Quick Take: Daniel Boone III, manager of Calvert Social Invstmnt Fd: Equity/A (CSIEX), sees synergies between good corporate citizenship and high-quality growth investing. Boone says the Calvert Group’s socially responsible investment criteria weed out corporate governance offenders, leading to companies that are in business for the long run.
Boone combines top-down and bottom-up investment measures to look for high-quality growth stocks. The fund usually focuses on the consumer and finance sectors, favorites of other socially responsible funds. In addition, the manager currently likes the health-care sector, because regulatory concerns have spurred lower valuations.
The fund’s excellent performance record recently won Boone a 2004 S&P/BusinessWeek Excellence in Fund Management Award. For the five-year period through last month, Calvert Social Investment Equity rose 5.9%, on average, versus a loss of 1.3% for its peers. The portfolio has been in the top quartile of large-cap blend funds for three of the past five years.
The Full Interview:
S&P: What is your basic investment philosophy?
BOONE: We focus on high-quality companies that are also socially responsible. The Calvert Group focuses on socially responsible investing, and Atlantic Capital, the fund’s subadvisor, stresses high quality investing.
We consider four criteria in potential investments. First, we like companies that operate their businesses for the long term. They may have costs from treating employees well that will lead to payoffs later, such as higher productivity.
Secondly, we look for anomalies from the top-down. In most cases, unusual situations return to normal. For instance, capital and tech spending fell to 45-years lows two years ago. We felt things were as bad as they get, so we overweighted technology in the second quarter of 2002.
Our third consideration is bottom-up fundamentals. We try to understand companies’ competitive advantages and balance sheets.
The final element is valuations. What you pay for earnings makes a difference. We try to look beyond Wall Street’s time horizon.
S&P: Would you mention some top-down trends that you’re following?
BOONE: Many companies are mature and growing slower. It will be hard for the productivity increases of recent years to continue, so growth will be difficult to find over the next five years. Growth stocks have also underperformed value stocks in recent years, so investors may be more willing to pay for growth in the future because it will be rarer and more attractively valued.
S&P: What are Calvert’s social investment criteria?
BOONE: A company should try to encourage better behavior, such as being a good steward of the environment or a producer of safe products. Companies have to respect their employees and work with unions in a non-confrontational environment. A potential holding needs to practice good corporate governance, such as not filling boards of directors with company insiders.
They have to have good community relations, such as banks not redlining neighborhoods. Companies with foreign operations have to respect international human rights and not abuse labor or environments in other countries. For example, we don’t invest in companies operating in Burma.
S&P: How have the Calvert socially responsible criteria affected the composition of the fund?
BOONE: Socially responsible companies tend to be longer term in their thinking, which fits in with Atlantic Capital’s long time horizon. About two thirds of the Calvert fund will have the same holdings as similar Atlantic Capital portfolios, and one third will be different. The Calvert fund tends to focus on smaller large-cap stocks, with an average market capitalization of $8 billion.
Following the Calvert criteria, we’ve never invested in companies that went bankrupt or had major accounting violations. We sold Tyco Intl (TYC) when it had an environment problem, but before its major difficulties.
S&P: What are the fund’s largest sectors?
BOONE: The fund’s main sectors are consumer discretionary, financial services, and health care. Consumer and financial companies tend to be overweight in socially responsible portfolios. Although we’re underweight in consumer stocks relative to the broad market, we hold consumer stocks that have good valuations. We’re overweight in health care, but that hasn’t helped the fund because of political problems. These problems, however, have led to lower valuations.
S&P: Do you avoid any sectors because of the social criteria?
BOONE: We tend to underweight energy and basic materials since they usually don’t have high scores in environmental protection. Despite this, we’ve found some medium-sized natural gas companies, which meet our investment and socially responsible criteria. EOG Resources (EOG) and Questar Corp. (STR) are both wonderful domestic oil companies.
S&P: The fund’s turnover is relatively low. Would you mention some long-standing holdings?
BOONE: Turnover is about 30% to 40%. Large fund inflows have helped keep our turnover low because we’ve been able to let some positions get relatively smaller.
Pfizer, Inc. (PFE) and Amer Intl Group (AIG) have been in the fund for ten years, and may be there for another ten years, unless their valuations get extreme.
S&P: Why have the fund’s long-term returns been strong, while the recent returns have been relatively less so? For the one-year period ended in March the portfolio rose 26.8%, good on an absolute basis, but your peers rose 34.4%
BOONE: Our long-term orientation opens up investment areas that are less explored by Wall Street. This year’s performance has suffered because the market hasn’t focused on quality and growth companies. We have holdings like Medtronic, Inc. (MDT), which are up, but not as much as the market.
S&P: Do you have any favorite stocks?
BOONE: Walgreen Co. (WAG) is a favorite holding. We like Costco Wholesale (COST) because of its potential profits and its ability to change communities when it opens stores overseas. CDW Corp. (CDWC) is a computer distributor with great products.