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October 24, 2003
Vanguard Fund Generates Strong Returns by Replicating the Calvert Social Index
    by William Baue

The Vanguard Calvert Social Index Fund outperformed more than four-fifths of its peers in the overall US mutual fund universe with similar investment styles over the past year.


An index fund can act as a barometer for the performance of a particular market segment. The Vanguard Calvert Social Index Fund (ticker: VCSIX), a large-cap growth domestic equity fund managed by the second largest mutual fund company in the US, has outperformed 83 percent of its peers, both SRI and mainstream. The fund has generated returns of 28.69 percent over the past year ended of September 30, 2003, according to statistics provided by Thomson Financial Network.

Vanguard manages the fund passively, tracking the Calvert Social Index (CALVIN) by fully replicating its constituency. The Calvert Group, which manages the nation’s largest family of SRI funds, constitutes the index by applying social, environmental, and corporate responsibility screens to a starting universe of 1,000 of the largest US companies. Calvert manages its own fund based on CALVIN, the Calvert Social Index Fund (CSXAX).

While other SRI indexes, such as the Domini 400 Social Index (KLDDSI), screen companies from the S&P 500 and then add companies to reach a desired industry distribution, Calvert does not tinker with the list determined by its screens: what you see is what you get. Currently, these screens whittle 341 companies from the index. Calvert’s SRI screens decide the fund’s sector allocation, and hence largely determine its performance.

“The Calvert Group's index selection criteria determine the fund's industry exposure,” said Rebecca Cohen, a Vanguard spokeswoman. “At the end of the third quarter, the fund had significant weightings in technology, financial services, and health care stocks.”

“These sectors, in the aggregate, represented 71 percent of the fund's assets, and accounted for the majority of the fund's return,” she added.

The fund’s top ten holdings, which comprise 27.7 percent of total net assets, all fall into these three categories. The top ten include Microsoft (MSFT), Pfizer (PFE), Intel (INTC), IBM (IBM), Johnson & Johnson (JNJ), Cisco (CSCO), American International Group (AIG), Bank of America (BAC), Merck (MRK), and Wells Fargo (WFC).

Technology and financial services stocks boosted the fund’s third quarter performance.

“Technology stocks, which accounted for about 23 percent of the fund's assets, were up 12.2 percent in the quarter as investors continued to bid up the prices of more volatile stocks,” Ms. Cohen told SocialFunds.com. “The fund's financial services holdings, the fund's largest sector exposure at nearly 30 percent of assets, performed in-line with those in the broad market, up 3.1 percent.”

Health care stocks, which accounted for more than 18 percent of the fund's assets at quarter-end, counterbalanced this strong performance, however, declining 5.1 percent.

“Companies in the drug and pharmaceuticals industry declined 8.4 percent due to investors' concerns about increased competition from generic drug makers,” explained Ms. Cohen.

The fund’s longer-term performance also counterbalances its recent performance. Over the past three years, it has generated annualized returns of negative 12.89 percent, placing it in the 55th percentile compared to its peers. In other words, almost equal percentages of its peer funds outperformed it as underperformed it.

Fund assets have risen sharply over the last half-year, climbing from $104.1 million on March 31 to $150.1 million on September 30, according to Thomson.

“The total net assets have growth due in large part to the strong 19.75 percent total return of the fund over this six-month period, as well as due to new cash flow,” said Ms. Cohen.

In January, Vanguard began offering institutional shares (VCSNX) with a lower expense ratio due to the lower cost of servicing large accounts. While the expense ratio for the individual shares is a low 0.25 percent, the expense ratio for the institutional shares is lower by more than half at 0.12 percent. With a minimum $10 million investment, this resulted in an infusion of assets, as the institutional shares currently add another $11.7 million to the fund’s total net assets.

“We always try to be responsive to client interest where feasable, and this was one opportunity in which we could easily meet client demand to offer even lower-cost shares of our Social Index fund,” said Ms. Cohen.

However, Vanguard has not experienced similar client interest, on the individual or the institutional side, for further SRI products.

“We have no plans to introduce other SRI funds at this time,” said Ms. Cohen.

 

 
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