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May 20, 2005
Catching a Rising Knife: Sophia Collier Manages the Citizens Value Fund
    by William Baue

Whereas former portfolio manager Shelly Meyers tried to catch falling knives, Ms. Collier shifted to a more conservative strategy that has generated much better returns.

When socially responsible investment (SRI) firm Citizens Funds absorbed Meyers Pride Value Fund assets into the new Citizens Value Fund (ticker: MYPVX) on September 24, 2001, the fund's net asset value (NAV) was $10.88. The fund retained phenomenally-performing portfolio manager Shelly Meyers, and added Citizens' broad social and environmental screening to the existing screening for progressive policies regarding gay and lesbian employment. About a year later, however, the NAV was down to the $6-7 range. On Halloween of 2002, with NAV at $7.51, Citizens President Sophia Collier replaced Ms. Meyer as portfolio manager. Since then, the NAV has climbed to $11.28 as of May 19, 2005, generating a cumulative return of just over 50 percent to outperform the S&P 500 by about 11 percent during that period.

"The key decision we made that has accounted for this return since we took over the portfolio was to adopt a quality-relative value strategy, whereby we focus on companies that are asset-rich but are selling at significant discounts to peer companies," Ms. Collier told "Shelly's style had some virtues, and she's a good manager for a certain type of investor, but her approach was more analogous to the deep-value style, which focuses on really distressed companies where the manager sees value that almost no one else does."

While this strategy can have some spectacular returns from time to time, companies can also go into bankruptcy or hidden liabilities can emerge, and sometimes value can be lost rapidly, so it is a risky form of value investing.

"There's an expression on Wall Street of 'trying to catch a falling knife' where value investors buy stocks with falling prices, but unfortunately they can fall farther and farther still," Ms. Collier said. "Our shareholders found this kind of downside volatility nerve-wracking, and we didn't want to have a strategy that was excessively exposed to risk, which we felt her strategy was.

"We wanted to design a value strategy for Citizens that is a stable, effective strategy without a lot of volatility that builds incremental basis points over the index by selecting asset-rich companies selling at a discount to their peers where an important turnaround was happening, and all it needed to do was roll forward for the company to trade up closer to its peer."

Ms. Collier explains this value strategy by comparing it to growth strategies, which seek to capitalize on rising stock prices before companies "revert to the mean," where growth slows, gravity exerts itself, and new products lose steam. Ms. Collier's value strategy inverts this equation. Instead of investing in growth companies rising above the mean before they crest, she invests in companies valued below the mean that have all the assets they need to climb closer to their peer average price--more like catching a rising knife than a falling one.

"I consider it like betting with the house," said Ms. Collier, drawing an analogy to the safe poker strategy that acknowledges the reality that casinos set the odds in their own favor. "A great example is FedEx [FDX], which has sold at a lower price than its rival UPS [UPS], but it is executing a little better than UPS, so as FedEx trades up closer to the valuation of UPS, it's actually outperformed UPS on a stock basis.

"Likewise with CVS [CVS], which has been a much better investment than Walgreen [WAG], its well-known competitor," Ms. Collier said. "We look for a relative value--UPS trades at 25 times earnings, while CVS trades at 18 times earnings, and it has plans to improve pharmacy and front-end sales and expand its reach with its recent purchase of the Eckerd chain."

FedEx is the porfolio's fourth-largest holding, CVS its third, and the top holding is ConocoPhillips (COP), which trades at a significant discount to industry leaders such as ExxonMobil (XOM) and Chevron (CVX) while having comparable or better growth prospects, according to Ms. Collier.

"ConocoPhillips is also one of the rare oil companies that is socially approved at Citizens because it has a much better environmental record across a wide range of dimensions than does ExxonMobil or Chevron," said Ms. Collier. "This allows the value fund to participate in the energy boom that's happened."

This positive environmental screening of ConocoPhillips exemplifies Citizens' move toward a more broad-based screening approach.

"Joanne Dowdell, our director of corporate responsibility, has been a great addition in moving our company toward a more quantitative screening approach by ranking companies on a number of dimensions," said Ms. Collier. "When I first got involved in SRI, I felt sometimes our industry had more of a beauty-contest approach, where we would agree that we like this company and not another company, sometimes choosing aspects that were laudable but not central to their work."

"We like to see companies in their core business executing well from a social and environmental standard," she continued. "So the more dimensions and the deeper research we can do into those factors to assess the companies on a like-to-like basis, the better job we can do for the shareholders in terms of their goals of investing in very strictly-screened funds."


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