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A Mutual Fund That Plays Politics


On a snowy day in January, 2006, former Democratic National Committee Chairman Joseph J. Andrew trudged through the gray Manhattan slush to make his time-tested speech claiming that Democrats operate more innovative, socially responsible, and, yes, profitable companies.

Days after that speech to young Democratic business professionals, an Excel spreadsheet popped up in Andrew's e-mail at his Washington office at law firm Sonnenschein Nath & Rosenthal. Sent by a 29-year-old McKinsey & Co. consultant named Daniel de Faro Adamson, who attended the event, the e-mail showed that companies whose officers or political action committees gave to Democrats had outperformed major stock indexes over the past five years.

From this research Andrew and Adamson created a new mutual fund composed of companies that donate to Democrats and are deemed "socially progressive." The new fund family, named the Blue Fund in honor of the Democratic Party, was launched quietly on Oct. 17, 2006. In its first three months, its large-cap fund--whose holdings include Google (GOOG), Starbucks (SBUX), Lehman Brothers (SBUX), and Costco Wholesale-- (COST) topped the Standard & Poor's 500-stock index fund and gained 6.7%. The small-cap fund bested the Russell 2000 by rising 3.8%. Competition Policy Associates Inc., a bipartisan Washington-based consulting firm, found that over the past five years the large-cap fund would have outperformed the market by 13% per year; the small-cap fund would have beat the Russell 2000, but by less than 1% a year. "Democratic companies do better than Republican companies in the market--period," Andrew claims.

The new venture, with just $1 million in assets, is tiny by Wall Street standards. Many mutual fund companies aren't yet offering Blue; E*Trade Financial Corp. (ETFC) and Fidelity Investments made it available in early January.

It already has drawn skeptics, including fund executives who say the Blue Fund has a long way to go to prove its viability. Some critics caution against such socially responsible funds, which they say ask investors to "buy for love and not money." "When companies start to rely on social responsibility, it's time to sell," says Steve Milloy, portfolio manager for the Free Enterprise Action Fund, which urges companies to resist liberal shareholder activism and has its own $8.9 million portfolio of blue-chip stocks.

NO "RED" ALTERNATIVE

Although the Social Investment Forum lists 201 funds that market themselves as socially responsible because they meet environmental, workforce diversity, and best-practice standards, none takes contributions into account. No fund restricts itself to Republican companies. Yet of the 25 top corporate contributors to politicians over the past decade, all favor Republicans, according to data from the nonpartisan Center for Responsive Politics.

The socially conscious investing movement has not been especially lucrative. "Over a long stretch of time, there's not really a significant difference" in returns from those of traditional funds, says David Kathman, an analyst for Morningstar Inc. (MORN), "but they do better or worse at different times." That's because the funds often invest heavily in technology, which has seen boom-and-bust cycles in the past decade, and little in energy, where values have soared lately.

Costco Chief Executive Jim Sinegal welcomes inclusion in the Blue Fund. But Sinegal notes that though he is a big Democratic donor, his company doesn't make political contributions. "We strongly believe you shouldn't be taking shareholders' money and putting it into political causes."

Andrew's business pedigree includes co-founding the Anson Group, a Carmel (Ind.) firm that provides business development services to medical startups and midsize companies. He was named DNC chair in 1999 by President Bill Clinton to bring his business acumen to a party chronically in debt. Now he's out to convince executives and Democrats to write checks for his new venture. "My goal," says Andrew, "is not simply to make a political statement but to build a serious financial institution."

By Richard S. Dunham


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