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Fund Shop Takes Action to Salvage Reputation

Calvert's turnaround effort involves cleaning house at its SRI funds.

Last Friday Calvert Asset Management filed a proposal with the SEC, detailing their plans to merge the Calvert South Africa Fund  with one of the firm's foreign-stock offerings. The move makes sense and isn't even that surprising--after all, with just $2.7 million in assets, the South Africa fund is tiny, unpopular, and easily absorbed by its larger foreign-stock sibling. It's notable, also, for being yet another in a series of changes that Calvert has instituted in 2002 to address its rocky performance in the past.

An overhaul of some kind is a good idea for this shop, one of the largest socially responsible (SRI) mutual fund firms. A lot of investors were disappointed by SRI funds when global growth slowed in 2000. With their strict social criteria, these offerings were often heavily invested in technology and communications companies, which easily passed environmental, workplace safety, and human rights screens. These were the very companies that tanked in 2000 and with some exceptions (notably, large-blend  Calvert Social Investment Equity (CSIEX)), the Calvert equity funds lost ground in the first part of the new decade, posting mediocre relative results. SRI investors are fairly loyal, though, so these funds generally didn't get hit with the same redemptions that other, similiarly positioned offerings faced.

Now Calvert is rewarding that investor loyalty. In recent months, the shop has launched new initiatives to improve its tarnished reputation the old-fashioned way--by taking action. In other words, don't expect to see the new fund offerings, marketing gimmicks, excuses, and spin employed by other fund companies. (Don't get me started onRS Fund's unhelpful headlines touting"large tax-loss carryforwards,"as if that's a top priority for potential investors seeking a new fund). Instead, Calvert is weeding out poor performers, merging a few offerings, and injecting some new blood.

First, Calvert brought Kemal Ahmed on board in late 2001, plucking him from a position as senior investment officer in the World Bank's Treasury Department. He now directs the selection and management of the Calvert's equity managers and subadvisors. It's likely that he's partly responsible for the decision to finally merge the long-suffering South Africa fund with its international sibling. Since his arrival, heads have rolled; the shop fired two longtime subadvisors earlier this year.

In March, the shop ditched Andrew Preston of London-based Murray Johnstone, who managed  Calvert World Values International Equity (CWVGX) for more than 10 years. Preston ran a fairly staid portfolio throughout much of the growth-addled 1990s, and the fund was a respectable--though hardly brilliant--performer. He added fast-growing tech and telecom fare to the fund towards the end of the tech rally, just in time for it to suffer when those sectors sold off in 2000's ugly downturn. The fund paid for his poor timing over the next two years, lagging its peers by a small margin in 2000 and 2001. Calvert stepped up in early 2002 and replaced Preston with a gang from Grantham, Mayo, Van Otterloo & Co. There's history at work here: Team leaders Chris Darnell and Thomas Hancock worked with Ahmed during his days at the World Bank. There's every indication that the new team will take this fund back to its roots: their GMO-branded funds are some of the more cautious (and successful) offerings in the foreign-stock group.

A later casualty was NCM Capital's Maceo Sloane, who managed the equity portion of  Calvert Social Investment Balanced Fund (CSIFX). Sloane favored large, well-known firms, usually emphasizing tech giants such as Cisco Systems  (CSCO). Not surprisingly, his trend-following picks cost the fund a lot of ground over the past few years. Calvert has moved this portion of the portfolio to the able hands of Doug Holmes of SSgA.

Decisive action to address poor performance is something we don't see enough of in the fund industry. Of course, new faces and fund mergers don't guarantee success, but the GMO team has put up some strong numbers since their arrival at Calvert. Kudos to Calvert for an earnest, gimmick-free effort to right its ship. We're excited to see what it does next.  

Gabriel Presler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.