To make the fund's cut, companies must meet sustainability measures--and be cheap.
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Video: Morningstar analyst Michael Breen discusses Appleseed's strategy with co-managers Josh and Adam Strauss.Investors have come to expect certain things of the companies in socially responsible portfolios: Strong environmental stewardship, fair working conditions, and conflict-free materials sourcing are just some of the biggies. But low price/sales ratios and copious free cash flow? Not so much.
Socially responsible funds tend to cluster around growth stocks and go heavy on tech and alternative-energy names where carbon footprints are small and workers are treated well. But valuations can be stratospheric.
"A lot of the SRI funds screen out the more industrial areas," says Scott Secrest, chief investment officer with Natural Investing, a San Luis Obispo, Calif.-based registered investment advisor that specializes in social investing. "The funds have found it easier to be growth managers."
A small amount of the $44 billion invested along socially responsible principles is parked in the value style. Seeing an opening, Chicago-based Pekin Singer Strauss, an investment management firm, pounced in 2006 with the introduction of its open-end value SRI mutual fund, the Appleseed Fund
Value investors since 1990 in their separate accounts business, the five portfolio managers of the $18 million Appleseed Fund first dipped a toe in the SRI waters at the behest of clients.
"We'd have clients say 'I don't want tobacco or alcohol or defense,' " says Josh Strauss, one of the five and a senior vice president. "Then we started doing some research and realized that there are lots of opportunities for this type of investing."