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HOW TO PLAY IT: Building a socially responsible portfolio
March 9, 2012 / 8:41 PM / 6 years ago

HOW TO PLAY IT: Building a socially responsible portfolio

NEW YORK, March 9 (Reuters) - It’s a different kind of value investing.

A growing number of Americans are deciding to base their investment decisions on principles ranging from their religion to their concerns about the environment. Financial advisers managed nearly $3.1 trillion in assets in 2010 using so-called socially responsible strategies, according to industry group US SIF, up from just $600 billion in 1995.

It’s a long way from the late 1970s, when most social investors were more concerned about what they wouldn’t buy than what they would. Typical taboo lists included companies involved in the production of tobacco, alcohol, weapons or nuclear energy.

Now, however, some socially-minded investors are starting to put as high a value on performance as well. For financial advisers, that means managing a client’s socially screened portfolio can require an additional layer of research to keep pace with or outperform the broader market.

Here are suggestions on ways investors enrich themselves without sacrificing their values:


The first step in any socially-screened investment strategy is to establish the universe of available companies.

This depends on the investor in question, of course. For those who want to focus on companies that have sustainable practices -- generally defined as things like working to lessen a company’s environmental impact, providing decent working conditions and encouraging diversity -- research firms like MSCI provide basic screening services and lists of acceptable options.

This research is also behind MSCI’s line of socially screened indices. One is the basis for the iShares MSCI USA ESG Select index exchange-traded fund. The fund, which charges 50 cents per $100 invested, is filled with 168 mid-to-large cap companies that pass MSCI’s screens in categories like environmental impact and corporate ethics. International Business Machines Corp, Starbucks Corp and Eaton Corp make up the fund’s top holdings, with about 10 percent of assets among them.

For those who look for active management, Domini and Pax World are two prominent socially responsible fund families. Domini, which manages $1 billion in total assets, tends to follow the sector weightings of a broad index like the Russell 1000 while making socially screened picks in each sector and subsector, said Tessie Petion, vice president of research at the firm.

In practice, that means that the firm will substitute a company like Toronto Dominion Bank for those that won’t pass its screens because of business practices, like Bank of America Corp -- a company excluded because of what Domini calls the “predatory lending” practices of its Countrywide line. Financial metrics still matter. Toronto Dominion bank trades at 13 times earnings and offers a 3.5 percent dividend yield, compared with Bank of America, which lost money last year and yields just 0.5 percent.

Pax World takes a more top-down approach to its portfolio construction. The firm, which has $2.7 billion in assets under management, looks for companies that fit within its broad investment themes, said Chris Brown, the chief investment officer for the firm.

Deere & Co is currently Brown’s largest holding. He likes the company not only because it fits within his broad bet on the strength of the agriculture sector, but because it ranks the highest among its peers on metrics like human rights and environmental policies. Pentair Inc is another pick. The company, which produces energy-efficient water pumps, will benefit as utilities rebuild or refurbish their infrastructure, he said.

Other investors want a more specific niche. Amana Funds, a line of funds screened according to Islamic principles, are among the most popular religious funds. The funds will not hold any company involved with alcohol, tobacco, pornography, gambling or pork processing, or with those companies that have high levels of debt -- a requirement that sidesteps most of the financial sector. Together, these rules winnow the possible number of companies to about 45 percent of the American market.

“Beyond these rules, we’re basic value fund managers,” said Nicholas Kaiser, the portfolio manager of the $2.2 billion Amana Trust Growth fund and the $1.4 billion Amana Trust Income funds.

Technology firms with large cash positions make up some of Kaiser’s largest holdings. Apple Inc, Google Inc , and Qualcomm Inc make up some of the top holdings of his growth fund. Each has a reasonable price to earnings ratio, he said, which means that he’s comfortable holding each company for the long-term.

“You (don‘t) hear me wanting to own Facebook. We tend to buy only the low-risk ones. With Apple, if you take out the cash, the P/E is about 8 and you’ve got a growth rate of 100 percent. I don’t find that speculative or overpriced,” he said.

Kaiser’s Growth fund, which returned an annualized 8 percent over the last 10 years compared with a 3.6 return for the Standard & Poor’s 500, suggests that socially screened strategies can work over the long-run. He estimates that only about 10 percent of his investors are Muslim; the rest, he said, are simply attracted to past performance.


Socially minded fund investors don’t have to sacrifice performance.

GuideStone Funds, a line of Christian-based mutual funds, received the 2012 Lipper Award Wednesday for best overall small fund group. Its GuideStone Funds Extended Duration Bond fund , for instance, has returned 18.4 percent over the last year, and an annualized 10.1 percent over the last five years, according to data from Morningstar.

Other funds have posted returns that outperformed their peers. The Virtus Small-Cap Sustainable Growth fund,, for instance, has returned 17.7 percent over the last year, compared with a 2.1 percent gain for the S&P 500. The Touchstone Premium Yield Fund, another socially screened fund, outperformed its large value peers by returning 12.8 percent over the last year.

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