by Patrick McVeigh
The past year has been like a bad joke for the mutual fund industry. Did you hear about the Pioneer High Yield Fund that increased its assets from $125 million to over $8 billion, then had the gall to raise its fee from .88% of assets to 1.05%? I’m sure they’re laughing all the way to the bank.
It’s no surprise investors concerned about nest egg security looked for alternatives this year. According to Lipper Analytic Services and the Social Investment Forum (SIF), the past year saw $1.5 billion added to socially responsible mutual funds (SRI funds), at a time when US equity funds overall saw outflows of nearly $10.5 billion. Over the prior two years, assets in socially screened mutual funds grew by 19% while the broader universe of professionally managed portfolios fell by 4%.
What accounts for the shift? It certainly is no coincidence that none of the SRI funds have been involved with industry practices like market timing trades and poor disclosure. It also doesn’t hurt that these funds continue to perform well. According to SIF, over 70% of the largest SRI funds got top ratings from Morningstar and Lipper during 2003, versus one-third for other funds.
With 200 socially responsible mutual funds now offered in the US, a 44% increase over the past six years, how do you find the best funds for you? Websites like SIF and SocialFunds.com are great places to start. I also like FundAlarm.com for its irreverent reporting on the mutual fund industry in general. For my annual favorite picks, read on.
Most Valuable Player – Bridgeway Funds
My top pick this year goes to a family of funds. Started by John Montgomery in 1994, Bridgeway offers 11 funds as also manages Calvert’s Large Cap Growth Fund. Montgomery made his reputation as a small cap manager, particularly with the Bridgeway Ultra Small Company Fund (currently closed to new investors), but his philosophies have been successful for a range of products.
The Ultra Small Company Fund rose by 79% last year, versus a 47% gain for the Russell 2000 index. His larger company fund – Calvert Large Cap Growth – also increased nicely by 38%, substantially above the Lipper Large Cap Growth Index’s return of 27%. Over five years the comparison is equally impressive, with this portfolio outperforming the index with an average annual return 1.1% versus negative 5.5%.
While its investment results have been consistently good, what stands out about Bridgeway this year is the firm’s ethics. Bridgeway has been an outspoken advocate of industry reform and has led by example. For example, the company strives to have the lowest costs in the industry. They charge no loads and no marketing fees. They pay no soft dollar commissions. The highest paid employee can make no more in salary and benefits than seven times the lowest paid employee. the expense ratio on its Blue Chip 35 Index Fund (.15%) is the lowest of any retail fund in the US. there is a rather limited set of social screens on Bridgeway Funds (no tobacco investments), though the offering through Calvert – Calvert’s Large Cap Growth Fund – does have a full set of positive and negative screens.
Most Direct Social Benefit – Calvert Community Investment Notes (CCI)
With yields on money market and savings accounts at all-time lows, CCI proved an excellent choice last year for both financial and social reasons. offering yields of 2% on one-year notes and 3% on 5-year or longer loans, these investments make a prudent home for cash.
CCI serve essentially as a “mutual fund” for investing in community loan funds. With $82 million in investments, these notes are the source of low-cost capital for affordable housing and small business development in low-income communities worldwide. A handy web-based calculator lets you determine the social return on your investment. For example, a $4000 investment for five years will build one unit of affordable housing or create five jobs in the US. there may be more lucrative investments, but no more direct way for individual investors to meet critical human needs.
Most Consistent Performance – Pax World Balanced Fund
With a blend of stocks and bonds, balanced funds are designed to guide you safely through the ups and downs of volatile markets. Pax World Balanced Fund has done just that since its founding in 1972 as the first diversified mutual fund using social screens. Its return during the past year of 17.3% was a bit below the 18.5% achievement of the typical aggregate fund, its record over time is a thing of beauty. Its 10, 15 and 25 year average returns are all over 10%. This is nicely above the 10 year average annual return for balanced funds of 8% and places it in the top 10% of all funds in this category.
Pax also has a proven record of consistency on social responsibility issues. Actively involved in proxy voting and shareholder resolutions, Pax has also used an innovative giving program called Pax World Service. Shareholders earmark portions of their dividends or capital gains for this service, which made news in 2003 by funding water development programs in Iraq only two days after the “official” end of the war.
Best New Player – Sierra Club Stock Fund
In its first year under its current structure, the Sierra Club Stock Fund got off to a rousing start, returning 32.02% for the year, above the S&P 500 at 28.7%. In a unique approach, the fund combines the environmental screens of the Sierra Club – the country’s oldest and largest environmental organization – with the financial prowess of two different investment firms, each with different styles. Based on the past year’s results, it looks like investors are getting the best of each.
As with all new funds, there are a few caveats. The track record is short and the expense ratio is high at 1.86%. Also worth watching is the election for the board of directors at the Sierra Club. A new faction, running on an anti-immigration platform, has apparently gained significant support which may or may not change the course of the fund.
Best World Player – Portfolio 21
With the US dollar and the country’s influence in decline over the past year, it was a good time to own foreign investments. Among international SRI funds, Portfolio 21 catches our attention for being one of the best. The fund searches the world for those companies that make environmental sustainability a key part of their business strategies and practices. It believes these firms will be more successful than their peers as consumers demand more sustainable products and services.
The thorough research they do has resulted in more firms being found in Europe and Asia than in the US. Currently, a little over 60% of the portfolio is invested outside the US. The fund returned 32.2% last year and is in the top 20% of all international funds. You can learn a lot about what constitutes a sustainable company just by reading their website.
Best Pick for the Next Year
I am not going to play the prediction game now, but I will tell you what a fund must do to over the next year to qualify for my consideration: reduce its 12-b1 marketing fees. In 1980, the SEC allowed these fees to be created as a temporary measure to help mutual funds grow in size. The intention was that as funds grew, they would be able to create
economies of scale that would result in lower fees for investors. This has not happened. Current shareholders continue to pay these fees out of fund assets. It’s my hope that SRI funds will join Bridgewater Funds in making a concerted effort to lower fees for investors.
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Social Investment Forum: www.socialinvest.org
Calvert Community Investments: www.calvertfoundation.org
Patrick McVeigh is a vice president with Lowell, Blake & Associates, a Boston-based investment advisory firm with $4 billion, which as been exclusively focused on SRI investing since 1973. www.lowellblake.com
Kevin O’Keefe contributed research to this article. He is a chief investment strategist with Colorado Springs – based First Affirmative Financial Network (FAFN), a nationwide network of financial advisors offering social investing guidance for consumers and institutional investors. www.firstaffirmative.com
FROM Business Ethics, spring 2004 issue, a SustainableBusiness.com Content Partner
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