Strict SRI Leads to Superior Performance

Johnny would no doubt be proud.

Ask Bill Pekin what his Appleseed Fund does better than anyone else, and the portfolio manager has a ready answer.

“We’re a global all-cap value fund,” he responded at FPA Experience 2013 in Orlando on Sunday.

It doesn’t sound so special on the surface, but then again, it adheres to the precepts of socially responsible investing. As anyone in the SRI community will tell you, the vast majority of SRI funds are domestically-focused and growth, so it’s one of a handful of global SRI value funds available.

“We have one-third of the fund in global companies, one-third of the fund in domestic companies and one-third of the fund in gold and cash,” Pekin explained, when asked about his philosophy and strategy. “Its risk-averse nature means it tends to outperform in volatile markets and lag in robust markets.”

What that translates to is strong performance in 2008 and 2009, and weaker performance since. However, he noted the 4.5% yearly alpha average over the life of the fund.

The fund is a concentrated portfolio of approximately 30 stocks, each of which has a “margin of safety” of 50%, meaning there is significant upside to intrinsic value.

“We feel 30 stocks are the right number,” he added. “It’s better to know a lot about a few stocks than nothing about many.”

It has a holding period that usually lasts one market cycle, or about three to five years. To get a name into the portfolio requires four out of five votes of the portfolio management team, which has been together for 10 years.

And of course, there are the SRI screens.

“We employ both positive and negative screens,” he said. “We don’t allow for tobacco, weapon systems, pornography, alcohol and gaming. On the positive side, we look for companies that make an impact on their community and the environment.”

Thirty stocks, 50% upside, strict screens and a majority vote — it all adds up to “a very high bar” for any holding to be included in the fund, and one he feels helps with the aforementioned risk-averse nature of the fund.

As far as their sell discipline, the rules are just as strict. Pekin said the he sells when the stock price of a holding reaches the estimate of intrinsic value; the firm’s investment thesis or intrinsic value estimate changes; the management team believes it has better investment opportunities elsewhere, and/or; the responsibility assessment of a company changes.

“We benchmark to the S&P 500 and the MSCI World Index, we look globally and domestically and have a value focus,” he concluded. “All of it adds up to something we feel is pretty unique and effective for investors.”

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