Morningstar Advisor - June/July 2009 - 32

Spotlight The social-screen criteria of the Catholic and Protestant faith-based funds generally don’t lead to sector biases as pronounced as the secular offerings’. That said, Ave Maria Growth AVEGX and other conservative Catholic and Protestant faith-based funds tend to have zero or minuscule stakes in the media sector because of their “anti-family” screens. Some of the more-liberal faith-based funds have relatively moderate positions in the commodityrelated sectors as a result of their environmental screens. As would be expected, the Islamic funds always have zero exposure to banks, insurers, and financial-services firms—which make up a sizable portion of the S&P 500 Index—though some do invest in real estate companies (which Morningstar classifies as financials). The green funds that look for a diverse mix of environmentally superior companies and incorporate nonenvironmental screens into their processes tend to have hefty hardware and health-care stakes, limited energy positions, and moderate weightings in most other sectors. Meanwhile, those that focus on just a couple of types of environmentally responsible firms tend to be extremely concentrated. New Alternatives NALFX normally invests 25% to 45% of assets in industrial-materials issues and 30% to 50% of its assets in utilities. PowerShares WilderHill Clean Energy PBW consistently devotes 35% to 45% of its assets to industrial-materials stocks and 30% to 40% of its assets to hardware issues. Mixed Bags of Opportunities value, smaller-cap, and international funds have been launched recently, there are fewer than 15 such funds. One of the newer ones, mid-cap value Appleseed Fund, has shown considerable promise, but most of the others are too unproven, mediocre, or flawed to be worthwhile options at this point. And while there’s a solid secular bond fund or two, there are no secular offerings that specialize in one sector or industry. The faith-based SRI universe is far more balanced than its secular counterpart. These funds are well represented across Morningstar’s domestic style-box categories. For starters, there are five faith-based large-value funds and a number of large-blend and large-growth offerings. There are a couple of mid-value funds as well nine smaller-cap blend and nine smaller-cap growth offerings. There also are a half dozen faith-based internationalstock funds, a few specialty offerings, an assortment of bond funds, and a multitude of allocation offerings. A diverse group of the faith-based domesticequity funds are fetching options. Amana Income AMANX is a topnotch large-value vehicle that’s run by one of the finalists for Morningstar’s 2006 Domestic-Stock Manager of the Year award. Amana Trust Growth AMAGX is a first-rate large-growth offering that’s run by the same skipper. LKCM Aquinas Value AQEIX is an attractive large-blend fund that’s managed by the same team and in a similar manner to the highly successful LKCM Equity LKEQX (which is not a faith-based offering). Ave Maria Rising Dividend is a fairly young but promising mid-value fund with a seasoned management team and a distinctive style. Some of the faith-based allocation and bond funds are pretty good choices, too. But none of the faith-based international-stock funds is compelling at this point. There only are a handful of large-cap green funds that are diversified enough by industry and sector to serve as a core holding. Portfolio 21 PORTX is one such offering. The world-stock fund has a strong management team that has succeeded by picking firms from a variety of industries that are integrating environmental sustainability into their business strategies. The rest of the green universe is dominated by specialty offerings, and more than half of those are concentrated natural-resources funds. The others are smaller-cap offerings. Winslow Green Growth recently had 46% of its assets in the industrial-materials sector and 26% in clean energy. Though it is extremely aggressive—and prone to huge losses in adverse conditions—the fund has huge upside potential, seasoned skippers, and a purview that isn’t quite as narrow as those of most of the other green specialty offerings. Extra Steps Advisors who are seeking SRI funds for their clients certainly don’t face the obstacles they once did. But they still need to take extra steps for their SRI clients, and major challenges remain. Because social screens vary across (and even within) the secular, faith-based, and green universes, it’s necessary for advisors to review the intricacies of funds’ screens, principles, and activities to make sure that they’re consistent with their clients’ values. Also, given the sector biases of most SRI funds and the limited number of strong offerings in some categories, it remains difficult to build well-diversified portfolios constructed entirely of good-quality secular, faith-based, or green funds. That said, the SRI universe is growing as fund companies meet the increased demand from investors. Advisors who haven’t encountered a client interested in SRI funds eventually will, and it would be wise for them to get their feet wet in the SRI arena. Because this type of investing can be so cumbersome, clients will be relying on advisors to expertly guide them through the hodgepodge world of SRI. K William Samuel Rocco is a mutual fund analyst with Morningstar. Large-blend, large-growth, and moderateallocation funds that focus on blue-chip blend or growth stocks dominate the secular SRI universe, and many of them are subpar or middling choices. Two good ones are Neuberger Berman Socially Responsive—a large-blend fund with a skilled skipper and focused style—and Pax World Balanced—a fine moderate-allocation offering that boasts a distinctive strategy and a distinguished record. Moreover, even though a number of secular 32 Morningstar Advisor June/July 2009

Morningstar Advisor - June/July 2009

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