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Green funds that don't admit it
Some of the best environmentally minded funds avoid the label -- while proving they know green is also the color of money.
By Timothy Middleton
Why do the best socially responsible mutual funds pretend they arent?
Theres a good reason, actually, which Ill explain in a minute. But the reality is that socially conscious investors are making a mistake to screen for investments based on such criteria, because theyll miss the best investments.
Like Winslow Green Growth (WGGFX). It is environmentally pure but it, a) doesnt call itself socially responsible, and, b) mints money like a defense contractor. In fact, over the last three years this fund has outperformed Fidelity Select Defense & Aerospace (FSDAX) by about one-third, and that fund has beaten the market by about 250%.
We think green investors who are seeking some pop for their portfolios -- and have nerves of steel and long time horizons -- should keep their eyes on this fund, Morningstar analyst William Samuel Rocco wrote in a recent report to subscribers.
Ill go a step further. If youre looking for a top-performing small-cap growth fund -- and theyre almost impossible to find because nearly all are closed to new investors -- Winslow Green is a candidate, even if you wish the planet were buried in garbage.
Why? Unlike socially responsible investing, which is snarled in utopian politics, this funds basic premise is economic. Young, with-it corporate managements are the ones that revolutionize existing industries and create new ones. A strong dose of environmentalism, which is universal among this breed, is the clearest measure of quality of management I have ever come across, says Matthew Patsky, the funds co-manager.
But Rocco is right about this: If you dont have the nerves for a wild ride, this fund is too adventuresome for you. But if you can tolerate the volatility, the fund is not only attractive -- it is attractively priced.
Green, the color of money
Were looking for small, young companies that have a disruptive technology or are addressing some new market, says Patsky. These are companies that are in the process of being able to break out, which we think over the next 12 to 18 months can double.
Patsky looks for them among environmentally oriented companies because, he says, his firms research indicates this is the only area of the market where social screening boosts performance rather than subtracting from it.
Related news and commentary on MSN Money
Patskys co-manager, Jackson Robinson, began researching socially responsible investments in the 1980s and found that the conventional wisdom about the concept was correct -- it is doomed to underperform because performance is not its central concern. When you screen according to criteria that dont have a material impact on shareholder returns, you hurt returns, Patsky notes.
But Robinson identified an exception: Companies that stress sound environmental practices. Here screening out (environmentally unfriendly) firms creates a universe that outperforms the larger universe, says Patsky. Here the correlation is positive.
One example from the funds portfolio is Whole Foods Market (WFMI, news, msgs) the organic grocer. From an environmental point of view, organic farming is gentler on the land and water than the conventional approach. From an economic point of view, that doesnt matter. What matters is that consumers are so convinced it does matter that the companys profits have nearly doubled in the last three years and its stock has nearly tripled.
Whole Foods is one of the few companies the fund owns that most of us have heard of. Specializing in companies with market capitalization between $50 million and $2 billion, it mostly owns firms ignored by Wall Street analysts, where its own research can spot winners before everybody else does.
| Top Winslow Green positions | | Company | Sector | YTD Return % | % net assets | | Durect (DRRX, news, msgs) | Health care | 86.0 | 8.5 | | SurModics (SRDX, news, msgs) | Industrial Materials | 12.2 | 7.6 | | aQuantive (AQNT, news, msgs) | Business Services | 102 | 6.1 | | Fuel-Tech NV (FTEK, news, msgs) | Business Services | 76.7 | 5.9 | | Herbalife (HLF, news, msgs) | Health care | 56.4 | 5.1 |
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Notes: Portfolio as of June 30. YTD return as of Oct. 12.
Sources: MSN Money, Morningstar
Because the funds staff of six managers and analysts can only become expert in so many companies, the fund usually owns about 20, with initial stakes in each of 5% of assets. So it is highly concentrated, and that brings extra risk.
Big bets, big risks
The risk is that one or two bad bets can bring the whole fund down. Though its ahead an annualized 33.4% in the three years ended Oct. 12, and 21.1% in the last 12 months, its down 5.5% for the last three months.
Aptimus (APTM, news, msgs), an online ad firm, tumbled to $7 a share recently from more than $27 at the beginning of the year as sales and profits weakened. The fund saw it as a survivor of the Internet bubble with a strong balance sheet. So it was, but when growth cracked, so did the stock.
Martek Biosciences (MATK, news, msgs) is the manufacturer of a proprietary omega-3 fatty acid called DHA, which is rich in breast milk but absent from baby formula. Though it captured a huge market among formula makers, it stumbled in production and sales fell. From an all-time high of $70 a share in the spring of 2004, the shares are down to $30.
These missteps are inevitable in a concentrated portfolio, and the great majority of the managers picks have been successful. The fund sells stocks that reach the managers measure of full value, which usually happens within 18 months. That helps push portfolio turnover to more than 100% a year.
A marketing kiss of death
So why would such an appealing fund for socially conscious investors be unknown to them? For the same reason social screening doesnt turn up the Bridgeway family of funds. This 11-fund family is run along conventional socially conscious lines, and nearly all qualify for Morningstars best-in-class rating of five stars.
But funds have to volunteer for inclusion in the socially responsible category, and Bridgeway shuns the label just as Winslow Green does.
There is such a negative stigma with many in the investment world toward socially screened investing, Patsky says. So while the fund advertises its focus in its name, it doesnt belong to prominent socially responsible groups and doesnt list itself as SR with database companies like Morningstar.
Indeed, even within the socially responsible community, the best funds tend to be those that eschew the pro-union, anti-military politics that represent socially responsible investing's mainstream.
Arguably the best fund of the bunch, Amana Mutual Funds Trust Growth (AMAGX), is run in accordance with Islamic religious principles. While identified as a socially responsible fund for that reason, it invests in all manner of politically incorrect companies like oil giants, mining companies and utilities.
Winslow Green has managed to best Amanas three-year annualized returns of 26.6%, by far the best in the category, by 6.8 percentage points.
The Winslow fund has assets of about $120 million, and they are rising rapidly, having begun the year at $48 million. It intends to close to new investors when assets reach $250 million. It takes a small fund to invest in small companies.
So greens should check it out, and so should anybody else who needs small-cap exposure. Its not a no-brainer decision -- it is too volatile for investors quick to lose confidence -- but for those with the temperament, it could be lovely.
At the time of publication Timothy Middleton didnt own any securities mentioned in this article.
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