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Socially responsible investing presents dilemmas


Andrew Leckey

Andrew Leckey

No one said socially responsible investing was perfect.

Just as a number of funds with ethical goals made the mistake of holding Enron stock a few years back, many this year owned BP Plc. stock when the company’s oil spill in the Gulf of Mexico dominated headlines.

After all, Enron had been billed as a modern, clean utility and BP was considered the green energy company. Who knew?

“Quite a few socially-responsible funds invested in BP and then bailed when the oil spill in the Gulf happened, but there are still quite a few that have held on,” said Steve Schueth, president of the First Affirmative Financial Network, Colorado Springs, Colo. “They had invested in it in the first place because, if a portfolio manager wanted exposure to oil and gas, no one had any better ideas.”

The BP tragedy did alert investors that every company’s philosophy and way of doing business should be examined – even though investors are destined to make a few bad judgment calls along the way.

Since underlying beliefs and screens of socially-responsible funds vary, investors should look at each prospectus before making a decision. Many funds have expanded beyond traditional negative screens for factors such as alcohol, tobacco and weapons.

“The trend in socially-responsible investment is green, with more companies implementing sustainability programs and issuing sustainability reports,” said Adam Strauss, co-portfolio manager of the Appleseed Fund (APPLX), up 9 percent the past 12 months with a three-year annualized return of 7 percent. “Our goal is to have market-beating returns by investing in a portfolio of companies that allow our investors to sleep well at night.”

His fund looks for “sustainable companies that balance the generation of profits with an awareness of their impact on the environment and society.”

He points to Dell Inc. (DELL), whose stock represents about 3 percent of his portfolio, which has the stated goal of becoming the “greenest tech company on the planet” and is constantly trying to reduce the footprint of the entire computer life cycle. Johnson & Johnson (JNJ), 4.5 percent of his portfolio, has had a sustainability program for years.

“There have been plenty of issues and crises the past few years – BP, Goldman Sachs, Toyota – that put a spotlight on the issue of corporate social responsibility,” said Bennett Freeman, senior vice president for sustainability research for Calvert Asset Management Co., Bethesda, Md. “There is greater environmental concern and commitment, with climate change emerging as a more significant driver of that commitment.”

While Calvert avoids companies producing tobacco or certain types of weapons, it more broadly bills itself as investing in firms that “proactively manage their corporate responsibility and environmental risks, and seek to improve their sustainability performance.”

“All equities markets have been volatile for over two years and SRI has been part of that broader story,” acknowledged Freeman. “Investors in SRI funds tend to be more loyal because they’re looking beyond just returns, so the fund flows into our funds have held up reasonably well.”

Never let your ideals overshadow the actual performance and future prospects of a fund.

Some investments require patience as you wait out the volatility of budding sectors. For example, the $118 million Calvert Global Alternative Energy Fund (CGAEX) is down 25 percent this year.

Its innovative holdings include Spanish utility Iberdrola Energias Removables SA, First Solar Inc., Germany’s Wacker Chemie AG in industrial materials, MEMC Electronic Materials, Germany’s SMA Solar Technology AG and Denmark’s Vestas Wind Systems. That fund requires a 4.5 percent load, minimum initial investment of $2,500 and has an annual expense ratio of 1.85 percent.

First Affirmative Financial Network (www.firstaffirmative.com) supports a nationwide network of investment advisors catering to socially conscious investors in areas that include personal finances, college planning, charitable giving and retirement planning.

“A lot of new accounts have been opened in the past few months, which surprised me,” said Schueth of First Affirmative. “But then, there are people comfortable making as much money as they can, and then those who want their money to make a positive difference in the world while making them more money.”

The $125 million Appleseed Fund has benefited this year from the stock of drug consulting firm PDI Inc., up 78 percent, and insurance broker Willis Group Holdings Plc, up 19 percent. Other fund holdings include Pfizer Inc.; the SPDR Gold Shares exchange-traded fund; Switzerland’s Novartis AG; and trail mix maker John B. Sanfilippo & Son.

That “no-load” fund requires a $2,500 minimum initial investment and has a 1.17 percent annual expense ratio.

“Investors know that we’re not invested in a tobacco company or oil and gas company operating in the Sudan,” concluded Strauss. “An investment has to meet our valuation hurdle that it has a 50 percent appreciation potential from current stock price, as well as pass social and environmental screens.”

Another well-known socially-responsible fund, the $1.8 billion Pax World Balanced Fund (PAXWX), is up 7 percent over the past 12 months. It follows environmental, social and government guidelines in its stock and bond portfolio. EMC Corp., Cisco Systems Inc., Deere and Co., Becton, Dickinson and Co. and Teva Pharmaceutical Industries Ltd. are its largest holdings. A $250 minimum initial investment is required and it has an annual expense ratio of .98 percent.

Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, 555 N. Central Ave., Suite 302, Phoenix, Ariz. 85004-1248, or by e-mail at andrewinv@aol.com.

About Andrew Leckey