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June 17, 2005
Women's Equity Mutual Fund Supports Businesswomen Through Screening and Now Microfinance
    by William Baue

Subadvisor Walden Asset Management provides research on how companies treat women, and Blue Orchard Finance provides a new securitized product supporting microfinance institutions.


The idea to create the Women's Equity Mutual Fund (ticker: FEMMX), a socially responsible investment (SRI) mutual fund that screens companies according to how they treat women, grew out of a chance meeting in early 1992 between Linda Pei and Leslie Christian. Ms. Pei had just returned to the US from Hong Kong (where she spent most of the 1980s as a consultant to Citibank) with two children, wanting to "make a difference on their behalf." Ms. Christian, Ms. Pei's mentor at her first job, had just quit an investment banking job at Goldman Sachs to volunteer at battered women's shelters.

"Leslie realized women often reenter abusive relationships because they don't feel strong enough financially, so she decided to become a financial planner to educate women about investing," said Ms. Pei, who followed suit by taking the seven tests to earn financial planner certification. "After I'd passed three tests, Leslie called saying there's got to be something we can do to make a bigger impact."

Ms. Christian had been learning about SRI funds.

"Look at how effective they have been in getting companies to diversify out of South Africa--don't you think somebody ought to create a fund using the same SRI methodology to influence corporations to improve their policies toward women?" Ms. Christian asked Ms. Pei. "We always say 'somebody ought to,' but we don't have the right to complain if we don't do something ourselves--after all, we're educated in business, we should do this."

Mss. Christian and Pei launched the no-load, large-cap blend fund in October 1993. The fund's long-term performance supports their notion that "companies that make use of the talent of all their employees, including women, are best equipped to be more profitable in the competitive global marketplace." As of May 31, 2005, the fund has outperformed the S&P 500 in five-year (2.86 percent compared to -1.93 percent), and ten-year (10.31 percent compared to 10.18 percent) returns.

This five-year performance places the fund in the 19th percentile compared to its peers, meaning that it generated better returns than 81 percent of SRI and non-SRI funds with in the same asset class and investment style similar characteristics, according to Thomson Financial Network. The fund's ten-year performance places it in the 28th percentile.

Walden Asset Management serves as the subadvisor for the fund, with Walden's Heidi Soumerai and Bill Apfel serving as co-portfolio managers (Mr. Apfel focuses more on securities analysis while Ms. Soumerai predominantly handles the social research.) The women-centered screens focus on issues such as the percentage of women in senior management positions and on boards of directors. Women hold 16 percent of the total board seats of companies in the fund, compared to 14.6 percent for S&P 500 companies, according to data from the Investor Responsibility Research Center (IRRC).

In addition to positive screens for women's issues, racial diversity, and environmental sustainability, the fund also employs negative screens that exclude companies that produce tobacco, alcohol, or weapons. These screens narrow the universe of investable companies to about 350, from which Walden chooses about 70 to constitute the fund. The top five holdings include BP (BP), Bank of America (BAC), Sysco (SYY), Illinois Tool Works (ITW), and Chubb (CB). The fund's website profiles how each company excels in its treatment of women, a degree of disclosure that has earned praise from Paul Hawken, who has criticized the SRI industry for lack of transparency on how portfolio companies pass social screens.

"ITW (Illinois Tool Works) has been in discussions with Walden about equal employment opportunity, and in recent years has added both female and minority representation to its board of directors," the ITW profile states.

Within the past year, the fund has implemented perhaps its most innovative strategy by investing in microfinance, which is particularly appropriate since this investment style provides microloans almost exclusively to women entrepreneurs in developing nations to help alleviate poverty. Microfinance's focus on women is born of both theoretical and practical considerations: in emerging economies, women's connection to children means support for the former positively impacts the latter, and experience in these areas shows that women repay loans better than men.

With such a clear synergy with the fund's mission, Ms. Pei has worked for five years to develop a vehicle for supporting microfinance in an equity fund, which requires a securitized product that is priced daily to conform with the mutual fund's daily net asset value (NAV) calculation.

"While living in Switzerland for three years, I pushed the United Nations to develop such a securitized product, and they directed me to meet with Blue Orchard Finance, who developed the first ever securitized product based on loans to microfinance institutions," Ms. Pei told SocialFunds.com.

In collaboration with Darien, Connecticut-based Developing World Markets, Geneva-based Blue Orchard launched the security in July 2004 by pooling $42 million in loans to nine microfinance institutions in seven countries in Latin America, Southeast Asia, and Eastern Europe. The Women's Equity Mutual Fund invested $500,000 (about 2 percent of the fund's assets) in the offering, known as Blue Orchard Microfinance Securities I, which will earn 4.936 percent (one percent above the rate for US Treasury notes) over a seven-year term.

Microfinance investment is much better geared toward fixed income vehicles, so Mss. Pei and Christian are currently developing a bond fund "so that we can have more funding in the capital markets directed into microfinance," according to Ms. Pei.

 

 
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