The 12-year-old (IGIAX) - Get Report Integrity Growth and Income Fund (IGIAX) recently began marketing itself as a socially responsible fund in an effort to capitalize on the growing popularity of ''green'' investments.
The fund's name hasn't changed -- the "Integrity" moniker alludes to its sponsor,
Integrity Mutual Funds
of Minot , N.D.
Neither has the fund's strategy. Manager Robert Loest says he has always run it as a socially responsible fund; it's just that not many people knew. And with just $46 million in assets, it made sense to change the prospectus to better reflect his investment strategy -- and incidentally, attract more investors.
After years as a kind of investment backwater, socially responsible funds are finally having their day in the sun. Partly it's in response to a greater cultural awareness of issues such as global warming. Even those who don't believe global warning exists can't deny the need for alternative energy sources as the country's dependence on foreign oil continues to deplete their disposable income.
And as funds take a more activist role in corporate governance, investors realize that where they put their money can foster change, particularly on issues such as the environment and alternative energy.
Over the past 10 years, assets in socially responsible bond and equity funds have surged 828% to $40.1 billion from $4.8 billion. By comparison, total assets in mutual funds of all kinds have risen 260% to $10.9 trillion.
Socially responsible funds may also be shedding their reputation for lackluster returns. In the past, they have lagged the overall market, in part because they use additional screens, which tend to inflate costs. For the year ended June 11, 82 equity funds following a social-criteria strategy returned an average 19.06%, compared with 22.79% for the
, according to fund tracker Lipper. And over the past five years, socially responsible funds have returned an annualized 9.5%, compared with 10.27% for the S&P 500.
This year, Lipper reports that social-criteria funds gained 7.67% year to date, vs. 7.28% for the S&P 500.
Loest is taking it one step further than other socially responsible funds, which screen out undesirable aspects of society, such as alcohol, tobacco, gambling and big polluters.
"I talk to People for the Ethical Treatment of Animals
PETA," says Loest. "They have really savvy liaison people with graduate degrees who work with pharmaceutical companies. They know things most stock analysts don't know, so that helped me decide to buy
Johnson & Johnson
. They're aggressively working with the Food and Drug Administration to remove animal experiments, so that makes them good in my book."
While Johnson & Johnson hasn't completely abolished testing on animals, Loest says the New Brunswick, N.J., pharmaceutical manufacturer is supporting new technology to make animal experimentation obsolete.
"I don't know what the reason is," he says, "but I suspect that the animal models are proving to be extremely poor subjects for extrapolating results tohumans. So JNJ is using living human tissue to test toxicity."
The fund also holds
, the largest lab-testing company in North America. Loest likes it because the Lyndhurst, N.J., company sold a business unit that had relied on animal testing.
The animal-rights focus isn't the only thing that sets this fund apart. Unlike many of his peers, Loest doesn't shy away from investing in arms dealers. "We all have the right to defend our homes," he says. "I can't make a clear case that making guns is bad."
Loest first looks for companies that satisfy his basic financial criteria. Then he looks for factors that would eliminate them from contention. He then aims for value stocks with high free cash flow, a high return on invested capital, and dividends -- two-thirds of the stocks in the portfolio pay dividends.
"By starting with a value bent, the social part is return-neutral," Loest says. "That means buying for social reasons won't make you any more money than not doing it, nor will it lose you money. It won't affect returns. It just offers people a way to invest in the stock market without stepping outside their moral universe. If they don't care about social issues, I'm still a bottom-up value manager."
That has helped him beat the S&P 500 with a year-to-date return of 7.73% (vs. 7.28%) and a three-year annualized return of 13.56% (vs. 11.96%). But over the past five years, the fund has lagged the S&P, with annualized reurns of 8.9%, vs. 10.27%.
The fund's portfolio is highly concentrated, with about 25 holdings, including health care company
, which is up 21% year to date, and publisher
John Wiley & Sons
, also up 21%.
is in the fund because it's the seventh-largest corporate purchaser of renewable energy in the U.S.
The fund also holds
because the producer of adhesives and other industrial products is working to minimize pollution by designing plants to run on solar energy, Loest says.
Loest, 63, started his own money management firm in 1986 and has run his current fund since its inception in 1995. His firm was acquired by Integrity two years ago.
The fund charges a steep front-end load of 5.75%, which tops Lipper's average maximum load of 5.28%. Its expense ratio is 1.56%, topping Lipper's median expense ratio of 1.21%.