May 19, 2005
Ethical Funds Hires Manning & Napier to Manage Its North American Equity Fund
by William Baue
Former portfolio manager Alliance Capital Management got the boot due to poor performance and a
lack of diverse strategies to navigate market cycles.
Looking to boost performance in the Ethical
North American Equity Fund, Vancouver, Canada-based socially responsible investment (SRI) firm
Ethical Funds booted
portfolio manager Alliance Capital
Management in favor of Manning &
Napier Associates. The fund lost 8.6 percent over the past year ending April 29, 2005, and
generated annualized returns of negative 9.3 percent over the past three years.
"Performance lagged in the portfolio," said Russell Moldowan, portfolio analysis manager
for Ethical Funds. The Russell 1000 Growth Index gained .40
percent over the past year and 1.51 percent over the past three years, while the S&P 500 Composite Index was up 4.47 percent for the year and
up 2.42 percent for two years. "We also didn't have full confidence in the manager, so we needed
to make a change."
"For us, the decision to change managers was as much style-related as
it was performance-related," Mr. Moldowan told SocialFunds.com. "If we are offering only one US
Equity Fund within our fund family, better that it act as more of a core holding that can withstand
the effects of various business cycles as opposed to being so focused on one particular style."
Manning & Napier shifts its portfolios from value to growth style as the market rolls
through cycles--for example, shifting from 70 percent value and 30 percent growth in March 2000 to
30 percent value and 70 percent growth by September 2003.
"When looked at the performance
numbers, we saw a durable and persistent alpha--that is, the value that they add over and above
risk-adjusted returns was persistent, it hadn't diminished even when the market rolled through a
trough and then went back into an expansion," said Mr. Moldowan.
"Manning & Napier's
ability to deliver performance through an entire market cycle puts them among a group of less than
5 percent of US equity investment managers who have outperformed the S&P 500 Index each year since
1999," added Elaine McHarg, senior vice president of marketing at Ethical Funds.
performance was the last thing Ethical Funds considered in their due diligence for hiring a new
manager. In September 2004, Ethical Funds retained independent search consultant Brockhouse Cooper to develop a
strategy for manager searches. This strategy seeks to identify managers with a high degree of
independence, active employee ownership, remuneration aligned with fund performance, low stock
turnover, and smaller portfolios.
"We put all that information into a quantitative scoring
system that comes up with a ranking that includes philosophy, process, people, and performance,"
said Mr. Moldowan. "We came up with dozen candidates and narrowed that down to five, so we went
and spent about a half day with each of those five managers, then invited the top two candidates to
visit our offices in Vancouver."
Rochester, New York-based Manning & Napier, which is
fully owned by its 35 employees, got the nod.
"We saw a company that had the right number
of employees, the right amount of assets, the right compensation schedule," said Mr. Moldowan.
"The research we did indicated that, in the coming term, lower turnover will result in higher
returns over time."
Manning & Napier manages $10 billion in assets, keeps turnover low,
and also keeps the number of companies in its portfolios low, ranging between 40 and 60. The firm
manages about $750 million in socially screened mandates for religious organizations, unions, and
"Manning & Napier has been applying SRI criteria on behalf of clients since
the 1980s," said Richard Barrington, managing director of client services at Manning & Napier.
Ethical Funds' staff of five sustainability analysts performs the social and environmental
screens, integrating their research directly with portfolio managers. For its part, Manning &
Napier dedicates specific staff to work with its screened accounts.
One of the fund's
challenging aspects is investing in US stocks with Canadian assets.
"Our funds are only
available in Canadian dollars, so there will always be a differential in performance in local
currencies," explained Mr. Moldowan.
Manning & Napier registered with the Ontario
Securities Commission and the British Columbia Securities Commission to qualify for managing the
"We have well over a decade of experience with international
investing, which includes accounting for currency fluctuations," Mr. Barrington told
SocialFunds.com. "Given the high covariance between the Canadian and US dollars, we do not expect
the currency issue to be significant under most scenarios."
Ethical Funds has the option
to have Manning & Napier hedge the currency, according to Mr. Moldowan, though this is not an