Like virtually all equity mutual funds, socially responsible investment (SRI) funds got beaten down in the first quarter. However, according to Morningstar (MORN), in 9 of 13 fund categories, the losses for the SRI portfolios were not as severe as were those for the broader category during the quarter. In particular, midcap growth and value SRI funds delivered significantly better performance than their broader categories. A year earlier, before the credit crisis, the reverse was true—the returns of SRI funds in 10 of the 13 categories lagged those of the broader categories.
SRI funds invest in companies with superior environmental, social, and governance (ESG) practices, in addition to solid balance sheets and low debt. In the last year or so, two big themes have helped stem losses in a turbulent market: renewable energy and traditional energy companies focused on fossil fuels. Funds betting on green energy have had huge gains, while those that have avoided or been underweight in oil and natural gas producers have not done as well.
Steadier Plays in a Windier Climate
Managers of these funds also attribute their performance to their long-term investing philosophy. Todd Ahlsten, who manages the $1.04 billion Parnassus Equity Income Fund (PRBLX) in San Francisco, says his portfolio has outperformed the Standard & Poor's 500-stock index by buying underweight financials and consumer-oriented stocks and by owning health-care and technology names. And in energy, rather than making heavy bets on renewable energy stocks (which make up only 2% of his fund), he focused on traditional energy companies that are more progressive in the technology they use, such as Smith International (SII), which makes water-based drilling fluids that are less toxic and more easily recovered from the ground.
It's not enough to focus solely on sustainable earnings growth, he says. "You've got to get the overweights and underweights right at the industry level," he says.
A year ago, when investors were seeking higher yielding assets with little heed to the greater risks they carried, companies with steadier earnings and dividend-paying records weren't being rewarded, says Richard England, lead manager for the $1.3 billion Calvert Social Investment Equity Fund (CSIEX), which is subadvised by Atlanta Capital Management. "That was a little bit of a headwind for us stylistically, and we believe that has changed with the uncertainty of the last year," says England. He expects his focus on more consistent growth and avoidance of cyclicals to turn into a tailwind for the next year or two. By not owning as many companies that can get jerked around by short-term shifts in sentiment, the Calvert fund lost 8.5%, compared with a 9.45% loss for the S&P 500 in the first quarter.
Beating the Market
At the same time, funds that adhered to an aggressive growth philosophy got punished. The Winslow Green Growth Fund (WGGFX) was the worst performing of the three SRI small-cap funds, losing 26.64% during the March quarter, compared with a negative return of 14.51% for the small-cap growth category as a whole, according to Morningstar. Ethan Berkwits, director of marketing at Winslow Management in Boston, blames the fund's aggressive growth strategy rather than its commitment to environmentally friendly investing principles. He admits that part of that growth strategy was being overweight in clean energy stocks, which fell sharply in the first quarter.