One fund's formula: put stock in women-run firms
Ingrid Dyott appreciates the fact that the mutual fund she helps manage, Neuberger Berman's Socially Responsive Fund, invests a good chunk of its assets into companies that treat women well.
While no studies indicate that firms with a more-than-average number of female executives perform better than their male-dominated counterparts, Ms. Dyott holds that a women-friendly environment is one sign of good corporate governance.
Companies that strive for diversity in their workplace, she says, have a competitive advantage by attracting and keeping talented workers of both sexes. In a tight labor market, talented employees will be "the first to leave," she notes, if the company lacks the right programs that allow employees a proper balance between work and family.
Certainly the emphasis of Dyott's New York-based fund on investing in socially responsible firms hasn't hurt its performance. "A great track record," says Shannon Zimmerman, an analyst at Morningstar Inc., a Chicago group that studies the mutual fund industry.
In 2002, a bad year for the stock market, shares of her $87 million Neuberger Berman fund (NBSR) fell 14.4 percent. That's down 7.6 percent less than the Standard & Poor's 500.
If an investor had put $10,000 into NBSR on Jan. 31, 1998, five years ago, the investment would be barely above water - worth $10,098 at the end of last month, with capital gains and dividends reinvested. That doesn't sound exciting. But it is better than the record of some 95 percent of the funds invested in companies with $1 billion or more in assets. Most have been battered by the dragged-out bear market.
Morningstar gives NBSR four out of five possible stars for its five-year performance.
Socially responsible funds, such as NBSR, generally won't invest in companies involved with alcohol, tobacco, weapons, gambling, or nuclear power. The investment "screens" they use, though, often vary. Altogether, some 230 socially responsible mutual funds operate in the United States. Together, they have about $150 billion in assets. Lipper, a New York firm that also tracks mutual funds, notes that socially responsible funds enjoyed net inflows of $1.5 billion last year. Other diversified equity funds posted outflows of nearly $10.5 billion.
The thinking behind socially responsible funds, as Dyott puts it, is that "good corporate citizenship is good business."
That thesis appears to hold up. A recent study by three professors at Maastricht University in the Netherlands of 103 German, British, and American "ethical" mutual funds found "little evidence" of significant differences in the returns between ethical and conventional funds for the 1990-2001 period. The study takes into account the riskiness of the various funds' stock investments.
The Dutch study squares with one by Morningstar, comparing the track record of 60 American socially responsible funds invested in domestic corporate stocks with comparable conventional funds. It found that both groups showed a 7.8 percent average annual return over the past 10 years. Over 15 years, though, nonsocially responsible funds came out ahead 10.2 percent to 9.3 percent.
Mr. Zimmerman blames this pattern on the relatively high average expense ratio of socially responsible funds - 1.4 percent a year versus 1.28 percent for conventional funds. Ethical funds not only must do standard financial research on corporations, but also must look at social behavior. "Over time, expenses eat away at the return," says Zimmerman.
Expenses at Dyott's fund amount to 1.17 percent, well below the average. That money is spent on selecting a relatively few 30 or so stocks for a "focused" portfolio.
First step, notes Dyott, is to review the 1,750 American companies with assets exceeding $1 billion. That number is reduced by more than 100 with a simple screen knocking off tobacco, alcohol, etc. Next comes detailed analysis of balance sheets and the market. Company managers are interviewed. These steps help narrow the list to firms seen as having potential to return 15 to 25 percent per year in the next three to five years.
Then Dyott steps in to examine the level of corporate responsibility of a firm. For instance, at Johnson & Johnson, a pharmaceuticals firm, 37.3 percent of officials and managers and 28 percent of its board are women. On average, only 12 percent of board members of firms in the Standard & Poor's 500 index are women.
Also, Johnson & Johnson is ranked by Fortune magazine as one of the 100 best companies to work for. Working Women magazine also rates it highly for its onsite day care and other programs helping working mothers.
Similar analysis also resulted in the stock of Keyspan, Target Corp., and UnitedHealth Group being added to NBSR's portfolio.
Keyspan, Dyott says, has a good environmental record that enables it to get through the regulatory process for new power generation in record speed. This saves the company money.
Zimmerman says NBSR's investment in Keyspan and other energy companies has helped the fund's performance in a time when energy companies are benefitting from the rise in oil and gas prices. The fund also tilted its purchases toward smaller companies, those closer to the $1 billion revenue level, and some of these did well in 2002.