) is a rare bird for more than one reason. Although its name suggests that it invests in small-cap stocks, it's actually a mid-cap fund. It's also unusual because it's one of the few funds with a socially responsible investment philosophy that can brag about excellent returns.
Citizens, which is a Standard & Poor's Select Fund, had a five-year average annual return of 14.7% through the end of April, while its peers averaged 9.9%. That performance record didn't help manager Gail Seneca keep her job, though. In late March, Citizens announced it was removing Seneca Capital Management as subadviser on the fund, replacing Seneca with Jeffrey Schappe, a Citizens employee.
The reason? The fund's performance during the tech downturn. "We don't want to see years of good performance wiped out by one quarter of bad returns again," says Citizens President Jeff Shields.
PAINFUL FALL. That may have been a bit of hyperbole on the part of Shields, who acknowledges that other reasons for the move included bringing the expense ratio down and pursuing a general strategy of internalizing the family's funds. The expense ratio is currently a rather stiff 1.68%.
Citizens was down 32.9% in 2001, which is painful, but it hardly negates five years of outperformance. The fund has actually underperformed its benchmark in each quarter since the third quarter of 2000, and it underperformed its peers in five of those seven quarters ended in March.
Seneca says losing Citizens won't have a major impact on her firm's business. It has more than $15 billion under management and had a net inflow of assets in the first quarter of 2002 despite the loss of the $216 million Citizens fund.
SACRIFICED UPSIDE. Now that the fund has been internalized, Schappe, the new manager, wants to continue the same style of aggressive-growth investing that Seneca used to garner such high returns. The major difference, though, will be a stronger emphasis on risk management. "We're willing to sacrifice some of the upside performance if we can have less downside when the market turns down," says Schappe, who has managed the Citizens Funds: Small Cap Core Growth Fund (CSCSX
) since its inception in December, 1999.
Prior to joining Citizens, he had been the head of equity research at George K. Baum, a brokerage based in Kansas City, Mo. For the year ended Apr. 30, 2002, Citizens Small Cap Core Growth returned 12.7%, well above its peer group average of 4.3% and the 6.7% gain in the Russell 2000 Index.
Schappe's plan to reduce risk doesn't involve toning down the fund's momentum style of investing. He just wants to increase the number of stocks that are picked. "We'll have a minimum of 50 stocks, whereas before there were sometimes fewer than 30 in the portfolio," he says. "We'll also spread it out more evenly across several sectors. We'll still overweight some sectors, but not as drastically as before."
"BLOCKING AND TACKLING." That's Schappe's way of saying Citizens will be overcoming its addiction to tech stocks. At various points in the last three years, it had as much as 40% of assets in tech. Schappe says the fund will never again be so heavily invested in any sector.
That doesn't mean he'll avoid technology altogether. For instance, one of Schappe's top holdings is storage maker Emulex (EMLX
), which had an earnings hiccup late last year. But he thinks it's back on the right path. Says Schappe: "We're not looking for flashy stocks. We just want to do our blocking and tackling right, and the performance will follow." From Standard & Poor's Fund Advisor