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January 24, 2006
In the Year of the Oil Boom, Some SRI Funds Look Elsewhere for Strong Performance in 2005
    by William Baue

The top-performing socially responsible investing funds compared to their category peers (SRI and non-SRI alike) drew strong performance from pharma, tech, and financials.


Traditional energy stocks were on fire in 2005, a trend that prompted Congress to haul oil company executives up Capitol Hill to explain what looked like price gouging and profiteering in the aftermath of Hurricanes Katrina and Rita. Socially responsible investing (SRI) mutual funds tend to screen out traditional energy stocks due to adverse environmental impacts, and thus missed out on this trend. However, SRI funds such as Winslow Green Growth (ticker: WGGFX), Calvert Large Cap Growth (CLGAX), Citizens Core Growth (WAIDX), Flex Funds Total Return Utilities (FLRUX), Aquinas Growth (AQEGX), New Alternatives (NALFX), and Pax World Balanced (PAXWX) identified alternative trends to fuel strong performance in 2005.

"SRI funds for the most part are going to be underweight in energy versus their non-screened rivals, and obviously energy was the big story last year, outperforming just about everything else in the market," said Greg Carlson, an analyst for fund rating firm Morningstar who covers SRI.

Mr. Carlson's colleague Bill Rocco, who also analyzes SRI funds for Morningstar, expounds on the larger context of how SRI sector allocation affects the evaluation of SRI fund performance.

"It is very difficult to generalize about SRI performance, as you have different screens ranging from politically progressive to religiously conservative," Mr. Rocco told SocialFunds.com. "You really have to compare funds to their category peers by looking at percentile rankings, and even then you have to take a closer look to see if there are significant differences that can drive performance." Percentile rankings compare performance within fund categories, so a 1st percentile fund outperformed 99 percent of its peers--both SRI and non-SRI.

"The SRI screens can indeed make them different, primarily because of the sector weighting," says Mr. Rocco, echoing Mr. Carlson. "The typical SRI screen tends to push you toward things like software and healthcare and away from things like energy."

Indeed, of the 60-odd broadly-screened SRI funds tracked by SocialFunds.com, the top three equity funds percentile-wise in one-year performance for the period ending December 31, 2005 (according to data provided by Thomson Financial Network) all reflect such sector allocations. The Winslow Green Growth Fund, an aggressive growth small- and mid-cap fund that placed in the 10th percentile with 12.18 percent one-year returns, devotes almost a quarter (23.88 percent) of its portfolio to pharmaceutical and biotechnology companies.

Technology companies comprise more than a quarter (28 percent) of the Calvert Large Cap Growth Fund, which placed in the 14th percentile with 11.07 percent one-year returns. And financial institutions make up almost 20 percent of the Citizens Core Growth Fund, which placed in the 19th percentile with 9.63 percent one-year returns.

Of these three funds, this last fund has the highest percentage of energy holdings at 10.6 percent.

"The Citizens Core Growth Fund actually has a pretty sizable stake in energy, more so than the S&P 500 and more so than its large growth category," Mr. Carlson told SocialFunds.com. The fund does not include major oil companies such as ExxonMobil (XOM) or Chevron (CVX), which are the subject of numerous shareowner resolutions on environmental and social issues this proxy season. The fund's top energy holding is Questar (STR), which deals in natural gas, a cleaner energy source than oil that makes it more likely to pass SRI screens, according to Mr. Carlson. "I would expect that this degree of exposure to energy did help fuel outperformance."

Both the Winslow and Calvert funds had strong three-year percentile rankings and performance as well, with the Winslow fund placing in the 1st percentile with 34.09 percent annualized returns and the Calvert fund placing in the 7th percentile with 21.45 percent annualized returns.

Other top 25th percentile SRI equity funds in 2005 include the Flex Funds Total Return Utilities, which placed in the 20th percentile with 16.8 percent returns, Aquinas Growth, which placed in the 22nd percentile with 9.15 percent returns, and New Alternatives, which placed in the 24th percentile with 8.94 percent returns.

The top-ranking balanced fund was the Pax World Balanced Fund, which placed in the 25th percentile with 5.39 percent returns in 2005. Mr. Rocco attributed this fund's outperformance to heavier-than-normal exposure to equities as compared to bonds, as equities performed better than bonds in 2005. Also, the fund rode the strong performance of international markets with a higher concentration of foreign holdings than most balanced funds.

Interestingly, none of the international SRI funds tracked by SocialFunds.com placed in the top 25th percentile.

"There are so few international SRI funds, and they tend to have high costs," explained Mr. Carlson.

Finally, two SRI bond funds broke the top 25th percentile in 2005: the Calvert Social Bond Fund (CSIBX), which placed in the 2nd percentile with 4.51 percent returns, and the Parnassus Fixed Income Fund (PRFIX), which placed in the 12th percentile with 2.55 percent returns.

 

 
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