Ethics Go Global in Two Stock Funds
More than a year ago, the directors of the Calvert World Values Fund sat down to debate a weighty issue: investing in China.
The fund's portfolio included an increasing number of multinational companies with operations in China, and its Hong Kong investments were preparing to merge into China in 1997. Given that nation's reputation for human-rights abuses, the socially responsible mutual fund had to come up with guidelines for investing there.
Rather than boycotting the country altogether, Calvert opted to avoid companies that have child or prison laborers or work with the Chinese military.
The search for a China policy illustrates the hurdles that socially responsible mutual funds face when investing globally.
"It's a major challenge on a lot of levels," says Jon Lickerman, director of Social Research at the Calvert Group in Bethesda, Md., parent of the four-year-old World Values Fund. Barriers to picking foreign stocks range from differing languages and customs to limited public access to information.
"Even in the EC [European Community], where there is a strong regulatory environment," Mr. Lickerman says, "the public's right to know ... is traditionally much more limited than in the US." To track down information, he says, Calvert goes through a process akin to "investigative journalism."
Citizens Global Equity Portfolio, which says it is the only other socially responsible mutual fund with a diversified overseas portfolio, takes a similar course. Sophia Collier, president of Citizens Trust (formerly Working Assets) in Portsmouth, N.H., says its two-year-old Global Equity Portfolio relies on international news sources and about 300 activist organizations. No decision is based on any one group's comments, she says. But together the sources form an overall picture. Information also comes from the New York firm Clemente Capital Management, where the fund's manager is based, and from the companies themselves.
Calvert, meanwhile, draws on in-house analysts who specialize in areas such as labor relations, the environment, and - exclusively for the overseas fund - human rights. The fund also uses information from international trade secretariats in Geneva, which represent various trade unions. Fund manager Johnstone International Ltd. in Scotland, tells the researchers what companies to look into.
Rather than investing only in "purist" companies, the Calvert fund applies social guidelines and analysis to major corporations, Lickerman says. Just because a company gets in, he says, doesn't mean it's "a perfect company." In many cases, the fund will work with the management of a company to help it improve in areas where it may be deficient, he explains.
Both funds say that while it is easier to collect data on US companies than overseas ones, they still try to assess the latter without having every detail.
"Research is a proxy for what a company is doing," Lickerman says. "We don't pretend to know everything that is going on at the companies we look at."
Ms. Collier notes that "every industry has an area of social concern" that researchers can focus on. For example, to evaluate a bottling company, the Citizens Trust fund can look at whether it uses recycled materials. As a result, she estimates that the fund's foreign research is about "85 percent of the way there." Currently, there are about 150 companies on the fund's approved list.
Calvert and Citizens Trust both maintain that they do not invest socially at the expense of financial results, although in their short histories, neither fund has beaten average global-fund returns.
"We are focused like a laser on financial performance," Collier says.
Lickerman says the World Values fund "looks and feels like any other global equity portfolio." In mid-June, the fund will switch its objective from global to international, meaning it will no longer have any US holdings. "This is a mutual fund first," he says. "That drives everything we do."