January 28, 2003
SRI Investors Find Managers Funds Meets Current Income Requirements
by William Baue
The mortgage-backed securities in the Managers Funds Short Duration Government Fund help it achieve
solid financial performance.
Some investors want to limit their investments in the stock market but still receive higher rates
of return than a money market fund provides. These investors can find some alternatives in
government bond funds, which primarily invest in U.S. Treasury securities. The Managers Funds Short Duration Government Fund (ticker:
MGSDX) approaches this type of investment differently. It focuses on high credit quality (AAA)
U.S. government agency mortgage bonds, such as Fannie Mae (FNM), to approximate the
six-month Treasury Bill.
Social investors who are concerned about investing in
Treasury securities because they help to fund the Defense Department may be particularly attracted
to the Managers Funds. Although the Managers Funds, based in Norwalk, Connecticut, does not
consider itself a purveyor of SRI funds, it distinguishes itself by choosing outside managers with
excellent reputations. The Short Duration Government Fund has been managed since its 1992
inception by Daniel Dektar of Smith Breeden
"We do not specifically target social responsibility in the management
of this fund; we target total return and overall risk," explained Managers Funds Director of
Research Tom Hoffman. "However, this fund typically fits well into a socially responsible
portfolio because it is primarily invested in mortgage-backed securities."
investors value mortgage-backed securities (MBSs) because they support a clear social good:
housing. Managers Funds values MBSs because they allow the subadviser to generate relatively high
current income while maintaining relatively low volatility.
"In order to manage the
interest rate risk, the fund's subadvisers use Treasury futures to realign the portfolio duration,"
Mr. Hoffman told SocialFunds.com. "As it so happens, our use of Treasury futures is typically as a
short position. That is, we are contracting to sell Treasuries in the future. There are rarely,
if ever, any actual Treasury securities in the portfolio."
"This in some indirect way may
be even more attractive to socially conscious investors," Mr. Hoffman said. This is because the
subadvisers hedge the interest rate risk by selling Treasury futures, most often without actually
buying any Treasury bonds. "Let me restate, however, that our strategy has nothing to do with
social or political beliefs. There is no guarantee that we won't actually buy Treasuries or
Treasury futures contracts at some point in time."
A prominent member of the SRI community
concurred with all of Mr. Hoffman's points.
"We consider the fund to be suitable for SRI
investors, though it's not specifically an SRI fund," said First Affirmative Financial Network (FAFN) CEO George
Gay. FAFN is a nationwide network of financial advisers specializing in SRI. "The fund uses
innovative management strategies that utilize mortgage-backed securities and derivatives to achieve
Treasury-like performance without actually investing in Treasuries."
The Short Duration
Government Fund proves the value of this management strategy; it has not had a negative quarterly
or annual return since its inception. This is significant, given that many equity funds yield
negative returns in bear markets. The fund generated an annual return of 4.1 percent for the
calendar year 2002. This compares favorably to the 2.2 percent return of its benchmark, the
Merrill Six-Month Treasury Bills index. The fund's annualized returns have outperformed its
benchmark's returns over the past three years (5.5 percent compared to 4.6 percent), five years
(5.1 percent compared to 4.8 percent), and ten years (5.3 percent compared to 4.9 percent).