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Mutual Funds

Screening Out Terror

What's in a name? With this fund, the name stands for a lot, but has little affect on stock choice.

The knee-jerk reaction upon hearing about a mutual fund called Roosevelt Anti-Terror Multi-Cap is to think marketing ploy. In fact, this fund has performed terrifically in its five and a half years of existence. And as for that "anti-terror" stuff in the name, it's more than a gimmick -- it may be the next big thing in socially motivated investing.

In this context, anti-terror means avoiding stocks of companies that conduct business with Iran, North Korea, Sudan or Syria -- nations that the U.S. government considers abettors of terrorism. It's an idea that's catching hold in pension funds and state governments across the country. Roosevelt is the first, but will certainly not be the last, anti-terror product to reach small investors.

The Anti-Terror Multi-Cap fund is Roosevelt Investment Group's first foray into the public arena. Based in New York City, Roosevelt manages about $1.2 billion for pensions, endowments and private clients. It started the fund, originally called Bull Moose Growth, to enable those with modest means to avail themselves of Roosevelt's investing acumen (the fund's initial minimum is $1,000). The money manager comes by the Roosevelt name honestly -- a previous incarnation of the firm was run by a descendant of Teddy Roosevelt before its acquisition by Sheer Asset Management in 2002.

Results have been top notch. Over the past five years through June 30, the fund (symbol BULLX) returned a bit more than 16% annualized. That beats Standard & Poor's 500-stock index by an average of nearly six percentage points per year. Although the fund lost 5% in 2002, it beat the S&P 500 by 17 percentage points that year. The fund has delivered double-digit returns in each calendar year since (including the first half of 2007) and lagged the S&P index in only one of them (2006). Adding the anti-terror theme was a pragmatic decision. Adam Sheer, president of Roosevelt, says the company that sold the fund to 401(k) clients requested that Roosevelt create a new name because no one had "any idea what a bull moose was." And in 2004, Sheer says, some private clients asked him about terror-free investing and if it was part of the company's philosophy. "Frankly," says Sheer, "we had never heard of it."


He admits to being somewhat ambivalent about the idea at first. But as business people, he says, the Roosevelt execs try to meet the needs of the marketplace. Anti-terror is a concept that "would appeal to many Americans, and that's what really drove the decision," he says.

National trend

Screening against terrorism accomplices is an idea that's taken root among some big institutions. At least ten states, including California and Texas, now have laws that could require their pension funds to follow anti-terror investment policies. Missouri says it will soon have a terror-free offering for its state-sponsored college savings plan.

And the outfit that is paid by Missouri and Roosevelt to screen out terror-related companies says more investing options for retail investors are coming soon. Once more products become available, "you'll see a snowball effect," says Adam Pener, chief operating officer of the Conflict Securities Advisory Group, a research organization based in Washington, D.C. Pener declined to say which investment companies are planning to introduce the products. One other minor offering has already hit the market: In June, Claymore Securities, known for its narrowly focused exchanged-traded funds, introduced Claymore/KLD Sudan Free Large-Cap Core ETF (KSF), which avoids the stocks of the few companies that do business with Sudan.

A Security and Exchange Commission report in 2001 that identified "global security risk" spurred Conflict Securities' genesis. The demand to steer clear of companies that did business with Iran, North Korea, Sudan and Syria first came from pension funds looking to manage risk peculiar to those companies, Pener says. Most of the group's clients still employ its database to assess risks, but a growing number use it for ethical screening, he says.


Among those clients is Sarah Steelman, the Missouri state treasurer. When she took office in 2005, Steelman says, she saw the state did business through BNP Paribas, a French bank that had ties to Iran and that, before the ouster of Saddam Hussein, was involved with the corrupt oil-for-food program in Iraq. "No way are we going to do business with that bank," says Steelman. "Then I started thinking what other money we have funding terrorism around the world."

Steelman fired Paribas and another European bank that did business with Iran, but has yet to get the state legislature to go along with an anti-terror spin to state pension funds. However, a small account managed for cultural activities in Missouri is free of terror-tied stocks, and she's become a gadfly on the issue for other states.

The list

What makes a company complicit of helping terrorist states? Conflict Security Advisory has various screens depending on how doctrinaire a client wants to be. At one end are companies with direct business operations in the four countries. At the other are those who provide humanitarian aid. In between are companies with foreign subsidiaries in those countries and firms that sell products there.

Given that U.S. companies can't directly do business with terrorist states by law, 90% of the 500 or so on Conflict Security's list are foreign-based. Most of them are major corporations in Europe and Asia, Pener says, and many of those are in the energy sector. But some U.S.-based corporations make the list because of foreign subsidiaries. Those include General Electric (GE), insurer Aon (AOC) and energy companies ConocoPhillips (COP) and Halliburton (HAL).


Missouri Treasurer Steelman says the anti-terror movement is already starting to have an affect on how companies do business. She points out that Swiss financial giant UBS (UBS) has stopped doing business with Iran and has started a strict anti-terror screening policy. "The goal is to cut off funding for terrorism," she says, adding that U.S. citizens should have anti-terror investment options and demand that their pension plans divest.

But others see another side to the debate. Representatives for the California Public Employees' Retirement System argue, for example, that they can more effectively pressure companies in question by remaining shareholders.

The fund

Roosevelt Anti-Terror Multi-Cap excludes almost all the companies on the Conflict Securities Advisory Group list. But given that foreign companies dominate the list and that Roosevelt, by mandate, can have no more than 15% of its assets in foreign stocks, the fund isn't hurting for choices.

For domestic funds in particular, good investment alternatives exist for every company with ties to the four countries, says Conflict Advisory's Pener: "This is not like tobacco. If you have a tobacco screen, you can't buy tobacco. It's dead to you."


Aside from the terror hook, Roosevelt Anti-Terror is run like a traditional fund. Sheer says he looks for long-term trends that are not reflected in current stock prices. He then looks for stocks that fit the trend and aren't overpriced. In the past, he says, the fund profited from investments based on a shortage of U.S. utility capacity. Duke Energy (DUK) and Constellation Energy (CEG) were once big holdings, but the trend has played out with rising interest rates and utility stock prices.

Today, Sheer sees rising agriculture prices as a major trend. Worldwide droughts, the growing use of corn for ethanol production and improved diets among citizens of emerging countries all suggest higher food prices. Deere (DE), Potash Corp. of Saskatchewan (POT) and Monsanto (MON) are among Sheer's favorite agriculture plays.

As its name suggests, Roosevelt Anti-Terror Multi-Cap can invest in companies of any size. Given that the fund has only about $20 million in assets, it can be plenty nimble in choosing stocks. Given its good returns, low minimum, reasonable expenses (1.28% annually) and, of course, the anti-terror hook, this fund may not stay small for long.