Socially Responsible Investments-Is there an SRI/ESG replacement for your large cap core fund?

In our last piece we introduced Calvert Investments based in Bethesda, MD and in this piece we would like to examine a couple of their main large cap funds within their Signature Series to start to determine if they are worthy enough to replace your current large cap core. As we mentioned, they focus on socially responsible investments and incorporate a proprietary screen in their selection process. Below are two of their in-house funds described in order to help determine if they deserve a place in your portfolio.

Calvert Funds-Their Signature Series

CISYX Calvert Social Index Fund $333Mill AUM

Description and Strategy

The Fund employs a passive management strategy designed to track, as closely as possible, the performance of the Calvert Social Index. The Fund uses a replication index method, investing in the common stock of each company in the Index in about the same proportion as represented in the Index itself. The Calvert Social Index measures the performance of those companies that meet the sustainable and socially responsible investment criteria and that are selected from the universe of approximately the 1,000 largest U.S. companies, based on total market capitalization, included in the Dow Jones Total Market Index.

Risks

This is an equity fund and as such will possess equity risk. Also, since this fund has as it’s a self-created index at Calvert, there is process and construction methodology risk. It is large cap and since they employ SRI screens, the composition of this fund will differ from other large cap indexes.

Their team then scores each companies adherence to seven major ESG criteria to include; governance and ethics, environment, workplace issues, product safety, human rights and Indigenous Peoples rights and community relations.

This screening process has lead to a high industry concentration in info tech, financials and health care. This is not inherently bad although industry concentration bets are typically best left to a seasoned active manager.

Risk-Adjusted Stats and performance

It trails it own benchmark and has little chance given its passive mandate. It has done well vs. large cap blend funds at times although it does not possess the level of consistency that we would like to see.  

Process and overall assessment

While this fund is reconstituted each year and they are able to sell securities based on their SRI criteria, we feel that this fund construction methodology can lead to sector concentration. While this can be beneficial if those industries are in favor, an active management style would be more appropriate as there will be times of value detraction. This firm’s belief that SRI criteria can enhance shareholder value over time may be the case but will need to be found in other more dynamic offerings.

 

Zenith Score-Low

 

CISYX Calvert Large Cap Core Fund $167 Mill AUM

Description and Strategy

The Fund employs an active management strategy designed to outperform the Russell 1000 index performance. The fund has a wider tracking error which gives it more opportunity to add values. Similar to its other funds, it rates companies on financial and ESG metrics.

Risks

This fund is an equity fund and as such will possess equity risk. It is large cap and since they employ SRI screens, the composition of this fund will differ from other large cap indexes.

While they include mid-cap companies, they begin by taking the top 1000 companies in order of market cap as their initial screen. This ends up being about 95% of all US companies.

Their team then scores each for the companies adherence to seven major ESG criteria to include; governance and ethics, environment, workplace issues, product safety, human rights and Indigenous Peoples rights and community relations.

This screening process has lead to a high industry concentration in info tech, financials and health care. This can help or hinder performance and at times this has helped performance although not consistently.

 Risk-Adjusted Stats and performance

It trails its benchmark and has little chance given its passive mandate. It has done well vs large cap blend funds at times although it does not possess the level of consistency that we would like to see.

 Process and overall assessment

While this fund is labeled a “large cap core”, there is simply not enough appeal in spite of the rigorous SRI/ESG process that the firm believes will enhance value over time.

 

Zenith Score-Low

 

Our overall assessment is that there may be room for SRI/ESG investments within a portfolio although these two funds would not warrant a placement as there are many others to explore that may offer better value either within Calvert or in additional SRI/ESG funds.

 

We will continue to examine Calvert in posts after the 4th weekend.

 

Sincerely,

 

Tom Koehler, CIO

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