Levels and Breadth of Social Impact

Fixed-income investments are crucial in addressing many of the financial disparities that arise in our society today. We seek to address some of these disparities through the investments of the Domini Social Bond Fund, while simultaneously seeking to achieve competitive returns for investors. To help us assess our success in addressing these challenges, we have developed a tool to measure the level of community development impact for each investment in the Fund.

We use this tool, called the Domini Community Impact Gradient, to score each of the investments in the Fund on a range from one to five — five being those community development financial institutions with the highest and broadest level of community development impact.

Along with depth of impact, we also note the breadth of impact. We look to diversify our holdings across a broad range of social issues, including affordable housing, small business development, education, community revitalization, rural economic development, environment, and health. In today’s fixed-income markets, investments in affordable housing are most widely available, and consequently most of our holdings support these efforts. We look, however, to find investments that support other community development issues as well.

The five levels of community impact are listed below, with a brief description of the type of investments that are most readily available for our Fund at each level.

Level 5 Impact (Highest Level of Impact)

In this category are investments with community development financial institutions that serve communities in substantial need of capital inflows, in substantial need of public goods, and in substantial need of innovative financial services to fill these needs. Examples include the following:

·         Community Development Banks — for-profit banks whose mission is to serve low-income or underserved communities.

·         Community Development and Low-Income Credit Unions — member-owned credit unions that serve low-income neighborhoods.

·         Community Development Loan Funds — nonprofit loan funds whose mission is to promote community development in low-income regions.

·         Community Development Pools — highly rated securities backed by pools of community development loans and issued by financial services companies devoted to community economic development.

Level 4 Impact (Substantial Direct Impact)

In this category are investments that flow directly to regions in need of substantial capital inflows and the creation of substantial public goods. Examples include:

·         Project Loans and DUS (Delegated Underwriting and Servicing) Bonds — securities issued by government-sponsored enterprises, such as Ginnie Mae or Fannie Mae, and backed by loans to a single project, or limited number of projects. When these projects serve low-income communities, we view them as having a particularly identifiable and direct social impact.

·         Agency CRA (Community Reinvestment Act) Pools — securities created by Fannie Mae or Freddie Mac that include mortgages made to individuals or families with income levels below those in their standard affordable housing pools.

·         Taxable Municipal Bonds — bonds issued by state or local governments, or nonprofit organizations to support such public goods as low-income housing, economic revitalization, education, a clean environment, and healthcare. When these go to support low-income or underserved communities, we categorize them as having a substantial direct level of social impact.

Level 3 Impact (Moderate Direct Impact)

In this category are investments that directly support organizations specifically funding affordable housing, small business creation, and economic revitalization, and creating public goods in regions of moderate need. Examples include the following:

·         Ginnie Mae, Fannie Mae, and Freddie Mac Mortgage-Backed Securities —  securities issued by these government-sponsored enterprises and backed by mortgages on single-family, multiple-family, and rental properties priced at moderate levels, or in the case of Ginnie Mae, mortgages insured by the Federal Housing Administration, Department of Veteran Affairs, Rural Housing Service, and the Office of Public and Indian Housing.

·         Securities issued by the U.S. Small Business Administration and backed by loans to small businesses.

·         Taxable Municipal Bonds  — bonds issued by state or local governments, or nonprofit organizations to support such public goods as low-income housing, economic revitalization, education, a clean environment, and healthcare. When these go to support moderate-income communities, we view them as having a moderate, direct level of social impact.

Level 2 Impact (Moderate Indirect Impact)

In this category are investments that provide general, indirect support to organizations working to promote affordable housing, rural development, education, and related activities. Examples include the following:

·         Agency Bonds issued by government-sponsored entities such as Fannie Mae, Freddie Mac, the Federal Home Loan Bank, and Farmer Mac to support their mortgage lending in general.

·         Securities issued by Sallie Mae, formerly a government-sponsored entity, either backed by student loans or in support of its general work in making student lending.

Level 1 Impact (Lowest Level of Impact)

In this category are investments in mainstream for-profit corporations that meet our standards for our stock funds. Examples include the following:

·         Securities issued by mainstream financial institutions and backed by mortgages that tend to serve moderate- or high-income regions (whole-loan collateralized mortgage obligations).

·         Selected Corporate Bonds — general-purpose debt securities issued by for-profit corporations that meet our standards.

 

The Domini Social Bond Fund is not insured and is subject to market risks, including interest rate and credit risks. During periods of rising interest rates, bond funds can lose value. The Domini Social Bond Fund currently holds a large percentage of its portfolio in mortgage-backed securities. During periods of falling interest rates, mortgage-backed securities may prepay the principal due, which may lower the Fund’s return by causing it to reinvest at lower interest rates. Some of the Domini Social Bond Fund's community development investments may be unrated and carry greater credit risks than its other investments.

 

The Domini Social  Bond Fund may hold a substantial portion of its assets in the direct obligations of U.S. government agencies and government-sponsored entities, including Fannie Mae and Freddie Mac, and in the mortgage-backed securities of Government National Mortgage Association (Ginnie Mae), Fannie Mae, and Freddie Mac. Ginnie Mae is a wholly owned government corporation that guarantees privately issued securities backed by pools of mortgages insured by the Federal Housing Administration, the Department of Veterans Affairs, and the Department of Agriculture under the Rural Housing Service Program. Fannie Mae and Freddie Mac are government-chartered, but shareholder-owned, corporations whose mandate is to enhance liquidity in the secondary mortgage markets. (Ginnie Maes are guaranteed by the full faith and credit of the U.S. Treasury as to the timely payment of principal and interest. Freddie Macs and Fannie Maes are backed by their respective issuer only, and are not guaranteed or insured by the U.S. government or the U.S. Treasury.)