Both John Kerry and George W. Bush claim to be the better candidate when it comes to family values and the environment -- two issues that might sway individual voters but are generally ignored by the Wall Street community. It's not that Wall Street analysts are averse to these subjects, but they're difficult to plug into a stock valuation model.
But there are ways for investors to make money on these often mushy issues, and
caught up with two mutual fund managers who have successfully quantified these difficult fields. Matt Patsky is portfolio manager of the environmentally friendly
Winslow Green Growth Fund
, and Dan Ahrens is portfolio manager of the
, which invests in gaming, alcohol, tobacco and defense stocks.
Both of your funds have made investors money using nontraditional methods. How did you get involved in running specialty funds?
In 2001 we were studying different sector returns, and we noticed that alcohol, gaming and tobacco stocks consistently rose to the top in their five- and 10-year rankings. At the time we joked about how a portfolio of those might do against the typical portfolio of so-called socially responsible funds. After looking into the subject some more, we found that those areas perform well in both bull and bear markets, so we decided to go ahead with the idea and start a fund.
The history of Winslow Green Growth dates back 20 years, when the founder of the fund discovered there is a correlation between shareholder returns and corporate concern over environmental issues. He found that companies that considered the environmental impact of their production and products tended to minimize liability and delivered better shareholder returns over the long term.
Should morality play into somebody's financial decisions?
Investing is about making money, that's the bottom line. If people want to donate their money or time to causes they believe in, then they should go ahead and do that. If a company is truly doing something wrong, however, like
, that could make the company a bad investment on its own merits, or lack thereof.
Of course we believe in helping the environment, but we do not believe there even needs to be a moral component to this decision. It just makes sense for investors to factor in nonfinancial issues if they affect shareholder returns.
Many of the companies in the Vice Fund are good corporate citizens with award-winning employment practices and good recycling records. One of our top holdings is
, and they are one of the world's top recyclers of aluminum. And nobody is accusing them of cooking the books like Enron or
Dan, since we have Matt here, tell us how you feel about socially responsible funds? Are they only for goody-two-shoes investors?
Not at all. I admire Matt's fund a lot because he does positive screening for stocks. I do have a big problem with socially responsible funds that do negative screening, meaning they won't invest in things they consider morally wrong, like gambling or alcohol. I think that makes them judgmental hypocrites by screening out companies that in their view are doing some type of harm. But their view is not always the right one.
How does positive screening work?
We try to look at companies that are having a positive impact on the environment, like fuel-cell companies or a company that's promoting organic farming, like
Whole Foods Market
. There is a direct relationship between companies that are good corporate citizens and companies that perform well over a long period. Eventually a bad actor will stumble.
What are the drawbacks to running your respective funds? Is it hard to raise money when people think you have an agenda other than making them money?
Raising institutional dollars is problematic because many firms say that any kind of nonfinancial screening is against their investment policy. And that's somewhat ludicrous, because there are some nonfinancial metrics that clearly drive value.
When we launched the fund, we knew there would be water-cooler discussions about a fund concentrating on weapons, gaming and alcohol. We thought the reaction would be evenly split between positive and negative. It turns out the reaction has been overwhelmingly positive because investors can relate to our fund.
Which candidate will help your funds the most? Kerry or Bush?
Definitely Kerry. It's been an interesting and frustrating last few years, because as former Environmental Protection Agency head Christie Todd Whitman can attest, the Bush administration has not tried to protect the environment. They are literally trying to castrate the EPA. That's why Christie Todd Whitman stepped away. In the last two years, companies that are environmental polluters have done wonderfully. For example,
is dumping perchlorate in the Colorado River, and they are seeking liability protection from the White House in the name of national security to keep doing so.
In the case of our fund, it does not matter who wins the election. No matter who becomes president, people will keep drinking and smoking and gambling. With regard to defense, usually people assume that a Republican victory will mean higher defense budgets. That's not necessarily the case because a big part of Kerry's platform is to prove that he is strong on defense.
Matt, you run a small-cap fund, and although there aren't too many small-cap tobacco companies out there, would you invest in one?
We would still stay away from it, but more from the health aspect than an environmental issue. We are more focused on companies that promote health care rather than products that are harming consumers.
Both of you manage small funds, with less than $50 million under management. Has it become tougher for smaller funds because of the added compliance expenses after the mutual fund scandal?
The complexity of compliance is hitting us hard in terms of the expense side. The economics of the business have been changed. Funds with less than $50 million in assets are in jeopardy of needing to consolidate because the costs are becoming prohibitive.
Matt is absolutely right. There are a number of companies out there right now gobbling up small funds because they know small funds are getting hit.
We have no money for marketing, and that's common for small funds. If it were not for the media writing about our funds, it would be very tough. Our best press has come from a Web site called SocialFunds.com. They labeled us as the best-performing socially screened fund. So we get lots of leads from that one Web site.
What are your expectations for the market going forward?
There's lots of uncertainty out there between the election and Iraq. And that shows why you need an all-weather portfolio like the Vice Fund.
The uncertainty of the election is making things extremely volatile. But once the election is over, we should see fairly robust market conditions going into an economic recovery. The market hates not knowing the winner.
Dan, does the uncertainty cause people to drink and smoke more?
No, but it doesn't stop them. That's for sure.