With recent changes, socially responsible funds finally getting on track

MUTUAL FUNDS

June 12, 1994|By New York Times News Service

Big changes are afoot in the "socially responsible" mutual fund industry. Funds have realized that investing in companies with strong environmental or equal-employment records isn't enough -- they have to make money for their shareholders too. Or at least not lose money.

The Calvert Group in Bethesda, the biggest socially responsible group -- eight funds with $1.2 billion in assets -- announced extensive changes last month. Working Assets in Portsmouth, N.H., shuffled managers on some of its funds and recently hired managers to start new ones. And six new socially responsible funds have begun in 1994.

Experts say the industry is finally on track.

"They are doing what needs to be done by changing portfolio managers, rethinking strategies and offering additional portfolios," said Jack A. Brill, a San Diego investment adviser who specializes in socially responsible investing.

While the industry started in 1976, with two funds, it remains small, with 26 funds now. Assets total roughly $1.9 billion, according to Morningstar Inc. Perhaps that's because investors have had few choices, and none of the funds have had consistently good records, said John Rekenthaler, editor of Morningstar Mutual Funds.

Calvert, with a hefty 4.75 percent sales charge, has been criticized because of the subpar performances of many of its funds.

Among recent moves, Calvert dismissed the U.S. Trust Co. from management of the Calvert Social Investment Fund Equity Portfolio and replaced it with the management company Loomis Sayles, whose compensation will be tied to performance.

"I am not going to pretend that we have been completely satisfied with the performance of CSIF. Equity in recent years," said Clifton S. Sorrell,Calvert's president and chief executive. For the five years that ended in May, for instance, the fund gained an annual average of 6.8 percent, compared with 10.7 percent for all growth funds.

Why wait so long for such obviously needed changes?

"We want to give a manager enough time to go through a market cycle that accurately reflects their skills," Mr. Sorrell said. In this case, almost seven years.

And while the $85 million Equity fund is in new hands, Calvert's $518 million Managed Growth Fund, another laggard -- this one 12 years old -- is still entrusted to U.S. Trust.

That's because "we're comfortable with the return on a risk-adjusted basis," Mr. Sorrell said. Managed Growth gained 7.3 percent a year, on average, compared with 9.4 percent for its group for the five years ended May.

Calvert's conservative style has long been its hallmark, but the company is breaking out of that tradition. Its new Strategic fTC Growth Fund,the first socially responsible aggressive growth fund, is headed by Cedd Moses, a hedge fund manager with a strong record not yet tested in a prolonged bear market or in mutual funds.

Mr. Moses plans to buy smaller stocks and is allowed to use options, futures and short sales to hedge.

While Strategic Growth isn't as aggressive as a hedge fund because it is regulated as a mutual fund, it is still plenty risky. Potential investors should limit shares to no more than 10 or 15 percent of their portfolios.

While most mutual fund managers' compensation is not tied to performance, Mr. Moses's is, but only minimally; and unlike in the hedge fund, his new arrangement gives him a very healthy guaranteed base salary.

He gets 0.95 percent of the money he manages (the average advisory fee for aggressive growth funds is 0.8 percent) plus 0.025 percent more if performance exceeds the Russell 2000 index by up to 60 percent, and up to 0.75 percent more for beatingthe index by 90 percent.

Loomis Sayles gets a 0.25 percent base, plus 0.07 percent for performance exceeding the Standard & Poor's 500 by 6 percent, and up to 0.2 percent for beating the S&P by 18 percent.

Calvert has been unchallenged in its role as industry leader. Its eight socially screened funds plus 27 bond and money market funds make it a behemoth in an industry mostly comprised of one-person shops. But Sophia Collier, who bought Working Assets Capital Management at the end of 1991, is taking aim.

The company, which currently manages $252 million, started Citizens Growth, Balanced and Income funds in spring 1992. In October 1993, Ms. Collier replaced the investment adviser who had run the Growth and Balanced funds "because his low-turnover style wasn't compatible with mutual fund management," she said.

So far this year, the new manager, Gail Senaca, has matched all growth funds' loss of 2.7 percent; the balanced fund has lost 3 percent, compared with a 2.6 percent loss for the group.

Ms. Collier "wants to seek out managers with strong records in their own style." In February, she hired Lilia Clemente, a well-known international investment adviser, to start two overseas stock funds -- Citizens Emerging Growth and Global Equity. Like Mr. Moses, however, Ms. Clemente has no mutual fund track record.

In mid-May, Working Assets acquired the Muir California Tax-Free Bond Fund, a municipal bond fund. The company is also working on a 250-stock no- or low-load index fund. The group's other socially responsible equity funds carry a 4 percent upfront load; fixed-income funds, 2 percent.

The index fund would compete with the no-load 400-stock Domini Social Index Fund, which gained 8.3 percent a year since its 1991 inception, compared with 8.7 percent for the S&P 500.

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