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By Ann C. Logue, MutualsAdvisor.com |
GCEQX | Aug 18, 2008 |
Fund Profile: Green Century Equity Fund
By Ann C. Logue
Most money managers don’t beat the market once risk is taken into account. The market sets a high hurdle. The academics say that investors shouldn’t even bother trying; they should simply figure out what their risk tolerance is, then invest in a combination of index equity funds and fixed-income securities based on that. Index mutual funds make it easy for investors to buy the market on the cheap and take away some of the angst about making financial decisions that novice investors have.
However, indexes are not necessarily unbiased indicators of market performance. They’re big business. They are organized and marketed by companies that hope to make money selling the data to investment consultants, who evaluate institutional money managers or license the structure to mutual fund and exchange-traded fund companies. Dow Jones developed its indexes to sell newspapers. If investors see that the index is important, then they will want to follow it or invest in it.
So that brings us to the Domini 400 Social Index, created in 1990 by Amy Domini to measure the performance of 400 companies drawn largely from the S&P 500 that had good records for their treatment of employees, customers, communities, the environment, and shareholders. Domini herself was one of the first money managers to specialize in socially responsible investing; her 1984 book, Socially Responsible Investing, was released and remains a classic on the subject. The Domini 400 is managed by KLD Research & Analytics and is used by institutional investors that have a socially responsible investment policy to help construct portfolios and measure performance.
Although the Domini 400 index set the standard for the socially responsible investment sector, the index fund based on it might not be the best way for investors to meet their social and financial goals. Green Century Equity Fund is down 13.1% for the year to date, worse than the -12.6% decline for the S&P 500 and the -12.5% drop for the average Large Blend fund. For the last five years, the fund is up an average of 5.06% per year while the S&P 500 is up an average of 7.46% per year and the typical competitor is up 7.33%.
The research shows that social investing styles don’t add financial value, as much as social investors hope that conscientious companies will do better in the marketplace. But it doesn’t seem to detract value, either. So what’s the problem here? The index includes 250 S&P 500 stocks, 100 other large- and mid-cap companies, and 50 smaller stocks. All are weighted by their market capitalization rather than their relative goodness. Companies in the tobacco, alcohol, firearms, gambling, military weaponry and nuclear power industries are excluded. From the rest—a goodly number—the index looks for companies with good environmental, social and governance records. These companies tend to be more expensive and have higher risk relative to the market, with a price-earnings ratio of 21.39 times compared with 20.29 times for the S&P 500 and a beta of 1.05, compared with the beta of 1.00 (almost by definition) for the S&P 500.
The largest company in the index and the fund is Microsoft (Nasdaq: MSFT), the software behemoth, at 3.89% of assets. Next is telecommunications company AT&T (NYSE: T) at 3.53% of assets, followed by Procter & Gamble (NYSE: PG), maker of consumer products galore, at 3.28% of funds. The largest industries are technology and hardware at 11.18% of assets, pharmaceuticals and biotechnology at 8.50% of assets and diversified financials at 6.79% of assets.
Green Century Capital Management is a small firm owned by a consortium of nine non-profit organizations including the California Public Interest Research Group and the Fund for Public Interest Research. The Green Century Equity Fund has total assets under management of $50.3 million. It is sold at no load, carries no 12b-1 fee, and has a minimum investment of $2,500. The management fee is 0.25%, nice and low as an index fund’s management fee should be. Other expenses are 0.70% for total expenses of 0.95%.
Many investors want to invest in line with their social goals, but this fund is not the way to do it right now. Social investing shouldn’t mean you that you have to give up good performance, but that seems to be the case with the Green Century Equity Fund.
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