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| | Mutual Funds
Social responsibility is out; 'sin-vesting' is in
So-called socially responsible mutual funds are lagging along with favored sectors like technology, health care and financial services. But the wages of sin, as represented by the Vice Fund, are booming.
By Timothy Middleton
Pity the tree-huggers. It's not enough that left-leaning types are locked out of government. The stock market has turned its back, as well.
Socially responsible investing, or SRI, has traditionally focused on three sectors that score high in terms of environmental friendliness and good employee relations -- technology, health care and financial services. They were the growth sectors of the 1990s, and half of the 10 largest SRI funds were top performers in that era.
Today, the situation is reversed. With those sectors badly lagging, only two socially conscious funds cling to a ranking in the top 25% of their broader peer groups. None can match the recent record of an upstart fund that stands for all they don't -- Vice Fund (VICEX).
"Investing should be about making money long term, not about making social statements," says its manager, Dan Ahrens. His portfolio has jumped 16.5% in the 12 months ended March 30, ranking it among the top 2% of comparable funds, according to Lipper Inc. Ahrens puts 90% of assets into the groups SRI won't touch: weapons, liquor, tobacco and gaming.
SRI's decline is most obvious at Domini Social Equity Fund (DSEFX), which tracks an index of 400 companies Domini argues should do the best because they are the best corporate citizens. In 1998, its best year, the fund ranked among the top 4% of funds investing in big-capitalization domestic stocks. In the most recent 12 months, it plunged to the 88th percentile in Morningstar's database.
But even non-index SRI funds have been battered by the current market because they are locked out of the gritty, politically incorrect companies that are in the market's sweet spot now.
"Growth has worked against us for five years, and high-quality stocks have worked against us for the last two," says Daniel Boone III, manager of Calvert Social Investment Equity A (CSIEX). It ranked in among the top 7% of its peers in 2000, but trails 70% of its group over the past year.
| The good, the bad and the ugly: Top SRI funds | | Fund | Style | Assets | Performance rank: 1-year | Performance rank: 10-year | | Pax World Balanced (PAXWX) | Moderate allocation | $1.510 billion | 5 | 12 | | Ariel (ARGFX) | Small value | $4.403 billion | 23 | 19 | | Parnassus (PARNX) | Large growth | $341.7 million | 51 | 67 | | Parnassus Equity Income (PRBLX) | Large blend | $778.1 million | 54 | 12 | | New Covenant Income (NCICX) | Intermediate bond | $529.2 million | 56 | n/a | | Calvert Social Investment Balanced A (CSIFX) | Moderate allocation | $506.8 million | 56 | 77 | | New Covenant Growth (NCGFX) | Large blend | $881.5 million | 61 | n/a | | Calvert Social Investment Equity A (CSIEX) | Large blend | $799.4 million | 70 | 17 | | Ariel Appreciation (CAAPX) | Midcap blend | $3.226 billion | 78 | 21 | | Domini Social Equity (DSEFX) | Large blend | $1.362 billion | 88 | 40 |
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Notes: One-year data as of March 30, 2005. 10-year data as of Feb. 28, 2005. n/a-Not applicable; less than five years of performance data. Excludes institutional portfolios. Morningstar category ranking, 1 = best, 100 = worst.
Source: Morningstar Inc.
That's not to say all do-gooder funds are to be ignored. By far the best of the big SRI funds is Pax World Balanced (PAXWX), which has had only two bad years in the last 10 and currently ranks among the top 5% of Morningstar's moderate-allocation category.
"This fund is worth a long look from both SRI and non-SRI investors," says Morningstar analyst William Samuel Rocco.
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It is managed by H.G. Wellington Capital Management. The firm also runs Pax World Growth (PXWGX), a $67.3 million portfolio that ranks among the top 20% of funds of its type over the last three years and among the top 10% over the last 12 months.
Pax World Balanced is about 70% invested in equities -- a bullish stance for a fund that also invests heavily in bonds. In addition, 8% of assets are foreign stocks. "Energy has obviously been a good performer for us in the last year," says manager Christopher Brown. "Also materials companies." One of the fund's top holdings is Cemex (CX, news, msgs), the giant Mexican cement company.
Pax World does well despite faithful adherence to SRI principles. It won't own Treasury bonds (which indirectly support the military), and it recently sold one of its top-performing positions, Starbucks (SBUX, news, msgs), because the coffee maker licensed its name for a liqueur.
It even manages to nearly keep up with the Vice Fund, despite the profound differences between them.
| Top positions: Pax World Balanced and Vice Fund | | Pax World Balanced | | Vice | | | Stock | Gain YTD (%) | Stock | Gain YTD (%) | | America Movil (AMX, news, msgs) | -1.1 | International Game Technology (IGT, news, msgs) | -22.1 | | Apache (APA, news, msgs) | 17.6 | L-3 Communications (LLL, news, msgs) | -3.2 | | EMC (EMC, news, msgs) | -16.7 | Anheuser-Busch (BUD, news, msgs) | -5.9 | | Amgen (AMGN, news, msgs) | -8.0 | Altria Group (MO, news, msgs) | 8.2 | | WellPoint (WLP, news, msgs) | 9.5 | Fortune Brands (FO, news, msgs) | 5.2 | | YTD fund performance | -1.7 | YTD fund performance | -1.2 | | Standard & Poor's 500 performance | -2.59 | | |
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YTD performance is as of March 30.
Source: Morningstar Inc.
The Vice Fund was launched in 2002 to take advantage of what Ahrens saw as the clear dominance of the groups SRI hates. "I have to say we wouldn't exist if it wasn't for the existence of these SRI funds that were screening out those very same areas," he says.
Defense stocks have benefited from the Sept. 11, 2001, terrorist attacks and the war in Iraq. Sin, meanwhile, is ever with us. Vice Fund surged 34.3% in the bull market of 2003 and 24.4% in last year's sideways environment. "I think this fund is capable of performing well in all markets," Ahrens says.
Ahrens delights in twitting SRI for what he views as gaping holes in its moral armor. "I don't think a coffee liqueur is going to be the downfall of society," he jeers.
Indeed, SRI is continually stumbling as it crosses the moral terrain. In 1999, Enron enjoyed the heaviest weighting among energy names owned by Domini Social Equity.
Currently, that fund's moral compass is strongly drawn to insurance giant American International Group (AIG, news, msgs), which at the time of its most recent portfolio report was its third-largest position. AIG's boss resigned recently amid accusations of shady accounting practices. The stock was down 18.8% through April 1.
Personally, I don't care for bluenoses, whether they're yanking Huckleberry Finn from the library or going through the bars with hatchets. More to the investing point: I'm not looking for angels; I'm looking for angles.
At the time of publication, Timothy Middleton didn't own any securities mentioned in this article.
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