Funds That Play Stellar Defense
It's high time we invest positively, right? Over recent years, more investors have been coming around to the idea that maybe their money should be invested in socially responsible funds.
Not only are many retiring baby boomers interested in investing along with their consciences, but the financial crisis and environmental debacles such as the Deepwater Horizon disaster probably drove home some good points: Corporate bad actors can hurt us all, whether it's tomorrow or years down the line.
Furthermore, common sense tells us that companies that try to do the right thing in the world are a heck of a lot less risky than the ones that don't. Lawsuits, government action and regulation, and drastic deterioration of consumer goodwill are all risks when you invest in socially irresponsible companies.
More choices than ever
Financial professionals are increasingly offering socially responsible fund products to the growing numbers of consumers who desire them. In 2010, US SIF (The Forum for Sustainable and Responsible Investment) reported that socially responsible investing had become so widely practiced that it topped the $3 trillion mark in assets under management.
The conventional wisdom that socially responsible investing always underperforms the market is being challenged, too. The oldest SRI index, the FTSE KLD 400, returned 9.51% from its inception in 1990 through Dec. 31, 2009; the S&P 500 returned 8.66% over the same time frame.
If you want to roll with the do-gooders, there's quite a selection of SRI funds to choose from. You may have heard of some of the best-known SRI fund products such as Pax World, Calvert, and Domini Social Investments. If you're shopping around, check out this handy chart from US SIF, which shows the performance track records for a whole slew of socially responsible funds as of last month.
No vice, tons of value
I'd like to point out one fund that seems to put the "good" into really "good defensive strategy." SRI fund Appleseed Fund (FUND: APPLX) joins socially responsible investment and value investing in a harmonious union.
Appleseed Fund grabbed my attention in 2010, when it made the bold move of adding Bank of America (NYS: BAC) , Citigroup (NYS: C) , Goldman Sachs (NYS: GS) , and other "too big to fail" banks to its list of stocks to screen out of the running for inclusion in the fund.
In other words, this fund placed big banks into the same vice category normally reserved for the usual suspects: companies that attempt to profit from alcohol, tobacco, defense, gambling, and pornography. Appleseed was the first fund to take that step.
Goodness meets deep value
I recently had the opportunity to chat with Adam Strauss, one of Appleseed Fund's portfolio managers, who shared some fascinating elements of this SRI fund's policies and practices. He described the fund, which launched in 2006, as a "go anywhere, value-oriented mutual fund."
If you love value investing, you'll love that Appleseed seeks out stocks it believes have 50% upside potential and minimal downside. These companies must be stellar; good competitive moats, high-quality managements, and strong balance sheets are a few of the areas for scrutiny.
Another departure from business as usual is that Appleseed's five portfolio managers kick around each potential investment for the fund, utilizing an investment by consensus, collaborative approach. Stocks are only included in the fund if four of the five agree to pull the trigger.
Time horizon isn't one of Appleseed's main concerns. The fund's strategy is as simple as this: Once the stock hits its intrinsic value mark, it is sold. That's the reasoning behind the fund's sale of great performer Weyerhaeuser (NYS: WY) ; as the fund's semiannual report put it, "We suspect that the sudden increase in Mr. Market's optimism was somewhat premature, but we were happy to sell him Appleseed's Weyerhaeuser shares at what we believe is full value."
A few other reasons Appleseed might sell a holding is that the investment thesis or intrinsic value estimate changes, the managers see better investment opportunities in other areas, or if their assessment of the company's responsible aspects shifts to the less responsible side.
Appleseed boasts an interesting array of responsible holdings. Japan's Shimano makes bicycle parts, as biking is an environmentally friendly mode of transport. New Jersey's Sealed Air (NYS: SEE) represents 5.2% of the portfolio's holdings. Small-cap John B Sanfilippo processes and markets nuts, which are a less-environmentally disruptive source of protein.
Here's another admirable attribute: Appleseed Fund's employees have their own skin in the game. Officers and employees own more than $3 million of Appleseed Fund shares.
Last but not least, as of March 31, Appleseed Fund has generated an annualized return of more than 7% since inception, besting the S&P 500's roughly 2% average over that time frame.
The best defense
Socially responsible investing is one way to protect your future investments (and the future world) from the myriad negative outcomes that result from unethical or downright irresponsible corporate behavior.
Investing in the good guys -- and finding the good companies that are also very undervalued -- puts major defense into SRI's basic defensive strategy.
At the time this article was published Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Bank of America, Citigroup, and Weyerhaeuser. Motley Fool newsletter services have recommended buying shares of Goldman Sachs. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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