As editor of Tom Gardner's Motley Fool Hidden Gems, I recently had the fortune of conversing with Ron Wolfsheimer, chief financial officer of Calvert Group. Calvert is a mutual fund company best known for its focus on socially responsible investing -- a field the firm is considered to have pioneered.
To paraphrase, Mr. Wolfsheimer is a fan of The Motley Fool but has long wished that we'd not paint all mutual funds with the same brush. The brush of which he speaks, I assume, is the Foolish decree that the average investor should steer clear of most actively managed mutual funds because the vast majority of them underperform the market. Perhaps it's time to put a finer point on that.
If I might backpedal
Why hate all mutual funds just because so many charge a pretty penny to underperform? Just hate that majority that fumble the ball. Given the odds, the typical investor won't likely overcome the underperformance handicap, but clearly, there are good funds and there are bad funds.
If you know me, you know I'm a stock guy. I have a handful of funds, primarily in rolled-over IRAs, as well as an S&P 500 index mutual fund that allows free, automatic, periodic contributions. I also own a pair of exchange-traded funds (ETFs) that I wouldn't part with today for a hefty premium. But at heart, I like to pick my own stocks, make them my friends, and hold on to them for the long haul.
Despite all that, I find myself talking mutual funds more and more with our Fool fund guru, Shannon Zimmerman. Mainly, we talk investment styles, scandals, star managers, tax efficiency, and above all, fees. But we also talk strategies, not to mention the notion that if some small percentage of managed funds do outperform the index, how great would it be for less hands-on investors to succeed in picking the best and somehow avoid the rest? And sometimes we talk SRI.
The case for responsibility
Buzzword alert: SRI, you've gathered, is hipspeak for socially responsible investing. I didn't just stumble upon Calvert Group by coincidence. The notion of investing responsibly has been eating away at me for some time. Things heated up when I read radical economist David Boyle's The Little Money Book, which in turn prompted a spirited debate with our own Tom Gardner over the perils of mixing investing with my dreams of a utopian future.
I'd recommend both Tom Gardner and The Little Money Book, though not necessarily all of their conclusions. Some of the ideas in The Little Money Book are radical even for me. Still, for a book ostensibly about money, I was taken by its dedication to intangibles: community, relationships, spirit, charity, friendship, and self-esteem. I've spent years pondering the value of stocks and bonds, but rarely the value of a diverse community, a sustainable environment, and a healthy and fulfilled global population.
It occurs to me that this is no small oversight, but a product of my background -- one exacerbated by the more vocational aspects of my education. More importantly, I'm looking to do something about it.
The case for funds
Stocks are my job -- all day, every day. But for all that, I'm not convinced that I have the resources to plumb the investment well for winning prospects that also are making the world a better place. Fortunately, I've come to appreciate that this need not be an all-or-nothing proposition.
Maybe you will bombard me with emails decrying my slack socialist thinking and trumpeting the Darwinian beauty of the markets. Maybe I'll come to my senses. But until then, I thought I'd dig up an SRI fund, either from Calvert or elsewhere, and fight the good fight for a while -- at least, on one front.
I think I debate with Tom Gardner so much because I spend so much of my time working on his Hidden Gems newsletter. One thing we don't argue about, though, is the long-term advantage of small-cap investing and the role of smaller companies in most any balanced portfolio. Little wonder, then, that I am drawn to the Calvert New Vision Small-Cap Fund (CNVAX), which targets underfollowed smaller companies (less than $1 billion in market cap) that fit Calvert's "investment and social criteria."
The fund doesn't yet hold any of our hidden gems, but it does offer access to a diversified group of small caps. Publisher John Wiley & Sons (NYSE:JWA), for example, boasts growing revenues, double-digit returns on equity, and is nearly 25% held by inside owners. Though not so hidden, battery maker Rayovac (NYSE:ROV) offers many of the same characteristics. There are no guarantees, but even after expenses, the Calvert New Vision Small-Cap Fund has more than kept pace with its benchmark, the Russell 2000 index, over the past five years.
Then there's the Domini Social Equity Fund (DSEFX). Because it essentially tracks the performance of the Domini 400 Social Index made up of 400 companies that meet selected social and environmental criteria, the fund is efficient and relatively low-cost. There's no load, and annual expenses run south of 1%. Since its inception in 1991, the fund has returned 10.52% annualized vs. 10.92% for the S&P 500.
Underperformance? Strictly speaking, yes. But only you can decide whether it's a fair price to pay for a focus on, according to Domini, "the environment, community involvement, diversity, employee relations, product safety, and other product-related issues."
What is it worth?
To me, as an investor, SRI means thinking more "humanly." From now on, I will ask myself not only whether I understand what a company does (how it's going to provide me with outsized returns), but whether I approve of its methods. Can I sanction the way it treats the environment or its workers, consumers, and even debtors overseas? Does it peddle useless or even harmful products to children? Does its business unfairly burden the downtrodden in our culture? I never bought the notion of profit as sole arbiter, but maybe I don't resist as much as I might. For all my infatuation with money, I will try to love it less.
As for individual stocks, it's not been easy digging up a portfolio of companies that meet so strict a social responsibility mandate, especially among the usual suspects. Wal-Mart (NYSE:WMT) appears community minded, but runs out local businesses and funnels money out of communities. The same criticism could be levied against McDonald's (NYSE:MCD), despite the gift that is the Ronald McDonald House. International Multifoods (NYSE:IMC) hawks junk food unabashedly to impressionable children. Altria Group (NYSE:MO) and R.J. Reynolds (NYSE:RJR) clearly aren't for me.
Who's in? Atop most SRI rosters, you'll find a whole lot of tech. Experts in the field have found little to fault with the likes of Intel (NASDAQ:INTC), Cisco (NASDAQ:CSCO), and Microsoft (NASDAQ:MSFT). You'll also find big banks like Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC). Not surprisingly, the Domini index weighs all four quite heavily. But this is just a start.
Now what?
In the spirit of community, I hope you will share your thoughts -- and some socially responsible stock ideas of your own -- on our Socially Responsible Investing discussion board. Meanwhile, you can take a free trial of Tom Gardner's Motley Fool Hidden Gems simply by clicking here.
Paul Elliott is the editor of Motley Fool Hidden Gems and an advocate of, though not activist for, social responsibility. He does not own any of the stocks mentioned. Send Paul feedback via email . The Motley Fool is investors writing for investors .
