Socially Responsible Investing - Thoughts

Source: Capital Pixel

Last week I met with a client who held the Calvert Enhanced Equity Fund (CMICX).  This is a socially responsible fund.  It carefully screens stocks and selects only those that fit strict criteria in terms of their lines of business.  For example, many socially responsible funds would avoid tobacco stocks, military oriented stocks, etc.

My investment approach runs into a fundamental hurdle with these types of funds - they are typically very expensive.  For example, Morningstar reports that CMICX has expenses of 2.23%, a load of 1%, and turnover of 111%!  Yikes!

Not surprisingly, Mornningstar reports that CMICX achieved a return of 0.75% over the past 10 years versus 2.84% on the S&P 500 index.,- a huge give-up over this time frame.

In keeping with the "creative juices" theme of the past couple of posts, I suggested the client think of directly buying the stocks of the fund.  This client, by the way, has the time to do this--which is, obviously, an important consideration.  Partial duplication keeps the client in a values-investing mode and hopefully leads to better long-term performance by avoiding the high expenses.

To carry out this approach, the client was directed to Yahoo! Finance.  There they can put in the ticker symbol (CMICX) and on the right side click "more fund holdings." This would get them to:

Source: Yahoo Finance

CLICK IMAGE TO ENLARGE. The suggestion would be to create a 10-stock portfolio with 10% invested in each issue.  This represents 35%, approximately, of the total portfolio.  The client would have to check back quarterly to readjust on the basis of an updated listing.  These may be substantial, given the reported turnover!  In effect, this is a "poor man's index."

There obviously will be some difference between returns of the fund and the constructed portfolio  a type of basis risk), but it will satisfy the socially responsible criteria and avoid some heavy long-run expenses.

In fairness to Calvert, they do work hard to manage these funds, screen the stocks on the basis of strict criteria, and have some that perform well over the long term.  My perspective is to give my clients the best possible shot at a successful retirement.

As a final point, this approach can be used for any high-priced fund by those willing and able to take on the risks mentioned.

Disclosure:  I do not own the funds mentioned here but do own some of the stocks listed.  This post is for educational purposes only.