Responsible Meets Profitable

Responsible Meets Profitable

investing by Jean Gruss | Editor/Lee-Collier

Investing in companies that do well by their shareholders, communities and employees could pay off. One Gulf Coast money manager explains how.

Meet two responsible Andrews.

There's Andrew Hill, senior portfolio manager at Comerica Private Bank, and Andrew McElwaine, president and CEO of the Conservancy of Southwest Florida.

Both Naples men share a passion for the environment and investing, two seemingly opposite worlds. After all, investing is about making money, and then many give some of their winnings to charity.

But there's been an increase in demand for what's called "socially responsible investing." Broadly speaking, socially responsible investors seek companies with good records on a range of issues from environmental safety to corporate governance and employment practices to social morals.

The Social Investment Forum, a nonprofit group that tracks such types of investing, says assets managed by socially responsible managers grew to $2.71 trillion in 2007 from $2.29 trillion in 2005 in the U.S., an 18% increase and faster than the 3% growth of all investment assets.

Hill says the idea for a socially responsible fund was sparked when one wealthy Comerica customer threatened to pull his money out if the bank didn't offer that as an investment choice. And he knows other institutional and individual customers who would invest, especially nonprofit organizations who want to align their investment philosophy with their charitable work.

So Hill set to work creating a socially responsible fund, which he hopes will launch later this year. McElwaine, who has prior experience with socially responsible investing, is volunteering to help Hill vet potential stocks. Hill is a board member of the Conservancy in Naples.

Although Hill can't say exactly what investments will be in the fund because it hasn't yet been approved for sale, it's useful to think about how he is developing his strategy because it might lead investors to think about investing in a different light.

Searching for good stocks

Hill would begin with stocks that he screens for another fund he now runs, Comerica's Dynamic Focus Strategy. The fund's 15.4% return in 2007 exceeded the Standard & Poor's 500-stock index return of 5.5% and the Russell 1000 Growth benchmark's 11.8% return.

Hill looks for growth stocks of any market capitalization where earnings are growing by at least 15% annually but have limited debt. He also looks for stocks that have been unfairly beaten down in the latest market turmoil. "Now stocks are getting blown away for no reason," Hill says.

Then Hill considers the broad macro-economic trends. For example, strong growth overseas is benefiting U.S. companies with a large international presence, such as Pepsi.

Another broad factor Hill considers is investors' preference for industries that aren't affected by the economic swings such as health care and information technology. He recently bought shares of Hologic, a company that makes digital-mammography equipment (symbol HOLX, recent price $56). Besides being less sensitive to economic cycles, health care will be a major area of growth as the Baby Boom generation grows older.

The seemingly insatiable demand for energy and food is another broad trend that Hill hopes to ride. He says shortages of fuel and food will continue to boost the returns of companies in those industries. His fund owns shares of Apache (APA, $120), a natural-gas producer, and CME Group (CME, $507), which runs the Chicago Mercantile Exchange where agriculture commodities are traded.

Hill is not afraid to venture overseas for investment ideas. For example, his fund invests in Suntech Power Holdings, a Chinese-based company that makes solar-power cells. The company's stock surged last year but has given back most of the gains this year (STP, $33).

Hill also blends in what's called technical analysis. That means he looks at stock-price trends over time. For example, one of the best indicators last year was hunting for stocks whose prices were making higher lows, which indicate investors are gradually willing to pay more for those stocks as time goes by even when their prices fall.

As its name implies, Dynamic Focus Strategy has a portfolio of just 25 stocks now and that makes it riskier than a fund that holds, say, 100 stocks. But Hill generally won't let any single holding grow to more than 5% of the portfolio. "You don't want to get too far out of whack," he says. The fund currently has 10% in cash, though Hill laments he had more because of opportunities he spots in this volatile period. "I wish we had 30% or 40% [in cash]," he says.

Picking responsible stocks

When Comerica launches its socially responsible fund later this year, Hill says he'll go fishing in the same pool for stocks that he manages in the Dynamic Focus Strategy fund. But because of disclosure rules, Hill can't say what stocks he'll pick or reveal other details about the fund.

However, Hill can discuss the screen he'll use and it starts with the requirement that a company's product has to be of value to society. Second, the company has to treat its employees fairly. Third, it has to have a record of charitable giving. Lastly, it has to be shareholder friendly and its corporate governance has to be sterling.

That clearly rules out companies that make products that kill people, pollute or whose chief executives are involved in misconduct. Tobacco and oil companies are two obvious areas that would be out-of-bounds.

Despite the restrictions, Hill says there are still hundreds of good stocks to choose from. "There's plenty of opportunity for diversification," he says.

That's especially important because many socially responsible funds became overloaded with technology shares in the late 1990s and suffered in subsequent years as the sector crashed.

The universe of stocks has broadened because it's not limited to obscure, volatile tech-related companies that pop up when managers screen for socially responsible companies.

McElwaine points to well-known companies such as Nike and Canon as potential investment ideas. For example, Nike plans to cut waste and toxins by 2015 so that it minimizes its impact on the environment. Canon, the digital-copier maker, plans to cut its carbon-dioxide emissions by 50% by 2010.

However, there are some companies that make the grade in one area and fail in another. "There's a lot of gray area," Hill says.

For example, Clorox is one company that is environmentally responsible even though it manufactures some harmful chemicals. Another is Whole Foods, which sells organic food but whose chief executive posted anonymous messages on the Internet disparaging a rival. Still another is BP, an oil producer that is expanding into alternative sources of energy such as solar.

What about performance? Screening for socially responsible stocks doesn't translate automatically into outperformance. The closely watched Domini Social Equity Fund has trailed the Standard & Poor's 500-stock index since it was started in June 1991, reporting 9.47% average annual total returns versus 10.49% over the same period. But the Domini fund until recently was an index fund and perhaps managers who actively picks stocks can deliver better returns.

In the end, however, Hill says it's clear there is demand for socially responsible funds when he speaks with investors. He estimates the fund could potentially gather $100 million in assets in Florida alone, which is roughly half the current assets in the Dynamic Focus Strategy fund.

Dynamic stocks

Here are three stocks you may never have heard of that feature prominently in Comerica's Dynamic Focus Strategy fund managed by Andrew Hill in Naples:

•Woodward Governor (symbol WGOV, recent price $27) is a Colorado-based company that manufactures wind turbines.

•Hansen Natural (HANS, $39) makes and distributes natural sodas and fruit juices and is headquartered in California.

•ResMed (RMD, $42) based in California develops medical equipment for sleep-disordered breathing.

REVIEW SUMMARY

Manager. Andrew Hill

Industry. Money management

Trend. The growth of socially responsible investing.