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October 13, 2006
Blue Funds to Invest in Companies that Support Democrats
    by Bill Baue

The two new funds seek to capitalize on research that finds that Democrat-supporting companies significantly outperform Republican-supporting companies.

Just in time for a heated political campaign season comes the launching of The Blue Funds, a large-cap fund and a small-cap fund that hold companies that support Democrats with the majority of their political donations. The founders make no bones about their motivation--to promote progressivism.

"The Blue Fund arose to give progressives who have social and political values at the top of their investment agenda a way to support companies that match these values, both socially and politically," said Daniel Adamson, chief executive officer of Blue Investment Management. Mr. Adamson, a former McKinsey & Company consultant who worked in a New York private equity firm and the Yale University Investments Office, co-founded the firm with Joe Andrew, former National Chairman of the Democratic National Committee. Blue Investment Management is the investment manager for The Blue Funds.

The founders are not simply pushing their ideology, however--they also advance a compelling business case underpinning the funds. According to a white paper, the Blue Large Cap Index (comprised of the 76 Democrat-supporting companies in the S&P 500 that also pass comprehensive social and environmental screens) outperformed the S&P 500 by 13.1 percent annually over the past five years. It also outperformed the portfolio of some 380 "red" companies, which support Republicans with the majority of their political donations, by 15.6 percent annually over the same period. The red portfolio was thus "in the red" compared to its benchmark, while the blue index was "in the black."

The Blue Funds, which launch next week, screen first for whether companies "give blue" by examining donations over the past ten years by their political action committees (PACs) and by their top three executives, as this information is publicly available. The screen cannot take into account corporate lobbying expenditures and political contributions from corporate treasuries, as this information is not required disclosure. Most companies give a majority of donations to one party or the other, though more than 40 companies in the S&P 500 either had neutral giving, or did not disclose sufficient information for Blue Investment Management to make a determination.

The Blue Funds next screen for whether companies "act blue" by applying comprehensive social and environmental screens based on data provided by KLD Research & Analytics, a leading socially responsible investing (SRI) research firm. The screens cover seven areas: environmental sustainability, human rights, corporate governance, fair treatment of employees, diversity, positive community relations, and avoidance of harmful products. The funds also apply exclusionary screens on tobacco and firearms, though not on nuclear power production ("that's something we should consider," Mr. Adamson told

Interestingly, the Blue Investment Management analysis revealed that Democratic-supporting companies were more than twice as likely to pass the social screens than Republican-supporting companies. Only ten of the 86 companies in the S&P 500 that give a majority of contributions to Democrats failed the social and environmental screens, according to Mr. Adamson.

The Blue Funds maintain a "three strike" policy to pass its seven screens. KLD lists "concerns" in each of the areas.

"If a company has one environmental concern, they stay in the portfolio, but if they have three or four or five, then they're kicked out of the portfolio," said Mr. Adamson.

The top three holdings of the large-cap fund are Apple (ticker: AAPL), Google (GOOG), and Fannie Mae (FNM). Last week Apple revealed its own involvement in the stock option backdating scandal--it remains to be seen if the company, which directs more than 95 percent of its political donations to Democrats, will fail the governance screen. Fannie Mae, which was involved in executive compensation scandals two years ago, now passes Blue Fund screens.

The roots of the schism between "blue" and "red" companies date back more than a decade, according to Bruce Freed, co-director of the Center for Political Accountability (CPA), a nonpartisan nonprofit promoting transparency in corporate political donations.

"Traditionally there has been a 60-40 split--the party in power would get 60 percent of donations from any given company, the party out would get 40," Mr. Freed told " Most companies wanted to make sure they were covered on both sides, because they saw power shifting back and forth."

"That balance was upset in 1994 with the Republican push to basically shut down corporate funding--and funding period--to Democratic groups and liberal groups," he noted. "To see how the pattern of political spending and contributions by companies have changed, just take a look at Tom DeLay's K Street Project where they were really trying to corral all the money because they wanted to have the decision-makers in their camp."

Mr. Freed confirmed that Mr. Adamson has approached CPA to participate in shareowner engagement with companies to push for greater transparency. The Blue Funds could participate in dialogue and vote their proxies in favor of resolutions calling for greater political donations transparency, but SEC rules prevent them from filing resolutions until holding stocks for over a year, Mr. Freed pointed out.

The idea for The Blue Funds arose on a family trip through, appropriately enough, the Blue Ridge Mountains of North Carolina.

"The conversation shifted from talking about our environmental footprint to something that isn't often talked about but is just as important--our investment footprint," said Mr. Adamson. "As I continued this line of conversation with my eventual Blue Fund partners, we realized a critical part of our investment footprint is the political element."

"As a committed Democrat and someone who believes that the Republican Party is working to undermine environmental standards, human rights standards, and such, it is important to view the political screening and the social screening as part of the same process," he added.


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