Investing With Principle Can Pay Off
By Brenda L. Moore
06/09/1999 The Wall Street Journal
Page CA1 (Copyright (c) 1999, Dow Jones & Company, Inc.)
Clorox may be best known for making whites whiter, but Amy Domini also likes it for what it does for the "greens."
The Oakland bleach maker's efforts to cut toxic releases and increase recycling help it pass the screens Ms. Domini's namesake mutual fund, the Domini Social Equity Fund, uses to help pick companies to invest in.
Ms. Domini and others have been working for years to convince investors that they don't have to sacrifice ideals for profits. While some dismiss the concept as a high-risk, feel-good gimmick, proponents appear to be winning converts. The number of so-called socially responsible funds grew to 144 from 55 between 1995 and 1997, with assets in screened portfolios climbing to $529 billion from $162 billion, according to the Social Investment Forum in Washington, D.C.
Given the environmental- and health-consciousness that Californians are famous for, the movement has always been popular here. Although California amounts to 12% of the U.S. population, the state's investors account for 18% of the assets in the billion-dollar New York-based Domini Fund. They're also prominent players with the Calvert Group of Bethesda, Md. Of Calvert's 200,000 shareholders of record, 33,000, or 17%, are from California.
"California is a great market, I love going out there," says Paul Hilton, a portfolio manager with Dreyfus in New York. Mr. Hilton does research for holdings in the Dreyfus Third Century Fund, the oldest socially responsible equity fund in the country at 27 years.
California companies are also well-represented in the funds. Money managers and screeners offered the names of some that have made their financial and social cuts as well, including Advent Software of San Francisco, C-Cube Microsystems of Milpitas, Golden West Financial of Oakland, Robert Half of Menlo Park, Sanmina of San Jose, Solectron of Milpitas and Clorox.
The California companies tend to do well in screens for progressive environmental practices, strong employee relations and benefits, and community involvement. Many also pass the traditional exclusionary screens for "sin" stocks -- alcohol, tobacco and gambling companies. Then there are funds that cater to a specific cause or group; for example, the Meyers Pride Value Fund, offered by Meyers Capital Management of Beverly Hills, invests in companies sympathetic to gay rights, such as ones that offer equal benefits to same-sex partners.
On the other hand, there are Catholic-oriented funds, such as the Dallas-based Aquinas Funds family, that specifically eschew such companies. There are even a couple of Muslim funds that avoid, among other industries, pork producers -- since the faith does not consider the animal to be clean. Indeed, funds with a religious orientation are growing particularly fast, climbing to 34 last year from six in 1993, according to Wiesenberger, a Rockville, Md., fund-tracking firm.
The robust stock market accounts for part of the overall growth. People flush with newfound wealth may be spreading it around in ways that make them feel good. And while there have always been investors who paid attention to the social impact of their holdings, the idea of "values investing" gained momentum in the 1980s, when many investors pulled out of companies that did business in then-segregated South Africa. Tobacco companies became the next widespread target.
But fans of socially responsible investing also say the growth reflects the success of funds like the Domini, which marked its eighth anniversary last week. Through the first quarter of this year, the fund beat the Standard & Poor's 500 index on the basis of one-year, three-year, five-year and since-inception returns. Year-to-date through the first quarter, it's trailing slightly.
The Social Investment Forum notes that 10 of the 14 largest funds it tracks got "A" or "B" ratings from Lipper Analytical Service and five got four or five stars from Morningstar, the fund-tracking service.
"It puts to rest this idea that if you use a social screen or any social criteria, you will underperform," says John Harrington, a pioneer in social investing in California. Mr. Harrington was a founder of Progressive Asset Management, an Oakland firm that launched a screened money-market fund in 1983. The fund was sold in 1992 to Citizens Funds of Portsmouth, N.H.
Here's a closer look at some California companies that pass social and financial-performance screens of various investment pros.
Advent Software
Advent shares have already staged a healthy run-up this year, moving as high as $71.50 from nearly $20. But Tedd Alexander III, of Brown Capital Management in Baltimore, which manages the various Calvert funds, sees more growth ahead for the software maker.
"We use their product, so we are not only customers, but we are investing shareholders," says Mr. Alexander. "It's a company that has exhibited solid growth historically and we expect that they will continue to demonstrate 30% earnings growth for the next few years."
The stock closed Tuesday at $69.75, about 56 times trailing earnings, but Mr. Alexander says "based on our valuation methodology, there's still considerable upside."
C - Cube Microsystems
Sophia Collier, president of Citizens Funds, likes the prospects for C - Cube Microsystems, a pioneering company in digital-video compression.
It "has a great franchise in the digital-video area...a lot of the direct broadcast companies and others in the digital television market are using products from C - Cube ," says Ms. Collier. "They figured out a lot of different methods of encoding and compressing video so as to fit video into a smaller bandwidth to transmit more rapidly and efficiently and that's a very important type of work for the future."
Analysts project 25% annual earnings growth for the next five years, according to First Call.
Clorox
Ms. Domini likes Clorox for its environmental efforts and community involvement. But she also gives it points for its potential to profit from the global economy, one of four trends she's identified as key in making investment choices.
"One of the best ways to compete in the global economy is through great American brands," she says. Clorox is famous for its bleach, but it also has products that are well-known in their own right, from Armor All car-care products to Hidden Valley salad dressing and Fresh Step cat litter.
Analysts project five-year annual earnings growth of 14%.
Golden West Financial
Golden West, the holding company for World Savings, has made a name for itself with its investments in affordable-housing programs. The thrift, which has assets of $39 billion and 372 offices in 27 states, is also known for its unusual management team: husband and wife Herbert and Marion Sandler, who share the chief executive and chairman titles.
"They run a very disciplined, frugal operation and provide a fantastic service to their customers, and they are growing," Ms. Collier says. "If I wanted to place some money in the market in a more conservative position poised for appreciation but not taking a lot of risk, I would never be afraid of investing with them."
The stock is trading at about 12 times trailing earnings. In the first quarter, it beat analysts' expectations by 7%, coming in at $2.11 a diluted share.
Robert Half
Mr. Alexander, the Calvert manager, sees opportunity for Robert Half, a provider of temporary employees that was battered in the last year along with its counterparts, despite continued revenue and earnings gains. The sector suffered in general from the nation's low unemployment, which makes temporary workers harder to come by.
"They've experienced a problem in the past several months finding labor," says Mr. Alexander. "The {earnings} growth rate consequently has come down pretty dramatically after having been 40% plus for the past several years. Going forward, it's more reasonable to assume 15% to 20% earnings. I think the stock price has already discounted that slowdown in earnings, so we think it's extremely attractive at this level, but certainly for a more patient investor."
The stock closed Tuesday at $28.563, off a 52-week high of $60.25.
Sanmina and Solectron
Two contract manufacturers in the electronics industry were on separate lists. Mr. Alexander likes Sanmina while Ms. Domini praised Solectron, the largest in the field. Both stocks have been rising since last fall, but fans see more upside.
"One of the big themes going on for some time is outsourcing," Mr. Alexander says. "Sanmina is a beneficiary of the trend to outsource a lot of manufacturing" in the high-tech industry.
He predicts 30% annual earnings growth for the next few years and says "there's considerable upside there."
Solectron falls into one of Ms. Domini's four identified investment trends -- the continuing demand for new technology.
"They are a beneficiary of the fact that technology is getting faster and cheaper every year," Ms. Domini says. "It's got the wind at its back."
Analysts project average annual earnings growth of 30% for the next five years, according to First Call.
Ethical Equities
Investment pros say these California companies have the potential for
good returns, while passing various social screens.
Company Headquarters Tuesday's Trailing
Price P/E
Advent Software San Francisco $ 69.75 56
(Nasdaq: ADVS)
C - Cube Microsystems Milpitas 28.813 25
(Nasdaq: CUBE)
Clorox (NYSE: CLX) Oakland 106.938 33
Golden West Oakland 95.563 12
Financial(NYSE: GDW)
Robert Half Menlo Park 28.563 19
(NYSE: RHI)
Sanmina San Jose 75 43
(Nasdaq: SANM)
Solectron Milpitas 56.625 59
(NYSE: SLR)
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