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September 28, 2005 at 08:00 PM
Socially responsible investing (SRI) is rising in popularity as investors seek to match portfolio assets with personal beliefs and values. One of the largest and most successful SRI funds, the $900-million New Covenant Growth Fund (NCGFX), invests according to the principles of its affiliate, the Presbyterian Church (U.S.A.) Foundation. The portfolio automatically excludes companies with significant operations related to alcohol, tobacco, gambling and firearms.
In short, good morals have been translating into good returns. For the one-year period through the end of August, the fund gained 17.1%, versus a gain of 12.6% for the S&P 500, its benchmark, and 12.9% for the average large-cap blend fund. For the three-year period, the fund registered an average annualized return of 12.5%, edging out a 12.0% gain for the index, and 10.6% rise for its large-cap bend fund peers. Over five years, the fund dropped 2.0%, while the index slid 2.7%, and its peers fell 2.5%.
“We are the only SRI fund directly sponsored by a church,” notes Robert Leech, chief executive officer of the Foundation and president of New Covenant Funds. Based in Jeffersonville, Indiana, New Covenant supervises five independent subadvisers — Wellington Management Co. L.P., Mazama Capital Management Inc., Santa Barbara Asset Management Inc., Sound Shore Management Inc., and Capital Guardian Trust Co. — who perform security selection. The subadvisers each focus on a particular asset class or investment style, which helps to diversify the portfolio while controlling risk.
To start, New Covenant, a subsidiary of the Presbyterian Foundation, annually draws up a “divestment list” of companies that violate the church’s criteria for social responsibility. This list is handed over to the five subadvisers, and the companies on it are banned from the portfolio. Afterwards, each subadviser is free to invest in any other stocks that agree with their respective investment-style mandate. The subadvisers operate autonomously, and have final say in buy and sell decisions, subject to the screen of prohibited companies.
The subadvisers are allocated a portion of the fund’s assets. The bulk of the assets, 61%, are made up of style-neutral, multi-cap core investments run by Wellington. Three “satellite” allocations, each consisting of 13% of the fund’s total assets, are managed as follows: mid- and large-cap value stocks (Sound Shore); growth stocks (9% allocated to large-cap specialist Santa Barbara, 4% to small- and mid-cap specialist Mazama); and international stocks (Capital Guardian). Based on this breakdown, the fund is diversified by market cap size — 66% in large-cap stocks (above $10 billion), 30% in mid-cap stocks (between $1 and $10 billion) and 4% in small-cap stocks (under $1 billion).
“These target allocations may change periodically, but not dramatically,” notes George Rue, senior vice president of investments for New Covenant Trust Co. “When a certain investment style is hot, we could let the manager go slightly above their target allocation for a while before we rebalance the fund again to its initial level. In the past, the style-neutral core has represented as much as 65%-66% of the fund’s assets. But the basic structure has not really changed too much.” The fund recently increased its foreign stock allocation, instructing subadviser Capital Guardian to begin investing in the emerging markets.
Each subadviser was selected for performance, style bias, and investment process. Capital Guardian has been with fund since inception. Wellington and Sound Shore came in 2000, just after the fund’s inception. Mazama and Santa Barbara were hired in early 2005 to replace Seneca Capital Management, due primarily to poor performance and personnel changes.
