Despite the pressures brought on by another year of military action and diplomatic tensions overseas, not to mention natural disasters, the markets managed to claw their way into positive territory mid-way through the fourth quarter of 2005. The Dow Jones Industrial Average in late November for the first time climbed above its 2004 year-end close, the S&P 500 Index rose past 1250 for the first time since June 2001, and the Nasdaq moved toward its highest level in four years. Though not as exciting as the bull market of the nineties, this late climb into positive territory is certainly a welcome development.
Socially responsible mutual funds held their own during 2005, if not without some struggle. Unusually strong performances in some sectors — such as energy and defense — pushed up the stocks of companies shunned by SRI mutual funds. Thus some SRI funds lagged during the first half, but recovered nicely in the third quarter. Morningstar listed 224 socially conscious funds in November 2005, with total assets of over $40 billion, up from $36 billion in January 2005.
To help readers find the true gems among these, we have selected a half-dozen top performers in a variety of categories — from large- to small-cap, from balanced to bond. To pick them, we reviewed some 50 funds that passed various social screens — including alcohol, alternative energy, community involvement, human rights, product quality, and weapons — and that have performed strongly compared to their peers. We looked for those whose performance was impressive and reasonably consistent in both the near and long term, and whose social and environmental screening criteria were as well-articulated as their investment philosophy. These are the funds firing on all cylinders.
LARGE-CAP GROWTH FUND
As many investments meandered through 2005’s first three quarters, the Calvert Large Cap Growth Fund returned a healthy 7.48 percent. The fund has been remarkably consistent, outperforming the Russell 1000 every year since 1999 and frequently landing among the top 10 percent of its peers. Besides investing in stalwarts such as Dell Inc., it holds shares of Whole Foods Market, Starbucks Coffee Co. and the oil and gas producers XTO Energy and Pioneer Natural Resources. During 2005, the fund supported shareholder resolutions encouraging 3M to implement the China Principles on human and labor rights, and asking Starbucks to require substantially all its coffee to be free-trade certified by 2010.
LARGE-CAP VALUE FUND
The Citizens Value Fund is notable for its strong turnaround since 2002, when Sophia Collier, the fund family’s chief executive, took over as portfolio manager. Today, its performance stacks up well against peers. During the first three quarters of 2005, it returned 8.9 percent, more than double the 3.82 percent return of its benchmark, which tracks large-cap value funds with at least 90 percent of their investments in U.S. stocks.
The fund’s top ten holdings include ConocoPhillips, the health plan Wellpoint, Fedex, Pfizer, and the natural gas company ONEOK Energy Services. The fund co-filed shareholder resolutions in 2005 with Apache Corp. and Anadarko Petroleum, asking them to disclose the risks and opportunities faced from climate change. Citizens was also planning a new campaign in late 2005 to encourage wider use of the Global Reporting Initiative guidelines, a template to standardize social reporting by companies.
ALL-CAP EQUITY FUND
Neuberger Berman Socially Responsive Fund is another solid performer, focusing on mid- to large-cap companies both in the U.S. and abroad (26 percent of its portfolio is in non-U.S. stocks). It screens out companies involved in alcohol, tobacco, gambling, weapons, nuclear power, and the military. The fund tries to capture a wide range of opportunities rather than adhering to a narrow investment philosophy, and investors have been well served by this approach.
In proxy votes, the fund has backed measures to require reports on political contributions from Citicorp and Danaher, a tools and instruments manufacturer. It’s also voted to change the treatment of stock options at both Dell and UnitedHealth Group, seeking a more accurate reflection of their expenses.
SMALL-CAP GROWTH FUND
Our top pick here is the Winslow Green Growth Fund, which uses a mix of environmental screens to select its small and mid-sized U.S. companies. Most of its holdings are in healthcare, information technology, industrials, and telecommunications services, and nearly 58 percent of its companies are ranked as either environmentally proactive or environmentally responsible. The fund has been a strong performer since its inception, returning an average 35.28 percent over three years, besting by more than 10 points the Barra Small Cap Growth Index at 24.18. As with other funds concentrating on the small-cap universe, it produced strong returns in 2003 and 2004. Though it’s yielded ground as the small-cap market has cooled, its performance put it in the first percentile year- to-date through third quarter 2005.
BALANCED FUND
A can’t miss pick among balanced funds is Pax World Balanced Fund, the first fund to adopt socially responsible standards in the Vietnam War era. The fund has nearly $2 billion in assets, making it one of the larger SRI funds. Its remarkably consistent performance places it within the 10th percentile of all balanced funds over the last ten years. In 2005, Pax World decided to go “climate-neutral,” measuring and offsetting its greenhouse gas emissions. And the fund allows shareholders to earmark a portion of their dividends or capital gains to support Mercy Corps/Pax World Service, which recently assisted survivors of the Indian Ocean tsunami and the earthquake in Pakistan.
TAXABLE BOND FUNDS
The Calvert Social Investment Bond Fund is notable for its exceptionally high turnover rate — 244 percent, according to Morningstar. (Compare that to the 24 percent turnover rate of the Parnassus Fixed Income Fund discussed below.) In his quest to take advantage of inefficiencies in the bond market, manager Greg Habeeb will actively trade small positions around his core holdings. While this might be unusual, it has worked: The fund has turned in outstanding performances in the short, intermediate and long term. During the first three quarters of 2005, for example, the fund returned 3.77 percent compared to an average of 1.35 percent for all intermediate-term bond funds.
A second admirable fund in this category is the Parnassus Fixed Income Fund, which since 2000 has provided steady, if not explosive, returns. With heavy short-term holdings — nearly 75 percent of its portfolio was in securities with less than one-year maturities at the end of September — the fund has returned 4.22 percent over the most recent 12 months. That compares to a return of 2.43 percent for its active benchmark, Morningstar’s intermediate-term bond funds. The holdings that aren’t cash include issues of Fannie Mae, ONEOK and Bank One. These half-dozen top performers can all be confident picks for SRI investors seeking solid returns with social impact.
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Kevin O’Keefe is Chief Investment Strategist for First Affirmative Financial Network. Mark Feffer is a freelance writer based in Trenton, N.J.
FROM Business Ethics Magazine, a SustainableBusiness.com Content Partner.
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