Quick Take: As manager for the Calvert Large-Cap Growth Fund/A (CLGAX), John Montgomery sounds more like a mathematician than a moralist. He stresses the quantitative criteria used in constructing the team-managed fund, and downplays his own role. “Legally, you’ve got to have a portfolio manager with the authority to create the buy and sell tickets,” he said. “But remember that computers are generating the buy and sell signals.”
For a fund that aims to do good, the Calvert fund, ranked 5 Stars by Standard & Poor’s, has had strong performance with its use of strict social screens. As of July 29, the $313.5-million portfolio registered a three-year annualized gain of 19.3%, versus a gain of 10.6% for its large-cap growth peers, and 12.6% for its benchmark, the S&P 500. For the one-year period ended in July, the fund surged 20.8%, versus 14.1% for its peers, and the 14.0% for the benchmark. Expenses on the portfolio run at 1.61%, more costly than the average 1.44% expense ratio for its peers. Volatility runs slightly below its peers.
From a universe of 500 of the largest U.S. stocks by market capitalization, Montgomery’s team selects 250 that qualify as growth stocks, and then runs the data through Calvert’s social screens to determine those that meet the advisor’s seven core criteria. These range from environmental compliance to good corporate citizenship to respect for human and animal rights. Companies engaged in undesirable conduct, such as serious labor violations and the manufacture of tobacco products, weapons, and alcoholic beverages, are weeded out. Companies that pass those tests are then run through the financial models of Bridgeway Capital Management, the fund’s subadviser.
Bridgeway boasts a lean cost structure, facilitated by reliance on computerization. The firm, founded by Montgomery, also mandates that none of its 20 employees can earn more than seven times as much as the lowest paid employee, and pledges to donate a “majority” of its profits from investment advisory fees to charity and non-profit organizations.
As of July 26, Calvert Large-Cap Growth Fund had 88 holdings. The fund typically hold about 70 issues, but Montgomery attributes the current number to strong cash inflows. By prospectus, the fund can hold as few as 60 stocks. The fund’s top sectors as of June 30 comprised information technology (25.4% of assets), consumer discretionary (17.0%), financial (14.8%), health care (11.3%), and energy (9.0%). The largest holdings as of that date: Walgreen (WAG) (2.2% of assets), Legg Mason (LM) (2.2%), EOG Resources (EOG) (2.2%), Nordstrom (JWN) (2.2%), and Dell (DELL) (2.0%).
The Full Interview:
S&P: How long have you been on the fund?
MONTGOMERY: Since inception. Its predecessor started out as Bridgeway’s socially responsible portfolio in 1994. Calvert approached us about subadvising that fund, and we were interested in gaining access to their social research department.
S&P: How would you describe your investment philosophy on the fund?
MONTGOMERY: The objective is to beat the market over long periods of time with a total risk profile roughly equal to the market. It’s a large-cap growth fund, though we do diversify slightly on the perimeter. Typically, up to 5% of the fund is in smaller or mid-cap names.
Apart from that, we’re quantitatively driven. I don’t get on a plane to meet management. We don’t look at any macroeconomic numbers, follow sectors of the economy, make sector bets, or any of that. It’s just picking one good stock at time.
S&P: What else sets the fund apart?
We do three things top down. One is cost management, specifically transaction costs. We use an outside evaluator, Plexus Corp., and our goal is to be in their top quartile — we’re in their best 10% on commission costs. We don’t do any soft dollars with this fund.
The second is risk management. A lot of quant shops basically have one model, and this one has five. Each model is picking a smaller number of stocks, which tend to be pure and good diversifiers of each other.
The third is tax management. Our unofficial goal is to be in the top quartile of tax efficiency within our peer group.
S&P: What are your five models?
MONTGOMERY: We have two “opportunistic models.” We also have a growth model, a growth-at-a-reasonable-price model, and a technically-driven model. I’d call it our “momentum model.”
S&P: How is “opportunistic” defined in the models?
MONTGOMERY: We’re looking for opportunities to get in where we think there’s a stronger probability of a shorter-term upside, six to 12 months.
If we just wanted the biggest return possible, we’d probably have only our two biggest return models. But half the investment objective has to do with risk, not just returns.
S&P: Are you trying to balance different sectors?
MONTGOMERY: No. We track industries and sectors, but we’re not trying to match the sector representation of the S&P 500. More important is the balance of risk inherent to the fund.