July 21, 2004
Two Socially Responsible Investing Funds Generate Double-Digit Year-to-Date Returns
by William Baue
The Ariel Fund and the Pax World Growth Fund perform well in the first half of this year.
Of the 60-odd socially responsible investment (SRI) mutual funds tracked by SocialFunds.com, two
funds have produced year-to-date (YTD) returns in the double digits at the half-year mark. The
Ariel Fund (ticker: ARGFX) generated YTD returns
of 11.84 percent, placing it in the third percentile compared to its peers--domestic equity value
funds that invest in small- and mid-cap companies. (In other words, it performed better than 97
percent of its peer funds.) The Pax World Growth Fund (PXWGX) produced YTD returns of
10.61 percent, ranking in the second percentile compared to its peers--domestic equity growth funds
that invest in mid- and large-cap companies.
All performance statistics cited in
this article are current as of June 30, 2004, and are based on data provided by Thomson Financial
Network, unless otherwise noted.
On social issues, the two funds converge on some screens.
Both funds exclude companies that produce weapons, nuclear power, tobacco, and negative impacts on
the environment, and both have positive screens for strong employment policies. Neither fund
practices community investment.
The funds diverge on other social issues. For example,
the Pax World practices shareowner advocacy, engaging with companies it holds to encourage
progressive social and environmental policies and practices; Ariel does not. The Pax World Growth
Fund also employs several additional screens, such as exclusions on companies involved in alcohol
and gambling. In contrast, the top holding in the Ariel Fund portfolio is Caesars Entertainment
(ticker: CZR), a
The top holding in the Pax World Growth Fund portfolio, Dick's Sporting
does not particularly exemplify social responsibility, according to portfolio manager Paul Gulden,
except that it is not involved in any of the controversial areas screened by SRI. Mr. Gulden
attributes the strong recent performance of the fund in large part to the strong showing of this
company, which comprises 4.86 percent of the portfolio.
"It did well because it went up,"
Mr. Gulden told SocialFunds.com, imparting Yogi Berra-like wisdom.
"Eon Labs [ELAB] was a
particularly strong performer during the quarter," Mr. Gulden said, referring to the fund's third
largest holding. Eon typifies a strategic move to capitalize on Medicare reform by increasing
health care holdings, which is now the sector in with the largest representation in the fund at
28.07 percent. "With Medicare recipients obligated to purchase more and more generic drugs in an
effort to keep down prices, generic drug makers like Eon Labs will see growth."
November 2003, the US Senate approved a plan to overhaul Medicare by infusing $400 billion into the
government-sponsored health care system for the elderly.
Mr. Gulden prefers smaller
companies filling niches in the health care industry over the large pharmaceutical companies.
Mr. Gulden points out that the US is home to the major pharmaceutical companies and the
highest drug prices in the world, which the drug companies consider necessary to fund research and
development of new drugs. While Mr. Gulden does not dispute this logic, he points out that this
system is unsustainable, as cheaper prices prompt consumers to buy prescription drugs outside US
borders. Price controls are therefore inevitable, according to Mr. Gulden, and the major
pharmaceutical companies will be hardest hit by this development.
"I'm not focused on the
major pharmaceuticals in my portfolio--they are no longer great growth companies," Mr. Gulden said.
"They're also political footballs."
"I'm more concerned with companies that will see
faster growth in light of the current Medicare reform and the ageing American population," he
Smaller health care companies are better positioned to capitalize on growth in
"eResearch [ERES], a company that crosses the
border between information technologies and health care, was another strong performer," Mr. Gulden
However, this long-term strategy did not result in strong short-term results for
all of the Pax World Growth Fund's health care holdings. Caremark (CMX) and ExpressScript (ESRX), two
prescription benefit managers, did not post particularly good performance recently. However, the
companies are well managed, and have good quality distribution capabilities and record keeping,
according to Mr. Gulden.
"These companies are primed to take on the additional
pharmaceutical spending created by the Medicare bill," he concluded.