A Superb Socially Responsible Fund
Finding top-notch mutual funds is hard enough. Identifying first-rate funds that invest only in what their managers believe are socially responsible companies is virtually impossible.
Put Appleseed Fund (symbol APPLX) on the short list of superb socially conscious funds. Its performance has been stunning. Over the three years through February 19, the fund returned an annualized 7% -- an average of 15 percentage points per year better than Standard & Poor’s 1500 Citigroup Value stock index, which tracks the stocks of undervalued companies of all sizes. The fund coasted through the worst bear market since the Great Depression with relatively minor damage. In 2008, it lost just 18%, and last year it soared 60%. The S&P 1500 Value index, by contrast, lost 39% in 2008 and gained 22% last year.
Appleseed Fund began operating in December 2006. But the longer-term record of its sponsor is impressive, too. From the start of 2000 through 2006, stock accounts run by Chicago-based Pekin Singer Strauss Asset Management returned an annualized 10%. That was 3.5 percentage points per year ahead of the S&P 1500 Value index.
It’s difficult to pigeonhole Appleseed. Its managers clearly take a value-oriented approach to stock selection, but the fund invests in companies of all shapes and sizes -- micro-cap, small, medium and large. It has a 17% stake in foreign stocks.
Pekin Singer Strauss doesn’t invest in companies involved in tobacco, weapons, alcohol or pornography. The managers prefer companies with positive records on the environment, human rights and community involvement.
But Appleseed’s five co-managers focus most of their energies on picking stocks they think will lose little and have the potential for solid gains.
Right now, the fund is positioned defensively. It has 14% of its assets in gold securities, and cash holdings are in the low double digits. Co-manager Josh Strauss says the fund’s gold investments are insurance against a pickup in inflation. He and his colleagues believe the price of gold and other commodities will move up against paper currencies. “Preservation of capital is paramount to us,” he says.
Massive consumer and corporate debt, Strauss says, played a large role in triggering the financial meltdown of 2008. “What’s happened since?” he says. “We’ve moved that debt to the government. That’s not a sustainable solution.”
Strauss says he and his partners rarely make such big-picture calls. Normally, he says, they focus almost entirely on investing in attractive companies at temporarily depressed prices.
Why the big cash stake then? Strauss says that after the market’s extraordinary run-up over the past 12 months, it’s much harder to find compelling stocks.
In looking for stocks, Appleseed emphasizes companies with a competitive advantage over rivals, low debt, shareholder-friendly executives, temporarily depressed operating profit margins and, above all, a low share price relative to earnings, sales and other fundamental measures. The managers also like stocks that pay dividends.
A few good, cheap stocks
Once the managers find a stock they like, they’re not afraid to back up the truck. The fund owns only about 20 stocks, and its largest holding, Pfizer (PFE), is more than 11% of assets. Strauss says Pfizer has a strong pipeline of drugs in development, some of which should win government approval soon. He also sees huge cost-savings opportunities for Pfizer in its takeover of Wyeth, which was completed last October. At $17.95, Pfizer trades at less than nine times analysts’ estimated earnings for 2010 of $2.19 per share and yields 4.0% (all prices and related ratios are as of the February 22 close). “This is a dirt-cheap stock,” says Strauss. “Everybody hates Pfizer, but eventually that will change.”
Appleseed also sees value in PetSmart (PETM), which sells more pet supplies than any retailer except Wal-Mart. Despite charging 3% to 5% above Wal-Mart’s prices, Strauss says, PetSmart can attract customers to its stores by offering unique services. These include dog training and grooming classes as well as pet-sitting services. At $27.29, the stock trades at 16 times estimated profits of $1.68 per share for the fiscal year that ends next January. But Strauss says the price-earnings ratio is misleadingly high because depreciation charges stemming from construction of many new stores are depressing earnings.
Another favorite is insurance broker Willis Group (WSH). Although premiums industrywide are still falling, Willis has managed to consistently increase revenues. At $28.96, it trades at just 11 times estimated 2010 earnings of $2.66 a share and yields 3.6%. Once premiums turn up, as they inevitably will, the stock will gain ground, says Strauss.
Steve Goldberg is an investment adviser in the Washington, D.C., area.