineligible for investment from the get-go. That
includes alcohol and tobacco companies,
nuclear power, weapons, coal miners, and fossil
fuel owners and producers. That's just the starting
point, though.

Source: Morningstar. Data as of 10/31/2017.

and the investment analysis under the same roof.
This fund is guided by a partnership that
marries two sets of expertise. Domini handles
the sustainable investing side of the ledger,
screening for companies that have a positive social
and environmental impact. Wellington's
quantitative investment group whittles that
list down to a portfolio of roughly 160
stocks that its models suggest will outperform
the market.
Domini's method makes sense to Jon Hale, director
of sustainability research at Morningstar.
"It's a much better choice than hiring their own
manager in-house and allows Domini to
focus on the things it is truly expert in, which
is ESG evaluation of companies and fixedincome issuers, corporate engagement, and impact
assessment," Hale says.

Advisor Kathy Leonard of the Leonard-McDevitt
Sustainable Investment Group, associated
with UBS, has specialized in ESG investing since
1983. She says that Domini Impact International Equity gives her clients "an impact bang for
their buck" because the firm not only does
social screening, but is an active advocate
in regular dialogue with companies: "When you
get a publicly traded company to make changes,
that has a huge footprint."
Leonard notes that the fund is also easy to work
into an asset allocation plan, as it doesn't
hold U.S. stocks, and its diversified portfolio is
suitable for a wide variety of clients. "Some other
ESG funds have themes such as 'energy' or
'water' that we or a client might want exposure
to. But from an investment perspective, this
fund is a nice base, and we can add to it tactically,
whether with themes or with emergingmarkets exposure."
Finding ESG Leaders

At the Forefront

That's how Carole Laible, Domini's chief executive
officer, sees it: "It's coupling together very
robust ESG analysis with strong financial analysis."
Laible, who played a key role in the launch
of the International Equity fund, joined Domini
Impact Investments at its inception in 1997.
Laible had established a career in the traditional
mutual fund industry when she realized
she wanted to work for more than money, wanted
to connect investing with a higher purpose.
That led her to Domini. Firm founder Amy
Domini had been at the forefront of ESG investing
since 1984, when she wrote the book Ethical
Investing. In 1989, she created the Domini 400
Social Index, along with Peter Kinder and

Morningstar December/January 2018

The firm's 11 research professionals research
ESG issues, set the firm's impact standards, and
decide which stocks are eligible or ineligible
for the list of potential investments that gets sent
monthly to Wellington. For the international
fund, Domini begins with an investment universe
of roughly 1,500 large and midsized stocks,
primarily in Europe and the Asia-Pacific region.
The firm's impact investment standards can
be broken down into two main focuses. There's
ecological sustainability, with a particular
emphasis on climate change mitigation and
adaptation. Then there's what they call "universal
human dignity," which encompasses justice
and fairness in dealing not only with the
world at large, but also what they call "partners

"We're not just looking to avoid negative companies, but in fact, we're using these standards
to find positive companies," says Laible. Company
analysis starts with assessing how closely a
company's core business aligns with Domini's two
goals. At one level, adding an ESG layer into
an investment process isn't much different than
a fund manager using more common
subjective criteria, such as quality of a management team. But with many specific variables
at work across different industries, and many
investors unfamiliar with ESG investing, Laible says
the question they most often get is, "How are
you doing this?"
Sometimes the process may appear obvious,
as with a recent investment in German
solar equipment manufacturer, SMA Solar
Technology SMTGF. But with concerns about
climate change at the forefront of Domini's goals,
some investors might be surprised to see
Nissan Motor NSANY in the fund. (It was the
fourth largest position at the end of August.)
"There is a balance between societal needs and
sustainability," Laible says. In most places around
the world, people need cars to be able to
work or shop. From there it becomes a matter
of the automaker's environmental impact.
Tessie Petion, a lead research analyst at the
firm, notes that Nissan makes the cut for
the eligible stocks list in large part because of the
fuel efficiency of its fleet. So did BMW BME:DE,
she says, which is now on the eligible stocks
list and was in the portfolio as of the end of
August. Like many luxury car manufacturers, the
company traditionally wasn't focused on fuel
efficiency but in recent years has made it a focus.
"It was only at that point that they were eligible."

Table of Contents for the Digital Edition of Morningstar Magazine - December 2017/January 2018