Five Great Green Funds
It's easy to be a "green" investor. The trick is to be a green investor and match, much less beat, the stock market.
It can be done -- as I'll show you in a moment -- but it isn't easy. Over the past ten years, the average socially screened stock fund has returned an average of about one percentage point per year less than the typical stock fund.
Why? Socially conscious funds, by definition, restrict the stocks in which they invest. Thus, for example, social funds of a liberal bent tend to invest less in smokestack industries than other funds.
(Socially responsible funds come in all stripes, but the overwhelming majority of them approach their mission from the left side of the political spectrum -- so this article is concerned with them. Liberal funds tend to exclude companies involved with alcohol, tobacco and weapons companies -- as well as those that pollute.)
Many of the funds charge too much. The average socially conscious stock fund charges 0.16 percentage point per year more than the average stock fund. One reason for this is that green funds are small, and fixed costs tend to represent a higher percentage of small funds. But even Calvert, the biggest player in the socially screened fund arena, suffers from high expense ratios -- and mediocre performance.
There's still another reason for poor returns. To be a first-rate fund manager, I think you have to be passionate about investing. All the green fund managers I've interviewed are passionate all right -- but most are far more devoted to their ideals than to making money for their shareholders.
Portfolio 21 (symbol PORTX) is Exhibit A. The global fund actually has an okay record, but I tried and failed repeatedly in a lengthy interview to get two of the co-managers to discuss how they pick stocks. About all they'd say is that they look for companies that pursue environmentally sustainable policies.
The bottom line: There are just a few funds worth considering.
The single best pick is probably Neuberger Berman Socially Responsive (NBSRX). Lead manager Arthur Moretti has been at helm since 2001 -- and he and his two co-managers also run flagship Neuberger Berman Guardian. Indeed, the only difference between the two funds is that the three managers exclude a few "socially irresponsible" companies from the portfolio.
The fund has beaten Standard & Poor's 500-stock index in every year but one since Moretti took over. Over the past five years through May 15, the fund has returned an annualized 12% -- an average of two percentage points per year ahead of the S&P 500.
The managers own just 35 stocks, but they've done a solid job choosing them. The large-blend fund tries to invest in companies with rising earnings whose shares sell at reasonable prices. "We want growing businesses that have some sort of competitive advantage, but we're also very careful about what we pay for a stock," say co-manager Ingrid Dyott. The fund mainly owns stocks of large and midsize companies, and 22% of assets are in foreign stocks. Expenses are just 0.90% annually.
Rather than altogether avoiding dirty industries such as energy and manufacturing, Neuberger hunts for the "best in class" in those industries. So you'll find oil and gas giant BP (BP) and energy producer Newfield Exploration (NFX) among its holdings.
Another first-rate fund that practices the "best-in-class" approach to polluting industries is TIAA-CREF Social Choice Equity Retail (TICRX). Relying on the KLD Broad Market Social Index for its list of acceptable companies, the fund seeks to replicate the performance of the broad-based Russell 3000 index. Over the past five years, the fund's older Retirement Class shares (TRSCX) have trailed the benchmark by just 0.2 percentage point per year, on average. The Retail class' annual expense ratio is just 0.21%.
For stocks of small companies, no fund comes close to Winslow Green Growth (WGGFX). The fund is extremely volatile, so shouldn't put more than 10% of your stock money into it.
Lead manager Jack Robinson looks for fast-growing companies -- and doesn't mind stocks with sky-high price-earnings ratios. But long-term returns have been terrific. Over the past five years, the fund has returned an annualized 17% -- an average of four percentage points per year more than the Russell 2000 small-company index. Unlike the other funds, which seek merely to avoid bad companies, Winslow invests almost exclusively in companies that offer solutions to environmental problems.
Finding a socially screened fund that invests overseas presents a challenge. New Alternatives (NALFX), run by the father-and-son team of Maurice and David Schoenwald since 1982, is a possible choice. The fund, which invests roughly 70% of its assets abroad, returned an annualized 8% over the past ten years through April 30 -- beating the MSCI World stock index by an average of three percentage points per year.
Like Winslow, New Alternatives looks for companies trying to cure environmental ills. The problem is that means two-thirds of assets are invested in industrial materials and utilities -- so the fund will rise and fall with those industries. Morningstar analyst Michael Herbst also cautions that the Schoenwalds don't have any analyst support. Note, too, that the fund levies a front-end sales charge of 4.75%.
A more conservative pick, and perhaps a better one, is newcomer Domini European PacAsia Social Equity (DUPFX). Early returns aren't so hot: The no-load fund lost 8.3% over the past 12 months, trailing the MSCI EAFE index, a measure of developed foreign markets, by 7.5 percentage points. What's somewhat comforting is that the fund is run by Wellington Management, a superb money-management firm that runs several Vanguard funds.
Steven T. Goldberg (bio) is an investment adviser and freelance writer.