October 07, 2005
SRI Utilities Fund Flicks Switch to Power Strong Returns
by William Baue
The Flex-funds Total Return Utilities Fund uses environmental and social screening in addition to
fundamental analysis to identify sustainable utilities.
Utilities represent the backbone of developed and developing societies, fulfilling what have come
to be understood as basic human needs for water and electricity. Their impacts on both societal
and economic levels makes these companies of special interest to socially responsible investors.
Flex-funds Total Return Utilities Fund (ticker: FLRUX), a socially responsible
investing (SRI) vehicle, assessing not only the financial status of utility companies, but also how
they manage their negative impacts on society and the environment.
"As residents of
Iraq and New Orleans have recently become acutely aware, utilities are essential to any modern
economy--without them civilization as we know it does not function," said Lowell Miller, president
of Miller/Howard Investments, the portfolio
manager of the fund. "When we flick the switch, there is a great and important infrastructure
behind the appearance of the light."
This balancing act has generated strong performance
recently, as the fund has generated year-to-date returns of 18.09 percent, placing it in the 17th
percentile compared to peer funds (SRI and non-SRI alike)--in other words, it outperformed 83
percent of funds with similar attributes. One-year performance of 31.03 percent returns looks even
better, though it places the fund in the middle of the pack (53rd percentile) compared to peers.
Looking at the long term, the fund has generated 9.46 percent annualized returns since its June 21,
1995 inception, placing it in the 42nd percentile.
All fund statistics cited in this
article are based on data provided by Thomson Financial Network covering the period ending August
Mr. Miller attributes recent strong performance to a shift from domestic
telecommunications--namely the "Baby Bells," otherwise known as regional bell operating companies
(RBOCs)--to cleaner energy.
"Over two years ago we sold all of our RBOC positions and
replaced them with natural gas producers, since all new electricity generation is powered by
natural gas, so there is a kind of equivalence between gas and electricity today," Mr. Miller told
SocialFunds.com. " We tend to favor natural gas producers and distributors, since this fuel is
superior to current alternatives and a reasonable 'transitional' fuel from an environmental
"Our performance has been a function of this driver, plus additional gains
from positions in foreign telecom companies, which gives us telecom exposure in a much more
protected and higher-growth environment," he explained.
What makes the fund's recent
strong performance more impressive is the fact that it has not ridden the wave of growth driving
the large-capitalization electric indexes, as the fund screens out nuclear power to which so many
of the companies in these indexes are exposed.
"We believe the large-cap nuclear
electrics are fully priced, and there are not likely to be the strong gains of the past few years,"
said Mr. Miller. "Our stocks don't suffer from this full valuation, however, and we remain
optimistic that our mix of gas, foreign telecom, suppliers, and transaction candidates can continue
to outperform both the sector and the broad market."
The nuclear exclusion is the primary
negative screen affecting utilities in Miller/Howard's Social Investment Policy, which also screens for
alcohol, tobacco, and defense contracting that utilities companies are generally not exposed to.
Positive screening for companies with environmental best practice takes a front seat.
Miller/Howard's social research relies on the SOCRATES database from KLD Research & Analytics, while also referencing the Domini Social
Index (DSI) and research from
the Interfaith Center on Corporate Responsibility (ICCR), and Institutional Shareholder Services (ISS). This in-depth research contributes to an expense ratio
of 1.99 percent.
Questar (STR), the fund's top holding,
exemplifies the convergence between strong financial and strong social and environmental
"We originally purchased Questar in the teens about six years ago as a
smallish utility with solid financials and a good yield in a growing demographic area," said Mr.
Miller. "We were also interested in its track record in a subsidiary of increasing both production
and reserves for five consecutive years, and in the fact that the company held substantial
interests in the Pinedale Anticline, a gas field in its own region with high potential."
"At the time, we felt we were paying no premium for this diversification," he added. "The
potential of Pinedale has been realized, and the company is now up five-fold from cost."
Questar's environmental sensitivity plays a key role in this growth.
"The company has
been meticulous in adhering to high standards of environmental stewardship during its drilling
endeavors, in part, we think, because it has been drilling in its own backyard," Mr. Miller said.
"There has been occasional commentary regarding the environmental impact of any and all drilling,
but we believe the environmental benefits of natural gas outweigh the sometimes undocumented
objections to drilling in general."
The fund's other top holdings include Sierra Pacific
Pioneer Natural Resources (PXD), and Kinder Morgan Energy