THE DEVIL IS IN

the details when it comes to socially conscious investing.

There's been a boom in the number of mutual funds calling themselves socially conscious over the last few years. As of Jan. 31, there were at least 88 such funds with assets of over $1 million, according to Thomson Financial. More than half were established within the last 10 years. And why not? As issues like global warming, fair labor practices and human rights violations have seeped into the nation's collective consciousness, the demand for morally sound investment opportunities has climbed.

Of course, moral duty is in the eye of the investor. A common criticism of these funds is that no single one is socially responsible across the board. Choosing a socially responsible fund is a bit like playing a game of Whack-A-Mole: For every sin you knock out, another one seems to pop up in your face. A fund that makes the environment its top priority might be less strict about screening for good corporate governance. It's enough to drive an investor to drink.

"Everybody's going to have certain issues that are more important to them than others," says David Kathman, a mutual fund analyst at Morningstar. "Probably not many funds are going to fit your views perfectly. It's just a matter of finding one that comes pretty close."

The Calvert Social Index Fund, for instance, listed two drug makers Pfizer and Johnson & Johnson among its five-biggest holdings as of the end of the third quarter last year, according to data from Lipper. Both companies are known for ethical practices, particularly their good treatment of employees. But critics could argue that, at a time when drug costs are cited as one of the biggest barriers to affordable health care in the U.S., they're a bad fit.

Contrast that with the Vice Fund. Toward the end of last year, its top five holdings included three tobacco companies Altria, British American Tobacco and Imperial Tobacco Group booze-purveyor Diageo, and casino company Las Vegas Sands, according to Lipper. In fact, all of its top 10 holdings, representing nearly 40% of its assets, were in those three sectors, which don't quite inspire debate over whether they're vice-y enough.

Indeed, staying away from such stocks is the easy part of the socially conscious funds. "You exclude the sin stocks booze, bombs and buds," says Thomas Donaldson, director of the Wharton Ph.D. program in Ethical and Legal Studies at the University of Pennsylvania.

In fact, those vices are so frowned upon that they can cause a fund to drop a company if it begins dealing in them. For example, the Pax World Fund jettisoned 375,000 shares of Starbucks worth roughly $23.4 million in 2005 when the coffee company said it would enter a joint venture with Jim Beam to sell coffee liqueur.

Energy and mining companies are also rare among such funds because the managers do not want to expose themselves to environmental criticism. However, that kind of "natural prejudice" can be counterproductive, Donaldson says, because it leaves such companies with little reason to improve.

Still, only a handful of sectors are automatically excluded from most funds. The rest is research and the criteria are more art than science. For instance, many funds are technology-heavy because Silicon Valley is chock full of firms with little environmental risk and reputations for treating their employees well.

Of course, another critique of do-good funds is that they can be duped when deciding which firms to include in their portfolios. "As these funds measure how good these companies are, they measure them in terms of whether they have procedures, departments and appointed executives who are responsible for ensuring good behavior," Donaldson says. "But the problem with that is that having all of the offices and departments doesn't ensure good behavior will come out of the process. It just means you have the process."

Tim Smith, a senior vice president at Walden Asset Management, an investment firm that advises several socially responsible funds, says that the more sophisticated funds do their homework. "A leading social investor can't just ask the company, 'Do you have a good policy,' and they answer and it's over," he says, adding that many firms purchase research from third parties in the course of doing their due diligence. Still, he says, "any researcher can be fooled."

So what of the investor looking to put his money where his ethos is? There's a compelling argument for simply doing your own research on companies and investing in a portfolio that suits your personal moral code. But be prepared to face many of the same dilemmas confronting socially conscious fund managers. Is Microsoft worth a spot in the portfolio because the company has a history of good behavior toward its employees and the environment, or should Microsoft be excluded because forcing a new operating system on the market it dominates constitutes bad behavior toward its customers? Don't laugh they're the kind of questions asked every day by socially conscious fund managers.

One more point in favor of the virtue funds: There's more to a socially responsible fund than its stock picks. Many, including Pax, Walden and the Calvert family of funds, take an activist role at shareholder meetings, addressing the environmental, social and corporate concerns of their investors in resolutions. "All of us have a significant record of impact through the use of shareholder advocacy," says Smith. He added, "The positions that these investors are taking are no longer curiosities in corporate boardrooms."

So even if not every company in a fund is doing everything right, the fund at least offers investors an opportunity to tell them what they're doing wrong. "We're not investing in saints," Smith says. "We're investing in companies that are striving to be leaders."