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November 20, 2002
SRI Mutual Funds Go Low-Tech
    by William Baue

SRI mutual funds that invest in large-capitalization companies weather the bear market by avoiding sagging technology holdings.


Technology stocks were largely responsible for the bull market of the late 1990s, and are now largely responsible for the bear market of the past two years. While socially responsible investment (SRI) proponents tend to admire the technology sector for its strong social and environmental performance relative to other sectors, some in the SRI community foresaw the overvaluation of technology stocks. They reacted by underweighting their mutual funds in technology, or holding less technology stock in their fund portfolios than the benchmark.

Several large-capitalization blend funds in the SRI market have used this very strategy to outperform the S&P 500, which is a standard benchmark of performance. Market capitalization is determined by multiplying the number of shares outstanding by the price per share, and a blend fund uses both value and growth strategies.

For example, the Women's Equity Fund (ticker: FEMMX) ranked in the seventh percentile for one-year performance, which means that it outperformed 93 percent of all other large-cap blend domestic equity mutual funds, be they SRI or mainstream. The one-year returns from the Women's Equity Fund were down only 6.12 percent, while the S&P 500 lost 15.11 percent in average annual total return over the past year. The Walden Social Equity Fund (WSEFX) used the same technology underweighting strategy to place in the eighth percentile compared to its peers, and lost 4.39 percent over the year, safely beating the S&P 500's one-year decline. All fund statistics in this article have been provided by Thomson Financial Network, and cover the period ending October 31, 2002.

"The most important factors leading to Walden Social Equity performance have been an emphasis on quality of earnings and an underweighting of the technology sector (due to its extremely high valuation)," said Walden Senior Portfolio Manager Robert Lincoln, who recently explained to the fund's investors how technology underperformed over the past two years. "In 2000, the technology sector lost 32 percent, accounting for just about the entire 9 percent decline in the S&P 500. The average stock actually gained 10.5 percent in 2000. Similarly in 2001, technology stocks lost 26 percent, leading the S&P 500 to a loss of 12 percent while the average S&P stock lost only 2 percent."

The MMA Praxis Core Stock Fund (MMPGX), which ranked in the 18th percentile for one-year performance, followed a similar strategy.

"We were never very comfortable with the valuations granted to many stocks, especially those in the technology and related sectors, as the bull market forged on into early 2000," Portfolio Co-Managers Chad Horning and John Nussbaum told SocialFunds.com. "We still remain underweight relative to the S&P 500 weight of the technology sector because we don't believe many of the valuations make sense even after the drubbing they've taken over the last 2 1/2 years."

Messrs. Horning and Nussbaum pointed out how this strategy inevitably affects the portfolio's balance.

"An underweight in one sector means that we have had to overweight other sectors," Messrs. Horning and Nussbaum said. They cited Biomet (BMET), the orthopedics company, as an example. "The stock has been driven both by technological advances and increasing demand for artificial joints.

Walden similarly overweighted healthcare holdings, investing in Biomet as well as Medtronic (MDT) and other healthcare companies that have been performing particularly well.

"Walden has over 100 percent appreciation in Dentsply (XRAY), St. Jude Medical (STJ), and Cardinal Health (CAH)," said Mr. Lincoln.

Other large-cap blend funds that have outperformed the S&P 500 over the last year include the Calvert Social Equity Fund (CSIEX), the Neuberger Berman Socially Responsive Fund (NBSRX), the Security Social Awareness Fund (SWAAX), and the Domini Social Equity Fund (DSEFX). The Calvert Social Equity Fund ranked in the ninth percentile relative to its peers, and fell only 7.46 percent over the past year. The Neuberger Berman Socially Responsive Fund ranked in the 12th percentile, and lost 8.76 percent. The Security Social Awareness Fund placed in the 20th percentile while declining 11.53 percent over the last year. And the Domini Social Equity Fund ranked in the 24th percentile, slipping 12.47 percent over the past year.

 

 
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