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| > Features > Undiscovered Managers |
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| Appleseed Fund |
| by
Ilana Polyak
| 06-01-09 |
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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 APPLX.
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."
Go Anywhere, Sort Of
Having two sets of constraints puts certain limits on the types of businesses that can be included in the portfolio. At times, the managers find themselves outsiders of both the value and SRI camps. "If it's a cheap tobacco company or an expensive solar company, we're not going to have that," Strauss says. But he stresses that there are plenty of opportunities elsewhere. "We do not find that we're restricted all that much," he continues.
Part of the reason the team feels unfettered is that it invests all along the capitalization spectrum, from giants like drugmaker Pfizer PFE to tiny names such as John B. Sanfilippo & Son JBSS, a peanut and almond seller with a market cap of just $55 million.
Stock ideas are generated in a variety of ways. Sometimes a manager or an analyst has an idea; other times the crew hunts for stocks that meet specific criteria. Regardless, all the names in the portfolio share certain attributes: They do not derive revenue from the sale of tobacco, alcohol, gambling, weapons, or pornography. In addition, they should also be businesses that have solid human rights and environmental records and invest in their communities.
Having made sure the sustainability measures are met, the team then drills down into the financials. "We're big balance-sheet guys," Strauss says.
Among the characteristics the five look for are low amounts of debt, plenty of free cash flow, and a defensible competitive advantage, characteristics that happen to play well to today's treacherous market environment. They particularly like companies that have stumbled recently, yet not so much that the missteps have impaired their free cash flow. This research process is identical to the one they use in the $500 million separate accounts business.
The value and SRI restrictions seem to be a winning formula, at least lately. For the 12 months ended April 17, Appleseed is in the top 1% of mid-cap value funds tracked by Morningstar, with a negative 5.6% return. (The fund's large-cap names together with its tiny ones average out to a mid-cap weighting.)
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