The Appleseed Fund is dashing the notion that limiting one's investment universe to socially responsible companies might impede an investor's returns. Even though it was launched less than a year before the bear market hit, this SRI offering was the top performer in Morningstar's mid-cap value category for the three years ended December 31. In 2009, it climbed 60%, when its S&P 500 bogey rose by only 26.5%, and amid the decline in 2008, it fell less than half as much for the year as the S&P. Assets have swelled from less than $20 million a year ago to just over $100 million today, with new inflows coming not only from traditional SRI investors-but from those simply drawn to performance.
The fund's five-member investment team, which includes father Ron Strauss and sons Adam and Joshua, seeks undervalued, well-run companies with socially responsible business practices to produce market-beating returns. Its holdings span the investment spectrum from small companies with less than $100 million in public value to industry giants such as Coca-Cola, Novartis and Pfizer.
Despite its Morningstar categorization as a mid-cap, Appleseed is really a "go anywhere" fund whose managers pay attention to preserving capital. The management firm that runs the fund is the Chicago-based Pekin Singer Strauss Asset Management (which has $700 million in assets under management, most of it in separately managed accounts). The firm has its own incentive to keep client losses at a minimum in the Appleseed Fund: Its five partners started the portfolio with their own money and continue to own a substantial stake in it.
The firm currently has an ample stake in cash equivalents, recently ranging from 15% to 20%, which reflects the scarcity of compelling values after the rapid rebound in 2009 and the substantial inflows into the portfolio. In another defensive position, the firm allocates nearly 15% of assets to gold through exchange-traded funds. Now that the financial panic has abated and the recession shows signs of waning, the gold stake would provide an effective hedge if the economy expands and inflation heats up, says 40-year-old fund manager Adam Strauss, who joined his father's firm in 2004.
Gold might be a surprising choice for a socially responsible fund, since the mining industry has a tarnished reputation on environmental matters. But Adam Strauss maintains that gold ETFs are indeed suitable for his portfolio.
"There is a difference between owning stock of gold mining companies, which are subject to government corruption and negative environmental issues, and owning shares that represent stores of the metal purchased on the secondary market," he says.
With concerns about inflation, the fund has been emphasizing investments that will either benefit directly from rising prices, such as gold ETFs, or companies that can raise prices, such as Coca-Cola. The beverage giant has a stock that is attractively valued, and it has shown its ability to produce consistent revenue through a variety of economic cycles. It also takes steps to minimize its water usage, using recycled water for instance.
Another company the fund likes is PetSmart, a leader in an industry without much competition. PetSmart boasts ample pricing power, since pet food and medication are necessary items for animal owners, costs that can't be cut. The company also donates to pet charity and pet adoption causes.
Many of the stocks in the Appleseed Fund don't come from the traditional value industry sectors like industrials and financials; to buy in, Appleseed's managers simply have to consider a stock undervalued, and Morningstar agrees enough to label the firm a value fund. The value orientation, however, contrasts with those of most socially responsible fund offerings, which tend to favor growth stocks. Adam Strauss says the value discipline and the commitment to SRI go hand in hand because they help the firm avoid companies violating the law or marketing products of questionable value that might later require costly litigation.
To be included in this highly concentrated portfolio of 20 to 25 names, a stock must have the potential to appreciate at least 50%. The investment management team meets twice a week to review new ideas and current holdings. Once the team members find a stock they like, they aren't afraid to build a substantial position-the most recent year-end fact sheet shows an 11% stake in top holding Pfizer, and the top ten holdings represent 58% of the assets.
"Just remember, its concentrated portfolio will stumble at some point, torpedoing near-term results," warns Morningstar analyst Michael Breen. "But over the long-term, expect this fund to remain a winner."