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Fund in Focus: Sierra Club Stock Fund

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May 13, 2003 — If the sponsors of one mutual fund tell its portfolio managers to take a hike, they won’t necessarily be firing them.

The offering, the nature-friendly Sierra Club Stock Fund (SCFSX), was launched by the club, which is known for its environmental activism, in January.

The fund shuns companies that are judged to pollute or otherwise harm the environment, or that fail to pass other social screens. Its list of verboten investments includes logging, mining and oil companies; chemical or nuclear waste haulers; and weapons manufacturers, among others.

While similar to other so-called socially conscious funds, the Sierra Club Stock fund differs from them in that its environmental criteria is more stringent, people associated with the fund say. Also, it is connected to the non-profit organization, which has final say over which stocks make their way into the portfolio. (The club also offers a balanced fund that follows the same social and environmental guidelines in investing in bonds as well as stocks.)

“The discipline that the Sierra Club involvement brings to the (investment) process means that the focus remains on environmental purity, as much as that is possible,” said Henry Smith, one of the fund’s portfolio managers.

Smith is president and chief investment officer of Harris Bretall Sullivan & Smith LLC, which is responsible for half the portfolio, and also oversees endowments for the San Francisco-based club. The remainder of the fund is run by New York Life Investment Management LLC.

Harris Bretall seeks large, growing companies, while New York Life hunts for undervalued mid-cap stocks.

Smith said he looks for companies with the potential to generate earnings and sales faster than their rivals and the stock market, and that feature strong cash flow and industry positions.

Kathy O’Connor, who helps manage New York Life’s part of the fund, said she hunts for companies whose stocks are priced low compared to a company’s earnings, cash flow, sales and book value. She also likes to see improving margins and a catalyst that can boost a stock.

O’Connor and Wesley McCain, New York Life’s other manager on the Sierra Club Stock fund, also run the insurer’s Eclipse Funds Mid Cap Value (ECGIX) and Eclipse Funds Small Cap Value (EEQFX).

Given the taboos defined by the environmental group, the Stock fund has a good source of potential investments among technology, health care and financial services stocks, Smith said. All told, about 200 companies are eligible to enter the portfolio, he said.

At the end of the first quarter, stocks of financial services companies accounted for 30.2% of the fund’s assets, and tech stocks made up 25.8%. Holdings in the consumer discretionary sector totaled 16.6%, and 9.2% were in health care stocks.

The fund’s No. 1 stock at the end of last month was Novellus Systems (NVLS), which makes equipment for manufacturing semiconductors. It was followed by drug maker Amgen Inc (AMGN); and BellSouth Corp (BLS), a telecommunications company.

Rounding out the fund’s top five holdings were Applied Materials (AMAT), another semiconductor equipment maker; and Illinois Tool Works (ITW), which produces industrial equipment.

The Stock fund eked out a return of 0.25% in the first quarter this year, while the average domestic equity fund was off 2.9%, and the Standard & Poor’s 500-stock index fell 3.2%.

Although its track record as a Sierra Club fund dates from January, the fund began life as the Forward Garzarelli U.S. Equity Fund, which had been run by Elaine Garzarelli, who predicted the 1987 stock market crash. That fund was reorganized and renamed.

So far, the Stock fund, which is sold without a sales charge, or load, has only about $3.5 million in assets. Owing to its small size, the fund’s expense ratio is a relatively high 1.84%. However, that is expected to decrease as the fund attracts more investments, said Louis Barnes, the club’s chief financial executive.

Part of the management firms’ fees for overseeing the fund and the balanced fund go to the Sierra Club to support its activities. The minimum initial investment for the portfolio is $2,500 for regular accounts.