From SRI funds, a more sophisticated tack

Investors vote with their pocketbooks, and many are voting for better ethical, environmental, and financial behavior by corporations.

While domestic equity mutual funds posted outflows of more than $27 billion during 2002, socially responsible investing (SRI) mutual funds benefited from net inflows of more than $1.5 billion, according to Lipper Inc. And the trend continues during the first months of 2003.

"Due to the wave of recent corporate scandals, we're seeing more and more investors concerned about the companies in which they invest," says Alisa Gravitz, executive director of Co-op America, a nonprofit investor-education organization.

As a group, diversified socially responsible funds seem to perform in line with major indices such as the S&P 500, and with the vast majority of diversified equity funds. When the market goes down, most SRI funds lose money. When the market rises, most of them profit.

Some funds, however, stand out. In the race for first-quarter results, the Winslow Green Growth Fund led most of the pack with a 6 percent gain for the quarter. Analysts note both the excellent long-term returns (13 percent annualized since inception in 1994), and the potential for high volatility, (down 30 percent in the past 12 months).

Overall, 7 of 79 socially responsible equity funds posted positive returns for the first quarter, a quarter in which the S&P 500 declined by more than 3 per-cent. Over the past three years, several socially responsible funds - including the Walden Social Balanced Fund and the Walden Social Equity Fund - significantly outperformed both the broad indices and their peers.

Walden portfolio manager Bill Apfel notes that the outperformance resulted in part from reducing the funds' exposure to overpriced technology stocks prior to the tech-stock decline of the past three years and from a focus on valuations, consistency of earnings, and quality of earnings.

Some of the best three-year performances belong to the Ariel and Ariel Appreciation funds, which have generated annualized returns of 11 percent and 6 percent during the period.

Ariel Capital Management Inc., which emphasizes investment in undervalued small and medium-size companies, manages more than $9 billion under the guidance of its founder and CEO, John W. Rogers Jr.

While these two Ariel funds are down for the first quarter and the past year, the three-year outperformance has been significant.

As for the future of socially responsible funds, observers note that their investment strategies are gradually becoming more sophisticated.

In the early years of socially responsible investing, some fund managers simply ran their social, ethical, and environmental screens, and companies that made it through the screens were purchased and held without much consideration being given to the financial fundamentals of the companies or the valuations of the stocks.

Now many socially responsible funds rigorously analyze the valuations, the financial data, and the competitive strengths and weaknesses of the companies in which they invest.

Several firms - including Bridgeway, Winslow Green, and Green Cay Asset Management - take the level of investment sophistication even further.

Seeking to reduce portfolio volatility and to generate higher levels of income, the Bridgeway Balanced Fund applies a carefully structured quantitative model to its investing.

According to fund manager Dick Cancelmo, the fund diversifies across a precisely designed mix of growth, value, fixed income, and option strategies.

True to its aim, the fund has shown far less volatility than the market and has beaten the market since its inception almost two years ago.

The Winslow Green hedge fund (a private partnership open only to wealthy investors) and Green Cay Asset Management, a values-based investment firm, have the ability to profit from both rising and falling stocks.

They not only buy stocks; they also "sell short" stocks. Stocks that are "shorted" profit if the stock price declines. Conversely, they lose money if the stock price rises.

"If we believe the work we're doing adds value on the long side by avoiding potential liabilities, shouldn't it also work on the short side?" asks Matt Patsky of the Winslow Green hedge fund. "And shouldn't we be able to make money by being short with the companies we've identified as having a higher probability of both problems and liabilities?"

Jane Siebels, who runs Green Cay Asset Management, tends to run market-neutral fund portfolios - half long, half short.

The long half of the portfolio consists of stocks chosen after careful analysis of the company's financial data, compensation rules, environmental records, code of ethics, corporate governance, and board of directors.

Ms. Siebels also talks with management, employees at many levels of the company, and competitors. Rather than screening out companies with imperfect records, she looks for companies that are improving, and then supports that improvement.

With the short half of the portfolio, she contacts a company's management and explains to them why she is shorting their stock.

"If you go to a company and say, 'I'm not going to invest in you,' basically the response is, 'So what?' But if I go to a company and say, 'I'm shorting you because you have XYZ bad values,' I get immediate attention."

Green Cay funds consistently perform in the top 10 percent of their categories.

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...