November 29, 2005
Calvert World Values Fund Tackles Challenges of International Socially Responsible Investing
by William Baue
The fund delivers double-digit three-year returns for shareholders while screening for corporate
environmental, social, and governance performance in international and emerging markets.
For socially responsible investment (SRI), the challenge of accessing credible information on
corporate social and environmental performance is compounded in the international arena, where such
data is even more difficult to obtain in emerging markets than in developed markets. This in part
explains the relative dearth of SRI international funds. Of the handful of international SRI funds
SocialFunds.com, the Calvert World Values International Equity Fund (ticker: CWVGX) leads the pack in
three-year performance with 16.64 percent in annualized returns for the period ending October 31,
"The twin challenges of SRI research are always the same: first, finding
information on social, environmental, and governance-related performance (much of which is not
required reporting), and second, distinguishing fact from public relations," said Julie Gorte, vice
president and chief social investment strategist for the Calvert Group. "In North America, we're lucky to have
governmental sources of information in addition to what nongovernmental organizations and companies
provide; that's lacking in many other regions--but it's not adequate in any country."
"International SRI research also magnifies the element of country context, particularly in
governance," Dr. Gorte told SocialFunds.com. "Even in a domestic investment universe, most
companies operate globally, so it's always useful for social researchers to be aware of differences
in countries own laws and enforcement--though of course compliance is only a starting point, and
often simple compliance alone is not sufficient to qualify a company for inclusion in a social
Despite having a solid 3-year return, the fund ranks in the 83rd percentile
for this time period, according to data supplied by Thompson Financial--in other words, 83 percent
of peer funds in its category (both SRI and non-SRI) outperformed it. On a year-to-date (YTD)
basis, the fund underperformed its benchmark, Morgan Stanley Capital International Europe
Australasia Far East (MSCI EAFE) Index, by 3
percentage points, generating 3.26 percent returns compared to 6.26 percent for the index.
"Sector selection, primarily an underweighting of energy relative to EAFE, has been prime
source of underperformance for the period," said John Nichols, Calvert's vice president for
equities. "The fund does not hedge its currency exposures and a strong US dollar during the period
hurt returns to US investors, but the fund's overall mix of currency exposures provided a marginal
benefit during the period."
Regulation and enforcement on environmental, social, and
governance (ESG) issues in emerging markets often lag that of developed markets, an effect that can
pose particular challenges to social investors in seeking to identify companies with strong
sustainability performance. Interestingly, emerging market investments fueled strong year-to-date
(YTD) financial performance for the Calvert World Values Fund as compared to its benchmark, the
MSCI EAFE Index.
"The fund's exposure to emerging markets was generally favorable during
the period as the fund's emerging markets holdings outperformed EAFE," Mr. Nichols told
"The Fund invests in both developed and emerging markets with an up to 10
percent allocation on an opportunistic basis to emerging markets," explains Dr. Gorte. "The
emerging markets component further diversifies the portfolio and offers the opportunity to
participate in a part of the market that has, from time-to-time, produced very high returns."
Calvert shifted subadvisors in 2002, hiring the esteemed money management firm Grantham Mayo
Van Otterloo & Co. (GMO), with Thomas
Hancock and Christopher Darnell sharing portfolio manager duties.
"GMO uses a rigorous
approach to portfolio construction that integrates a sophisticated proprietary quantitative process
with original fundamental research to develop core international portfolios," said Mr. Nichols.
"These portfolios are constructed in a manner to eliminate unintended sources of risk, and balance
the risk and potential reward of the fund relative to its benchmark."
The Calvert World
Values Fund's top
five equity holdings are pharmaceutical company GlaxoSmithKline (GSK), financial service company ING
telecommunications company Nokia (NOK), financial service company ABN
AMRO (ABN), and
electrical utilities company Enel (EN). The fund also has limited
investments in extractive industries, such as oil and gas company Encana (ECA) and precious metals company
Johnson Matthey (JMAT.L), both of which exhibit
sustainability leadership in Calvert's opinion.
"We believe it is important to recognize
sustainability leadership, and while that is very challenging is some sectors--extractives is
certainly one--we also know that every item we consume is taken from the earth in some fashion, and
that if we wish to enjoy the material items that give us comfortable standards of living, we must
find ways, as a society, to extract minerals and plant material from the land without impairing its
ability to sustain a wide variety of robust habitats," said Dr. Gorte. "If social investing is
successful, in the long run every company will be sustainable."
Looking to the
future, Calvert acknowledges it has its work cut out for it to generate strong returns from the
tightening international market.
"We believe that equity market valuation levels now make
a continuation of recent strong returns unlikely," states the fund's annual letter. "Perhaps the
good news is that there is scope for positive surprises in currently disappointing markets and
economies, such as Germany."
"Within markets (countries), valuation spreads are tight, and
there seems little justification for making style bets (such as a strategy of overweighting to
smaller-cap stocks, which have outperformed over the last several years)," it continues. "However,
since overseas stocks are still more reasonably priced than are those in the US, the potential for
international outperformance remains good."