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April 10, 2003
Healthy Living Sector Produces Healthy Returns
    by William Baue

Two SRI funds find common ground in their success from investing in the healthy living sector.


Two very different socially responsible investment (SRI) mutual funds are using very similar strategies to accomplish what few funds, SRI or otherwise, can nowadays: positive returns. The Winslow Green Growth Fund (ticker: WGGFX), an aggressive growth equity portfolio, generated returns that rose 6.3 percent in the first quarter ended March 31, 2003. First quarter returns for the Pax World High Yield Fund (PAXHX) increased 3.31 percent. Such success could be attributed to both funds' concentration in the healthy living sector.

"It's hard to tie performance for high yield funds to the equity market in general, but investment in the healthy living idea is something these two funds have in common," said Jim Shirley, a research analyst for Lipper, which is a Reuters-owned firm that tracks 80,000 mutual funds worldwide. "One of the main performance drivers for the Winslow fund is this health area, which has done very well so far this year, particularly recently."

Five of the Winslow Green Growth Fund's top ten holdings--AtheroGenics (AGIX), PolyMedica (PLMD), Thoratec (THOR), Whole Foods (WFMI), and Staar Surgical (STAA)--fall into the healthy living category.

The Winslow fund's first quarter performance placed it fourth among the 441 small cap growth funds tracked by The Wall Street Journal Online, based on data from Lipper. The average return for this group of funds during the first quarter was negative 4.0 percent. The fund ranked thirty-second of 4,230 publicly traded U.S. equity funds tracked by the The Wall Street Journal, based on Lipper data, placing it in the top one percent of these funds.

The Winslow Green Growth Fund, which applies both positive and negative environmental screens, also significantly outperformed its benchmarks in this year's first quarter. The Russell 2000 Growth Index fell 3.9 percent during this period, and the Russell 2500 Index dropped 4.1 percent.

"The key to investing for growth in a zero-growth economy is to invest in new growth areas, such as the healthy living and medical products sectors," said Jack Robinson, Winslow Management president and lead portfolio manager. "Many stocks in these sectors are performing relatively well, because they are not dependent on [overall] economic growth."

Interestingly, Pax is employing a very similar strategy in the high-yield bond market, also known as the "junk" bond market because of its relative risk.

"We are overweighted in health care, food and supermarkets, homebuilders and consumer products because we think they have the best risk-adjusted return prospects going forward," said Diane Keefe, manager of the Pax World High-Yield Bond Fund. The fund seeks more-conservative-than-average returns. "We have continued to add to more recession resistant businesses such as Nextel Communications (NXTL), Dean Foods (DF), and Chattem (CHTT)." Dean Foods subsidiary, White Wave, the country's largest soy foods manufacturer, recently committed to exclusively using wind power to fuel its production.

Mr. Shirley attributed Pax's success to the rally the high-yield market is currently experiencing.

"Pax is benefiting from the fact that high-yield funds have done extremely well this year, because there is less and less default risk for companies," Mr. Shirley told SocialFunds.com. "With the uncertainty out there in the market, investors have an opportunity to pick up some pretty nice yields with default risks being a little lower."

The 3.31 percent gain in first quarter returns for the Pax World High-Yield Bond Fund compares competitively to its benchmark, the Lipper High Yield Index, which gained 4.51 percent.

"We are not 'benchmark huggers,'" said Ms. Keefe. "We are underperforming the index because of our posture of being more conservative."

Pax distinguishes itself from its peer junk bond funds by its lower tolerance for poor credit quality. While some junk bond funds attempt to generate higher returns by concentrating on bonds rated CCC and lower by Standard & Poor's or Moody's, Pax concentrates on bonds rated in the BB to B+ range.

Pax distinguishes itself from its SRI peers through its position in the high-yield market, which affords more access to key corporate decision-makers.

"The high yield market is relatively small--it's $800 billion this year--and you actually get day-to-day contact with CEOs and CFOs through investment conferences, so you don't have to wait for a shareholder resolution once a year to have a conversation on an issue that impacts corporate behavior," Ms. Keefe told SocialFunds.com. "We are looking to be activists in a very pragmatic way to help these companies be our partners in making good products and services that improve the quality of life."

 

 
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