Typically, when investors think of socially responsible funds, they think of windmills, herbal tea and other do-good investments that sacrifice return for values-driven goals.
What they don’t expect to see is the sort of investments that the Chicago-based Appleseed Fund (APPLX) has sought since its inception in late 2006: contrarian, market-beating mid-cap stocks in a “go anywhere” range of asset classes that runs the gamut from consumer staples to industrials to international stocks to gold to community bank CDs.
Talk to co-portfolio manager Josh Strauss (left), though, and his contrarian spirit becomes quickly apparent.
“Inflation risk is huge over the next three to five years,” said Strauss in an AdvisorOne interview on Tuesday. “The market is chasing bonds, but it’s a herd mentality. Look at all the money-printing the U.S. government has done. People have been flocking to the dollar as a safe haven, but don’t they remember what happened last August? Our debt levels just broke 100% of GDP.”
Strauss’ answer? Buy gold, as well as consumer staple stocks with exposure to the growing middle class in emerging markets such as Brazil. And scrap all of the too-big-to-fail banks: Bank of America, Citi, Goldman Sachs, JPMorgan and Morgan Stanley.
According to Strauss’ brother, Adam, another Appleseed investment manager, any company that goes into APPLX’s portfolio has to meet two criteria. First, it must pass a strict value criterion, meaning stock price and the fund managers’ estimate of intrinsic value; and then it also has to pass through both negative and positive sustainability screens.
Tobacco, Booze and Big Banks
“Negative screens are industries that we just try to screen out, such as the tobacco industry, alcoholic beverages, gambling, weapon systems, pornography, and more recently we added a new screen on the too-big-to-fail banks,” said Adam Strauss in an interview last April with The Wall Street Transcript.
APPLX has the numbers to back up its portfolio picks. Now in its fifth year, the fund is the top ranked mutual fund by performance for the five years ended Dec. 8, 2011 in Morningstar's Mid-Cap Value category among 282 funds. In those five years, the Appleseed Fund generated an annualized total return of 6.1%, exceeding the -0.5% annualized total return of the S&P 500 during the same period.
The fund’s net assets, overseen by five investment managers, total $210 million invested in 24 total holdings as of Jan. 25.
Morningstar’s director of mutual fund research, Russel Kinnel, has called APPLX a “socially responsible rising star,” and Morningstar analyst Kathryn Young asserts that pessimism has paid off at Appleseed.
Prepared for a Dismal Economy
“This fund's managers aren't heading for the doomsday bunkers, but they have been preparing for a dismal economic scenario: sluggish growth combined with accelerating inflation,” Young wrote in an analyst note last year.
The Appleseed Fund earned Morningstar's five-star rating for its ability to generate strong risk-adjusted returns, and it’s rated No. 3 among top mutual funds in the Mid-Cap Value category by U.S. News & World Report, behind Artisan Mid Cap Value Fund (ARTQX) and Wasatch Strategic Income Fund (WASIX). U.S. News evaluated a total of 122 mid-cap value funds.
There is the occasional misstep. APPLX’s trailing returns updated as of Dec. 31 show that Appleseed has stumbled recently, with a -2.6% 2011 performance, Nevertheless, Appleseed’s three-year annualized returns are 17.8%, and returns year to date are 4.6%.
“As a socially-responsible investing fund, or SRI, the Appleseed Fund has made a name for itself in just a few short years by beating the returns of more established SRI funds in a challenging environment,” U.S. News reported. “Although it launched in December 2006, not long before the market meltdown, the fund demonstrated a defensive posture early on by losing just half of what other mid-cap value funds lost to the market swoon of 2008.”
APPLX currently has the largest percentage of its portfolio, 16.9%, sunk into gold trusts, and another 16.0% in the consumer sector. Top holdings also include Avon Products, Mabuchi Motors and Weyerhaeuser.
“Gold is heavily under-owned,” says the contrarian Josh Strauss, who foresees a shift over the next three to five years toward investment advisors using precious metals as a key component in asset allocation.
Read Vice vs. Nice: Sustainability Debate Pits ‘Tea Party’ Against ‘European Social’ Teams at AdvisorOne.com