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There is a common perception that investors in so-called socially responsible companies can't earn high returns. That simply isn't true, says George Walker, president of Friends Ivory & Sime Funds. Over the past three years, reports Walker, the firm's socially responsible funds have returned more than 20% annually and have outperformed the average mutual fund.
So how do Walker and Andrew Pringle, lead portfolio manager of the firm's Social Awareness Fund, achieve high returns while investing in companies that don't pollute, produce harmful products, or exploit their employees? Their first priority is to find large-company growth stocks. Then, their ethics team evaluates those companies based on social criteria. For example, both Cisco Systems and Wal-Mart Stores showed up on the Friends Ivory list of high-growth stocks. However, the fund could not invest in Wal-Mart because it sells guns and because of controversy over its overseas labor practices. Cisco, on the other hand, is the U.S. fund's largest holding because of its progressive employee-relations policies.
In a chat hosted by Business Week Online on America Online on Mar. 9, Walker and Pringle discussed how they evaluate companies and revealed their favorite and least favorite stocks in the U.S. and Europe. Here is an edited version of their answers to questions from the online audience and from Business Week Online moderator Jack Dierdorff. The full transcript is available on America Online at Keyword: BWTalk.
Q: Why has socially responsible investing had a hard time keeping up with other mutual funds?
Walker: The perception is that social investing has had difficulty keeping up in performance terms with other funds. The reality is that that is just not true. In fact, over the last 5 to 10 years, social funds have been performing very well. And one of the things that distinguishes the Friends Ivory Fund is a solid belief in growth investing. Because of our bias toward growth stocks, we have been comfortably outperforming the market in recent years.
Q: What about new "green" online-power companies? And specifically, what do you think of Green Mountain?
Pringle: Our investment style is large-company biased. This particular company is not one that would fall under our investment screen. We are investment-led in our process, so that initially, we try to identify large-company growth stocks that we like on investment grounds. After we have identified those companies, our ethics team analyzes them on socially responsible grounds. We can only buy a company's stock if our team agrees that it passes our social screens.
Q: What is your favorite stock?
Pringle: We have recently launched both a U.S. Social Awareness Fund and a European Social Awareness Fund. Cisco Systems is currently our largest holding in the U.S. fund. We believe the expansion of the Internet will enable Cisco to grow earnings at over 30% [annually] for several years into the future. This is a company that has grown to have a market cap of $500 billion within 10 years, and it leads an explosive growth industry. From a socially responsible perspective, they have extremely good employee relationships, offer excellent benefits, and have very good equal-opportunity policies for gay and lesbian employees. It is an excellent example of a company that we find extremely attractive on both investment and social grounds.
Walker: The European fund has a major position in Vodafone, the largest mobile-telecom company in Europe. We expect it to grow at over 25% a year for the next few years. Telecom companies like Vodafone screen very well from a socially responsible investing view.
Q: Can you give us any numbers to show how your socially responsible funds perform relative to more conventional rivals?
Walker: Over the past three years, our socially responsible funds have grown by well over 20% per annum. We have easily kept up with the market averages and have outperformed the average mutual fund. The market has been tough this year, and the Social Awareness Fund is down a little more than 6%. That's just ahead of the S&P 500, which was down 7% at the end of February.
Q: What do you think of Philip Morris?
Pringle: Philip Morris is a perfect example of a company that we do not like on either investment grounds or social grounds. From an investment perspective, at Friends Ivory Funds we seek to emphasize companies with attractive growth prospects and good earnings visibility. Clearly, at the present time, with Philip Morris' outstanding tobacco litigation, earnings visibility is not very good.
Q: What criteria does your ethics team apply?
Walker: We try to do three key things from a social point of view. First, we avoid investing in companies that produce tobacco, alcohol, gambling, or weapons. Second, we have a very strong preference for companies that are both good investments and also have good records on environmental protection and human rights, and have good equal-opportunities policies.
Lastly, we understand that no company is ever perfect. We engage in dialogue with the companies we invest in to encourage them to improve their practices. This is a case of talking, not walking. Walking away and not investing is easy. Talking to companies and persuading them to change takes time, commitment, and the resources of our ethics-research team.
Q: Can you point to any changes that resulted from this kind of talking to a company?
Walker: Home Depot is a good example of achieving results through constructive dialogue. Friends Ivory, along with other social investors, had raised the issue of old-growth wood products and encouraged the company to begin to sell lumber from sustainable forests. As a result, Home Depot has begun this new policy of sustainable lumber sales this year. So you see, constructive dialogue even with large corporations can yield results.
Q: What do you think of Motorola, Nokia, and Ericsson?
Pringle: We feel Motorola, having gone through a major restructuring, has become a well-positioned company exposed to fast-growth communications areas. So we find it very attractive from an investment perspective. From a social perspective, it is actually being evaluated at the present time by our ethics team.
Walker: Nokia is a fabulous company. We think it has outstanding growth prospects for years to come and we believe it can be very dominant in its sector. It is one of the top holdings in the Friends Ivory European Social Awareness Fund. On social grounds, like many of the mobile-telecom companies, Nokia is very progressive. We also like Ericsson, but we don't own it because we wish to have broad diversification and not put all of our eggs in the telecom basket.
Q: Of the big oil companies, do any stand out as being especially "green," or at least seem to be making a genuine effort to reduce greenhouse emissions or to be doing anything to make their company ecologically friendly?
Walker: The European oil companies are many years ahead of their U.S. competitors in this area. The best example is BP Amoco, which we own in the European fund. We believe they are the leading oil company from an environmental perspective. The company is doing a number of interesting things, such as building more than 200 solar-powered gas stations in both France and Australia. They are growing their business division which looks at developing renewable energy sources, and they are leading the way in environmental reporting.
Importantly, in recent times, BP Amoco has withdrawn from the Global Climate Change coalition and now seems to recognize and acknowledge that the global warming issue is real. Most other oil companies refuse to do this. The company is not perfect by any means, but in a dirty sector, they are leaning strongly in the right direction.
Q: You mentioned earlier the example of Home Depot changing its ways after consumer discontent. What about a company that was originally on your "O.K. to buy" list that fell off for some socially responsible investing reason?
Pringle: Wal-Mart is an example of a company that we have liked a lot on investment grounds. But on social grounds, it has a less-positive profile. Wal-Mart is a major retailer of guns, and there are also some concerns about overseas labor issues.
Q: As I understand it, your U.S.-marketed funds invest in pharmaceuticals, although European socially aware investors shun pharmaceuticals because of animal-testing issues. Which drug companies do you like on each side of the pond and why?
Walker: From the other side of the pond, we particularly like SmithKline Beecham. They have an excellent breadth of product, they have a very strong product pipeline, and we believe they have strong earnings prospects. From a social perspective, they are very active in providing free product in a number of Third World countries, and they are very progressive in terms of charitable giving and community outreach in the U.K.
Pringle: Within the U.S. fund, we hold several health-care companies, including the pharmaceutical company Merck as well as Medtronic, the world leader in medical equipment. Both are considered to be extremely high-quality companies that also offer attractive earnings-growth prospects in the next several years
Edited by LORI BONGIORNO
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