Socially responsible funds all seek to invest in businesses that are good corporate citizens. But the funds rarely agree on which stocks pass the test. The Gulf oil spill has served to highlight differences in strategies. While some funds are avoiding oil producers, other portfolio managers own energy companies that have made innovations in preserving the environment.
To appreciate the complexity of the calculations that social managers make, consider MMA Praxis International (MPIAX), a fund that owns BP but not Exxon Mobil. Mark Regier, the fund's director of stewardship investing, says that Exxon Mobil has denied the importance of climate change and refused to talk to socially responsible investors.
BP has taken a greener stance, investing in alternative energy and encouraging the oil industry to fight climate change. For years BP has met with MMA Praxis and other social investors, discussing ways that energy companies can improve their environmental policies.
Will MMA Praxis sell its BP shares now that oil is ravaging the Gulf? Not necessarily. “We don't tend to act hastily during a crisis,” says Regier. “We will take a look at the facts in coming months and see what BP does.”
In the past, advisors could feel free to ignore the philosophical arguments and steer away from social funds altogether. But these days more and more clients want to own investments that fit their beliefs. Because some social funds now boast strong long-term track records, advisors should not hesitate to accommodate clients with strong convictions. Below are some top-performing funds that use a wide range of social screens.
Diehard green investors may prefer New Alternatives (NALFX). “We have never owned BP or the other oil companies, and we never would,” says portfolio manager Murray Rosenblith.
Seeking to preserve the environment, the fund owns companies that are involved with alternative energy, recycling, or pollution prevention. The portfolio is heavy with producers of solar and wind power. The fund managers also favor natural gas as a cleaner alternative to oil and coal.
New Alternatives doesn't just take any green company. To protect shareholders, the fund only invests in companies that are consistently profitable. Holdings include Vestas Wind Systems, a leading producer of wind turbines, and American Water Works.
Another fund that has avoided BP is Calvert Social Investment Equity (CSIEX). “When we looked at BP a few years ago, we had concerns about workplace safety,” says Stephanie Aument, a Calvert analyst.
Calvert avoids tobacco stocks and looks for companies that treat employees fairly. Companies must be in compliance with government regulations and be working to improve the environment. No integrated oil companies pass the test. But plenty of blue-chip growth companies do qualify for the portfolio.
Portfolio manager Richard England looks for high-quality companies that can increase their earnings at an annual rate of more than 8 percent. The portfolio includes many dominant blue chips, such as Cisco Systems and Procter & Gamble.
England likes to buy growth stars when they have fallen out of favor. As the economy sank into recession in the fall of 2008, England became interested in Best Buy. Shares of the electronics retailer had collapsed as investors worried that holiday sales would plummet. But England figured that Best Buy would survive the downturn and gain market share as competitors shut their doors. His forecast proved correct, and he sold the shares after they doubled.
Parnassus Fund (PARNX) rarely buys the big oil producers, but it does own drilling companies with good records for safety and environmental issues. “For the foreseeable future we will be dependent on fossil fuels, and it is important to support those companies that are helping to use energy safely and efficiently,” says portfolio manager Jerome Dodson.
Dodson favors solid businesses that sell for a discount that is one third of their fair values. He likes companies that consistently report returns on equity of more than 15 percent, an indication that the business has a sustainable competitive advantage.
A favorite holding is Qualcomm, which holds patents on chips that are used in cell phones. Dodson says the stock is depressed because investors fear that the sales growth of cell phones will slow. He argues that sales will continue climbing. He also likes Tellabs, a maker of equipment for cellular systems.
Neuberger Berman Socially Responsive (NRAAX) looks for companies that show leadership on environmental issues and workplace practices. Although the fund currently has 13 percent of assets in energy stocks, it does not hold any big integrated oil companies. Instead, the portfolio managers favor natural gas producers, including Newfield Exploration. The fund also owns Smith International, which provides equipment for gas drillers.
The managers favor high-quality companies that can grow. But the fund will only pay modest prices. Once they buy a stock, the managers aim to hold on for three to five years.
First Focus Balanced Fund (FOBAX) avoids tobacco producers and companies that do business in countries that sponsor terrorism. But the fund makes no effort to screen out oil producers or other companies that may present issues for environmentalists. In fact, First Focus has scooped up shares of Occidental Petroleum in recent months. “The concerns about the oil spill dragged down the entire energy sector,” says First Focus portfolio manager Kurt Spieler. “We took advantage of the downturn to buy some energy stocks.”
Spieler looks for reasonably priced companies that are growing faster than their peers. A favorite holding is DeVry, a for-profit education company. He figures that the company should report strong sales gains as unemployed people head back to school.
A balanced fund, First Focus holds investment-grade bonds as well as stocks of all sizes. The equity allocation can range from 45 percent to 75 percent of assets. The fund lowered its stock holdings to near the bottom of the allocation range as risks mounted in 2008. Then as markets stabilized, the equity allocation climbed to 70 percent in 2009. The moves enabled the fund to limit losses in the downturn and achieve healthy gains when markets rebounded.