Calvert Funds-SRI-ESG Part Two

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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.


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.


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.




Tom Koehler, CIO


Equity Storm “Snowfall”

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We decided to name the recent equity volatility after the amount and ferocity of the snow storms that continue to hit a significant part of the country. The storms that were in the West, East and Midwest have even hit the South and the equity weakness that was largely in Emerging Markets and select Asian Countries has even hit the US markets that seemed until recently, untouchable.

Will the storms that continue to make life miserable for much of the East and Midwest continue and will the equity market down drafts paralyze investors?  We here at Zenith hope for some reprieve for all places except for the mountain regions where a foot of snow is welcome.

As we mentioned in one of our latest blogs, the structural imbalances in some Emerging Countries will likely lead to more volatility in spite of reasonable positive growth here in the U.S.  We would like to take a look at a few areas of the Asian region represented by passive ETFs and then present an active fund to compare volatility in this short time period.

I-Shares MSCI All Country Asia Ex Japan (AAXJ) -8.03% This ETF has holdings to varying degrees in all of the countries listed below. The largest holdings are as follows; China 26%, South Korea 20%, Taiwan 15%, Hong Kong 12%. The rest of the countries are below 10%.

These are individual country ETFs created by Blackrock I-Shares.

I-Shares MSCI Honk Kong (EWH)  YTD -7.43%

I-Shares MSCI Singapore (EWS) YTD -7.74%

I-Shares MSCI Korea (EWI) YTD-10.45%

I-Shares MSCI Taiwan (EWT) YTD – 6.73%

I-Shares FTSE China 25 (FXI) YTD-11.02%

I-Shares MSCI  India (INDA) YTD-5.53%

I-Shares MSCI Indonesia (EIDO) YTD+2.5%

I-Shares MSCI Malaysia (EWM) YTD-6.64%

I-Shares MSCI Thailand (THD) YTD-2.65%

Generally speaking if at the end of 2013 an investor wanted to gain exposure to this area of this area of the world they could have taken one of three major approaches. An equal weight approach to the nine country specific ETFs above would have returned approximately negative 6.17% while the All Country ETF described above lost approximately -8.03%. This is largely due to the overweight positions in China and South Korea in AAXJ.

While there are many other items to consider, the main issue with the all-country Asia ETF approach is that the investor is hamstrung by the current weights of country exposure which may or may not work well. The second approach is more flexible but will ultimately incur more trading which takes up valuable time. In addition, the countries listed in this piece have reasonably disparate growth and risk profiles.  A manager might be able to understand and to mitigate the risks in this region as well to identify the best growth prospects.

An investment  in Aberdeen Asia Ex-Japan (AAPEX) has returned negative 6.20% YTD. That is not too impressive as active managers garner the high fees to reduce risk in times of stress in the system. They are supposed to over and under weight countries and sectors that prospectively add value and reduce risk.

The active manager saved the investor close to 180 basis points in losses compared to AAXJ but charges over 1% for this ability. They were close with the individual country specific ETF approach but a fee and turnover analysis would need to be done before you sent this to your trading desk. The question for your investment committee is whether or not this or any other fund in this very specific segment of the equity market can over longer periods of time, add consistent value above broad-based Exchange Traded Funds.

Another more subtle question is whether or not it makes sense to invest into each sliced up area of the equity markets. The Asia-Pacific region offers a lot of opportunity but is defining it by this particular index the correct way to go, or would it make more sense to find a global manager that seeks value in many regions including this one but is not tethered by a specific regional mandate.

We believe that placements in funds in these specific segments must take valuation and volatility into consideration as well as a process examination so you understand if your placement with a manager is simply expensive beta or if it could truly mitigate risks in turbulent times.

We covered briefly a very specific area of the equity world with a snapshot in time of only a little over a month for the returns.  We suggest that you examine the valuations and growth prospects that your funds possess and to look back a variety of time periods to determine if value was created.

With an unending stream of new funds and ETFs being created seemingly weekly, it can be overwhelming. Sadly a lot of these products created to mirror an index of any kind are not materially solid investments and are typically not vetted to the degree they need to be examined.

As your firm reviews its current or prospective placements in non-US markets such as this, we suggest you develop a robust process for equity fund or ETF inclusion.


Tom Koehler, CIO

“Equity markets represent a complex asset class and while we covered a very small amount, there is a lot more information needed prior to making an investment decision. Let us know if we can provide more information to help in that process.”

Equity valuation

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Equity Market relative value

We would like to provide a brief outlook with respect to some reasonably well known equity ETFs and the indexes that they represent. This may provide a starting point for investment committees that want to dissect their equity portfolio and dig deeper into their mutual funds and ETFs in order to see how closely they match these and to determine if their managers are stagnant benchmark huggers.

Price/Revenue Revenue growth Price/cash flow Cash flow growth
ACWI 1.1 -10.4 8.8 -2.3
SPY 1.5 2.9 9.9 6.4
EFA .9 -21.3 8.4 -36.5
AAXJ 1.2 -24.3 8.4 -27.2
DEM 1 -5 5.3 1

We purposely left out EPS and P/E in order to focus on a couple metrics that do not garner the attention that they deserve.

ACWI-I-Shares All Country World Index

SPY-Standard and Poor 500 Domestic Large Cap

EFA-I-Shares Europe, Far East and Asia-Large Cap

AAXJ-I-Shares All country Asia ex-Japan

DEM-Wisdom Tree Emerging Markets Equity Income Fund

It is interesting to note that revenue and cash flow growth is largely negative or flat other than with the S&P 500 ETF SPY.  In part this has to do with the slump in Europe and the Asian slowdown. Flows have been strong in the US and this may continue.

Our suggestion is for firms that own ETFs and mutual funds to examine the fundamental metrics and position for the second half of the year in a combination of ETFs and funds with the best forward looking fundamental growth.


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Equity Market Update S&P 500 Index

To aid investment committees in their effort to maneuver through buy, hold and sell decisions within equities, we have provided a snapshot into a the large cap segment of the market.

The first chart lists the current P/E for the index and it’s sectors based on 2013 EPS estimates. S&P lists the PEG ratios for each. The PEG ratio divides the P/E by projected growth rates. A level of 1 implies a fairly valued market, a level above that an expensive market and below 1 a cheap market.

Just based on this metric, the overall market is rich, the IT sector is cheap while Telecomm and Utilities are expensive.

Source-S&P Website through 1/17/13


S&P 500

S&P 500 5YR

S&P 500


2013 EST











Consumer Discretionary




Consumer Staples












Health Care








Information Technology








Telecommunication Services








This information could be used along with additional metrics to determine areas within the market that may warrant closer attention for sale or purchase.

PEG ratios have severe limitations and should be used to possibly begin a search and  should be used as only one of many metrics to determine value. Each industry or sector should be evaluated for the appropriateness of the PEG ratio as a metric.

Below is a small table that displays the EPS estimates by S&P and below is a short explanation for each of the estimate methodologies. We enjoy taking a simple average for scenarios with various P/E ratios to help define a potential range for the S&P 500.

We then show a couple hypothetical scenarios although there are more assumptions and more scenarios.








(ests are

(ests are

(ests are

bottom up)

top down)

top down)




Operating earnings: Income from product (goods and services),
As Reported earnings: Income from continuing operations, also known GAAP (Generally Accepted Accounting Principles)
Bottom up estimate: Capital IQ consensus estimate for specific issue, building from the bottom up to the index level estimate
Top down estimate: S&P estimate (Economics Department) incorporates models (economic, financial, policy), does not comel

$106.80 is the average of the three estimates for the S&P 500 and at today’s price of $1494 the p/e is 13.98x.

While reasonable, if margins or sales contract, EPS will also come down. If estimates are high by 10%, the EPS comes in at $96.12. This leaves the index at 1345 if the same P/E is applied.  This would be a 10% correction.

Assume the same growth of EPS comes in and we apply a 15x EPS. The index would climb to 1600 or 7% higher.

The basic range then is 10% downside with 7% upside with these simplistic assumptions.

Given this, we recommend an examination of your portfolio beta to determine if your risk is higher or lower than the overall market as defined by the S&P 500. If you are more concerned about the downside, then sell some higher beta names for lower ones while maintaining equity exposure within pre-defined ranges.

Lastly, it is good to look at revenue and margins.

Here are two additional growth rates with respect to sales and margins for the S&P 500.

S&P 500 Sales/share rose from $272.64 to $282.38/share for a 3.57% increase YoY through Dec 31, 2012

Operating Margins rose from 8.7% to 8.92% through the same period.

While positive overall, it makes sense to dissect your holdings to determine if your funds overall are growing Sales, Margins and EPS faster or slower than the S&P500. Talk to your mutual fund managers to determine if they are worth holding based on comparable metrics.

While this short piece simplifies S&P 500 index level approximation, it can serve as a guide and one piece of input into your firm’s equity outlook.