Mutual-fund managers can find themselves under a lot of performance pressure. But it doesn't seem to affect Robert Loest, manager of the Integrity Growth & Income Fund.
"I don't worry about returns," Dr. Loest says in a phone interview. "I simply live my life the way I live my life, and the returns are up to the gods."
That may be "an enormously freeing concept" for Loest, but it's a statement that might send potential investors poring through his executive bio to evaluate this "life" of his.
Put simply, Loest's values inform his investment decisions, and he has no reason to try to separate the two. Integrity Growth & Income makes its money without investing in tobacco, alcohol, or gambling.
"If you don't smoke, I don't think you ought to buy a tobacco stock just because you think you can make some money," he says. "We try to run the fund using the same set of values people use raising their kids."
People have an innate desire to feel good about what they do, Loest says, and he recognizes a general desire for "a fund that doesn't require investors to make moral compromises in order to make money."
But making exactly that kind of fund available doesn't strike Loest as particularly noble. "I don't see myself achieving anything. It's the way I live."
Loest, a former naval officer with a PhD in biology, came into managing money after a period as a blacksmith, where he "sort of checked out of society for a while." What's not in a bio is his day-to-day life, the details of which illustrate his social values. He lives in downtown Knoxville, Tenn., a dense urban area that allows him to get almost everywhere he needs to go by bike. He eats pesticide-free, locally grown foods, and, as a believer in animal rights, is a longtime vegetarian.
Integrity Growth & Income works directly with People for the Ethical Treatment of Animals to analyze companies in terms of animal-rights issues and with other groups regarding other social issues.
Unlike some socially responsible investing (SRI) funds, Loest does not screen companies based solely on an objective measure of social responsibility. It's easy, Loest says, to screen out all companies that test on animals, or that mistreat employees or communities, but Integrity Growth & Income's wide-ranging principles make screening difficult. "If you're a broadly ethical fund like we are, and you worry about all these issues, if you start screening companies, you're not going to have anything left. So you've got to change the way you evaluate companies on an ethical basis."
Loest's method is, first of all, to identify companies that generate a lot of cash flow and have a very high return on invested capital. He then looks to buy them at 30 to 40 percent below fair value. Firms that meet those criteria are then put through an ethical evaluation. Loest looks at shareholder proxies and checks reports from special-interest groups and other sources for insight into a company's moral stance. "We go through this checklist of issues to try to see if we're buying a company that at least is moving in the right direction," Loest explains, adding assuredly, "None of 'em are saints."
Signs of a company's willingness to change is often more important to Loest than its track record. When Loest has to answer to animal-rights investors for holding companies that test on animals, he offers a rhetorical illustration: "If I'm an animal in a cage in the basement waiting to be experimented on, do I want somebody like me to own the stock if there's some hope that you can have dialogue and improve things? Or do I want somebody just to avoid the stock, screen it out, and go off and polish their halo?"
That strategy has generated above-average success in today's troubled market. While the fund is down almost 5 percent so far this year, it ranks among the top 5 percent of mid-cap blend funds, according to Morningstar Inc., in Chicago. As of July 15, the fund has produced healthy annualized returns of 10.8 percent over the past five years. Such results put a dent in the notion that applying ethics to a mutual fund limits results for investors.
"People have been kind of skeptical of SRI because they say you're giving up returns, or you're restricting yourself," says David Kathman, a fund analyst for Morningstar, "but I haven't seen any good evidence that socially responsible investing hurts your returns in and of itself. It's much more important who the manager is, what their track record is, what the fees are, and other factors."
Not only has the number of SRI funds grown dramatically since the mid-'90s, says Todd Larsen, media director with The Social Investment Forum, but "there's really no difference in the performance between socially responsible funds and the marketplace of broader funds."
The Integrity Growth & Income Fund, with $40 million in assets, is part of Integrity Mutual Funds Inc., and was started by Loest in 1995 under the name IPS Millennium fund. It is heavy on materials and industrial firms. The fund's largest holding is BHP Billiton, an Australian mining firm.
Loest compares the world today to a post-World War II United States, and consistent with that model, he invests in natural resources and machinery companies that will benefit from a worldwide need for infrastructure development.
As an environmentalist, Loest buys into companies that are developing in the most sustainable ways possible. A few of his alternative energy companies, such as Ocean Power Technologies, are "a gamble on obviously where the world has to go," he says.
Such efforts keep drawing investors. Loest says some don't even know about the fund's ethical management. "They'll call up and say, 'I didn't know this when I bought the fund, but I feel a lot better now that I know this.' "