Calvert Equity Portfolio’s England Finds Value in Socially Responsible Stocks

Using Calvert’s ESG criteria, fund manager never invested in ‘poster children for bad behavior’

Richard England, who sub-advises the $1.7 billion Calvert Equity Portfolio (CSIEX) mutual fund, is a portfolio manager who would be happy to run numbers all day as he checks his holdings’ performance and seeks new stocks to invest in.

But as it turns out, the environmental, social and governance (ESG) criteria that England must comply with as a Calvert Asset Management Co. sub-advisor have helped assure the solid stock picks that have won the Calvert Equity Portfolio a four-star rating from Morningstar.

“The companies we consider as high quality match up pretty well with what Calvert’s analysts consider a pass based on their ESG compliance criteria,” England said in an interview with AdvisorOne on Wednesday. “We’ve worked seamlessly together with Calvert for 12 years, and we never invested in WorldCom or Tyco or any of those poster children for bad behavior back then. And in 2008, we didn’t go down as badly because we never owned Fannie, Freddie, Countrywide, Lehman or Bear Stearns.”

Those firms were not high-quality value propositions as defined by England’s sub-advisory firm, Atlanta Capital Management, which oversees the Calvert Equity Portfolio. Plus, Calvert’s own stable of 18 analysts gave the troubled firms a failing grade according to the ESG fund firm’s seven ESG compliance metrics. This doubling of effort has resulted in strong downside protection for the fund.

“The people at Calvert will tell you that ESG issues can often turn into tomorrow’s financial problems,” England (left) said. “In their opinion, the risks rise when there are environmental, social or governance issues.”

Calvert’s seven metrics are the key drivers for the firm’s sustainable and responsible strategy, according to Bennett Freeman, senior vice president for sustainability research and policy at Calvert Asset Management. These include governance and ethics, workplace, environment, product safety and impact, international operations and human rights, indigenous people’s rights and community relations.

According to the Social Investment Forum, socially responsible investing, or SRI—a term now losing ground to the more popular ESG abbreviation—is a broad-based approach to investing that encompasses about $3.07 trillion out of $25.2 trillion in the U.S. investment marketplace.

Caught on the fly for a phone interview between meetings at Coca-Cola Co., Dow Chemical and Shell Oil, Freeman said Calvert’s signature funds are invested only in companies that meet “each and every one” of those core criteria.

Calvert monitors business ethics issues such as disclosure of policies and procedures, board independence and diversity, execu­tive compensation, shareholder accountability, and attention to stakeholder concerns. Calvert avoids companies with weak internal audit controls, poor governance structures or a record of illegal or questionable activities such as securities fraud or insider loans.

“We share this attitude with Richard,” Freeman said. “There are two reasons why these criteria matter to investors: because people want to invest in

companies that align with their values about human rights and environmental standards, and because ESG issues actually can matter to companies’ performance.”

Freeman pointed to BP’s Deepwater Horizon catastrophe, which made the company lose $87 billion of its value in the last year due to oil spill cleanup costs and an inability to expand U.S. operations.

“When a company gets those ESG issues wrong, it can affect the company’s performance,” Freeman said. “The BP catastrophe is an extraordinary demonstration of how screwing up on an issue like safety can blow up a company.”

In the case of CSIEX, England checks his picks against the core Calvert criteria by using a proprietary online tool similar to Morningstar’s quote-getter.

“Our goal is clearly to find stocks that have more upside potential than downside risk, and then make sure that it has a Calvert ESG pass, meeting minimal thresholds just to be eligible, and then the company also has to be fundamentally sound,” England said.

He spreads his Top 10 holdings into eight of 10 sectors (avoiding Telecom and Utilities because he has found little growth in those sectors) to keep CSIEX well diversified. Over the course of the first-quarter 2010 earnings season, England has made no changes to his portfolio.

“This quarter is about 60% to 65% done, and this is the ninth consecutive quarter where earnings in aggregate are coming in ahead of expectations,” he explained. “On a dollar basis, our turnover is about 40% annually, which means our average holding period is over two and a half years. If valuation doesn’t get too high, we’re likely to stay with a name.”

England’s primary Top 10 holding is Netflix (NFLX), because it is well managed and has strong metrics. His most recent addition is CarMax (KMX), added to the portfolio about a month and a half ago because the well-regulated chain of used car dealerships dominates an “extraordinarily fragmented” market and has plenty of room to add new stores and change the experience of buying a used car.

As for the finance sector, England’s only holding is JPMorgan Chase & Co. (JPM).

“I continue to think that the financial group is poised for outperformance, and banks in particular, unfortunately, because clouds are still hanging over the group,” he said. “JPMorgan is one of the winners. It is very well diversified, with strong mortgage, capital markets and credit card businesses.”

Asked if he gets a “gut feeling” about a particular company when engaging in his stock-picking process, England said he would be reluctant to use that term. Rather, he said, “I spend a lot of time reading and talking to companies. You start to develop a picture of what’s happening out there, and based on what you’re hearing, you start to put together a mosaic of who’s in line to benefit and who’s in line to be hurt. A ‘gut feeling’ sounds entirely too random. My wife tells me I’m way too logical. I’m a numbers guy.”

To determine whether one of your holdings meets Calvert’s ESG criteria, go to Know What You Own.

Read about adding ESG to asset allocation at AdvisorOne.com.

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