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Socially REsponsible Investing (long)
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Jun 23 19:54 UTC 2003 |
Five Winning Funds How to Be Good -- and Profitable
By Stephen Schurr Senior Editor 06/19/2003 11:00 AM EDT URL:
http://www.thestreet.com/funds/fivewinningfunds/10094738.html
The top three questions a financial journalist hears: When will
the bear market end? Can you give me a good stock tip? And (be-
lieve it or not), how can I build an ethical stock portfolio?
That's the honest-to-goodness truth -- perhaps "altruism" should
be added as a distant third emotion that influences the market,
after fear and greed. The first two questions are hard to answer:
I think we are in a "low-return environment" in the U.S. that
will last for at least a decade, and I'm not much of a stock-
picker. (Ask James Altucher, Arne Alsin, Jim Cramer or one of the
many Real Money or Street Insight columnists who knows his
stuff.) The third one is easy to answer, although it does come
with some caveats: Consider socially responsible funds.
This week's Five Winning Funds examines the stellar offerings
from the world of socially responsible investing -- SRI funds,
for short -- and it represents a bit of a change in my thinking.
http://www.socialfunds.com
My old answer to question No. 3 was: Ethics are too subjective to
consider in an investment portfolio. Microsoft (MSFT:Nasdaq -
news - commentary) is ethical to some for treating workers fair-
ly, but unethical to others who say its 800-pound gorilla tactics
stifle competition. Or, General Dynamics (GD:NYSE - news - com-
mentary) may be unethical to some because it makes weapons that
kill people, but others may have no problem with the high-tech
weaponry that helps protect America. Besides, there's no real
proof that a do-gooder approach translates into better returns.
My old advice: Make your investments to make money, and make the
world a better place by volunteering.
However, over the past few years, my answers have evolved. Recent
studies, including one conducted by the SRI World Group for its
Social Funds Web site, indicate SRI funds have, in general, held
up better than non-SRI funds during the three-year bear market.
Thirty of 52 SRI funds topped more than half of their peer non-
SRI mutual funds. That's not overwhelming and it's a short time
horizon, but it does signal that SRI funds are as viable as other
mutual funds. It also refutes the old line about SRI funds not
doing well in bear markets because of their aversion to industri-
als, materials and "sin" stocks that hold up in downturns.
Also, SRI funds have gone a long way to overcome the perception
that they focus on do-gooder companies to the exclusion of stocks
that look good. These funds don't have 80% of their assets in Ben
& Jerry's; in fact, Intel (INTC:Nasdaq - news - commentary) is
the top holding among SRI funds, according to Research magazine.
Other big holdings include Cisco (CSCO:Nasdaq - news - commenta-
ry) , SBC Communications (SBC:NYSE - news - commentary) , Merck
(MRK:NYSE - news - commentary) and, yes, Microsoft.
"We understand how Corporate America works -- there is no perfect
company," said Todd Ahlsten, skipper of the stellar Parnassus
Equity Income fund.
http://tools.thestreet.com/tsc/quotes.html?pg=mutualfunds&symb=PRBLX
"But when we go to bed at night, we want to feel confident that
the companies we own are responsible companies that are trying to
do good for society." (Click here to read a companion profile of
Ahlsten and his fund.)
http://www.thestreet.com/funds/fivewinningfunds/10094625.html
The last reason I've changed my tune on SRI funds is a matter of
ethics. Given the spate of corporate ethics scandals, the threat
of terror that makes the world a more dangerous place and, frank-
ly, the fact that many multinationals regularly flout environmen-
tal and human rights issues, it is heartening that a swath of the
investment arena diligently searches to find companies that aim
to make the world a better place, along with making money. Ap-
parently, others feel this way: In 2002, while U.S. stock funds
saw $10.5 billion in net outflows, SRI funds had $1.5 billion in
net inflows, according to Lipper, a Reuters company.
What's kept me from shifting all of my portfolio over to SRI
funds -- despite my wife's suggestion to do so -- is that I don't
think it's possible yet to build a diversified portfolio con-
structed entirely of SRI funds. While there are some outstanding
U.S. equity funds that pass SRI screens, the group comes up short
when it comes to international investing, which makes up more
than half of my portfolio these days. Worthy SRI bond funds,
meantime, are in relatively short supply, as well.
Nonetheless, there are some great SRI funds out there, including
the five featured in today's column. The list aims for asset-
class diversity -- a good small-cap fund as well as a fixed-
income fund, etc.
One last thing: Investors looking to buy into SRI funds have two
considerations. First -- and this applies to all funds -- make
sure the funds have solid management, a history of strong returns
and below-average costs. Second, make sure the fund's definition
of ethics matches yours -- SRI funds run the gamut from religious
funds such as the Aquinas Growth Fund
http://tools.thestreet.com/tsc/quotes.html?pg=mutualfunds&symb=AQEGX
to environmental funds such as the Sierra Club Stock Fund
http://tools.thestreet.com/tsc/quotes.html?pg=mutualfunds&symb=SCFSX
to women's issues funds such as the Women Equity Fund.
http://tools.thestreet.com/tsc/quotes.html?pg=mutualfunds&symb=FEMMX
A good place to start is Social Funds' Mutual Fund Center.
http://www.socialfunds.com/funds/chart.cgi?sfChartId=desc
1. Parnassus Equity Income (Large U.S. Stocks)
While the $193 million-in-assets Parnassus Equity Income fund
(Ticker: PRBLX) falls broadly under the "large-blend" category,
the value-oriented manager Todd Ahlsten takes a "go anywhere" ap-
proach that hunts for companies big and small. The fund aims to
keep about 75% of its assets in dividend-paying companies, making
the fund a decent way to look for yield.
Do-gooder or no do-gooder, Parnassus Equity Income has been one
of the best funds around since its 1992 inception. The fund's
five-year average annual return of 10.9% ranks in the top 1% of
all large-blend funds, according to Morningstar, and its 10-year
returns rank in the top 8%. While Ahlsten has only been at the
helm alone for one year (he's been with Parnassus for nine
years), the one-year return of 8.13% ranks No. 1, according to
Morningstar. And as today's Q&A demonstrates, his philosophy on
investing and corporate ethics mirror his predecessor closely.
Tech lovers, look elsewhere.
http://www.thestreet.com/funds/fivewinningfunds/10094625.html
Apart from a small Cisco stake and a few other holdings, Ahlsten
sticks to less frothy fare such as Johnson & Johnson (JNJ:NYSE -
news - commentary) .
The no-load fund's low turnover rate helps keeps the expense ra-
tio at a trim 0.96%, compared with the 1.28% category average.
2. Ariel Fund (Small U.S. Stocks)
We extolled the virtues of the Ariel Fund (Ticker: ARGFX) in a
recent Five Winning Funds on small-cap value stock funds
http://tools.thestreet.com/tsc/quotes.html?pg=mutualfunds&symb=ARGFX
and in a 10 Questions interview with longtime skipper John
Rogers.
http://www.thestreet.com/funds/stephenschurr/10089512.html
One thing we didn't mention: Ariel Fund also passes the SRI
screen.
Rogers, at the helm since the fund's 1986 inception, has racked
up stellar performance: Its 10-year average annual return of
12.23% ranks in the top 17% among its peers, and the fund's
three- and five-year rankings are good for the top 18% of all
small-cap value funds, according to Morningstar. His basic in-
vesting philosophy: "Slow and Steady Wins the Race," as evidenced
by the tortoise logo that graces the fund's Web site. The no-load
fund sports a below-average 1.19% expense ratio.
For investors looking for a solid small-cap SRI fund, Ariel is a
great bet.
3. Ariel Appreciation (Medium U.S. Stocks)
Another Rogers-helmed fund turns up on the SRI list, and once
again it's a great long-term performer: the mid-cap blend Ariel
Appreciation fund.
Rogers took the reins of this fund in September 2002 from Eric
McKissack, who managed to notch impressive returns while at the
helm. Rogers is the founder of value-oriented Ariel Capital
Management and the longtime skipper of the firm's eponymous stel-
lar small-value fund, which should placate smart investors who
seek an experienced hand at the wheel.
The fund's three-year average annual return of 11.3% ranks in the
top 4% of all mid-cap blend funds, and the 10-year average annual
return of 12.98% ranks in the top 15% of its peers, according to
Morningstar. The no-load fund's buy-and-hold approach has kept
turnover to a mere 13% and its expense ratio at a below-average
1.26%.
4. Domini Social Bond fund
While the SRI bond arena has few real standouts -- Parnassus In-
come, with Ahlsten as the new manager, has been a strong perform-
er in the past -- the relatively new Domini Social Bond fund
(Ticker: DSBFX) is a decent, low-cost way to get fixed-income ex-
posure through the SRI world.
http://tools.thestreet.com/tsc/quotes.html?pg=mutualfunds&symb=DSEFX
How does a fund screen for do-gooder bonds? Well, the Domini fund
avoids U.S. Treasuries "because they finance the purchase of
weapons of mass destruction," according to Domini's Web site. It
does invest in other federal agencies, such as housing agencies.
The fund's 9.57% average annual return over the past three years
ranks in the top 39% of all intermediate bond funds, and the ex-
pense ratio is 0.95%, slightly below the 1.02% category average.
While there may be better fixed-income offerings in the non-SRI
fund arena, Domini Social Bond is a decent way to go for those
set on doing the right thing while they put their money to work.
5. Indexer's Choice: Domini Social Equity Index or Vanguard Cal-
vert Social Index
For investors who like the virtues of low-cost index funds cou-
pled with the virtues of socially responsible investing, there
are two decent options.
The Domini Social Equity Fund (Ticker: DSEFX) mirrors the Domini
400 Social Index, an SRI index of 400 companies that pass screens
for environment and social issues -- no guns, no cigarettes, no
nuclear power, no alcohol, no gambling, no weapons contractors,
on the no-no list; environmental-friendliness, good workplace and
community activism are among the do-good list. The nice thing
about the fund is that its 10-year average annual return of 9.42%
a year is about a half-percentage point shy of the S&P 500, rank-
ing the fund in the top 33% of all large-blend funds. The expense
ratio of 0.92% is above most traditional index funds, but is
lower than the average fund.
The newer option is the Vanguard Calvert Social Index fund (Tick-
er: VCSIX). The fund, which tracks the Calvert Social Index
(similar to the Domini index), has only been around since May
2000 -- its 13% average annual loss ranks in the top 19% of all
large-growth funds, according to Morningstar.
http://tools.thestreet.com/tsc/quotes.html?pg=mutualfunds&symb=VCSIX
The clear advantage over Domini's longer history is the price:
Thanks in part to Vanguard, the fund sports a bargain-basement
0.25% expense ratio. While both funds count Microsoft as the big-
gest holding, the Vanguard Calvert fund is a bit more inclined
towards growth, according to Morningstar.
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