Charity is not an ideal many mutual fund managers actively advocate for their shareholders.
But, as its name suggests, the Jeffersonville, Ind.-based New Covenant Funds appeal to a higher authority. In matters temporal, that means the principles of the American Presbyterian Church. Like many religious and non-religious socially responsible mutual funds that includes screening out companies that violate certain church or socially-conscious principles, and actively participating in shareholder proxies. Unlike many of its peers, it also includes an opportunity for fund shareholders to give something back.
Through its First Fruits program, New Covenant – part of the Presbyterian Church Foundation – allows fund investors to direct dividend payments and capital gains distributions to a church, the foundation or the General Assembly of the U.S. Presbyterian Church.
“It’s a
way for people to retain an investment and to give something away,” explains George Rue, v.p. and portfolio manager at New Covenant. Rue, who also serves as chief investment officer for the Presbyterian Church Foundation, says too much emphasis is placed on screening out companies that violate SRI principles, which accounts for a mere 5 percent of New Covenant Funds’ screening process.
The funds will not invest in alcohol, tobacco or gaming companies. They also screen out certain firearms manufacturers and defense companies, particularly those firms that do no have a policy prohibiting the manufacture of land mines. That screen cuts out some of the bigger names in the field including Boeing, Lockheed-Martin, Northrop-Grumman and Raytheon.
In all, there are 71 names on New Covenant’s divestment list. That number pales in comparison to the more than 700 names in the firm’s stock fund, the New Covenant Growth Fund.
“The majority of what we do is being an active shareholder,” Rue says.
With religious-based SRI mutual funds “all over the map,” Rue appeals to his church’s long history of managing money. The Presbyterian Foundation, founded “to acquire gifts and raise money for the Presbyterian Church,” has been around since 1799, and the church has linked its values and beliefs with its investment strategies since 1971. Since 1999, the group has run four mutual funds: the $920 million Growth Fund, the $530 million New Covenant Income Fund, a bond fund, and two balanced funds, which are invested in the stock and bond funds.
“What we are, and have been for years, is a manager of managers,” says Rue, who has 20 years of experience in the investment industry, most recently with Invesco. For the Growth Fund, that means four subadvisers have a hand at managing the money. The bulk of it – better than 60% – is in what Rue calls his core strategy, run by Boston-based Wellington Management and benchmarked against the Russell 3000 Index.
The fund also has 13% targeted to three satellites. The first, international stocks, is managed by Newport Beach, Calif.-based Capital Guardian Trust. The fund also invests an equal portion in a value portfolio and a growth portfolio, managed by three other outside vendors. Sound Shore, of Greenwich, Conn., runs the value portfolio; the growth portfolio is divided between Santa Barbara Asset Management, which handles large-cap stocks, and Portland, Ore.-based Mazama Capital Management, which invests in small- and mid-cap stocks.
The fund, which was created in 1999, has outperformed the Standard & Poor’s 500 Index every year save 2004. And its top holdings include many household names: Bank of America, ExxonMobil, Citigroup, Microsoft, General Electric, Time Warner and Proctor and Gamble are its top seven holdings.
One of New Covenant’s biggest projects is encouraging companies to adopt the Ceres principles, formulated by a coalition of environmental groups and institutional investors to press companies to improve their environmental performance and reporting.
“A lot of it has really been about transparency,” Rue says. “Shareholders are going to be interested in what these companies are doing, and the more public they have to make it, the more accountable they have to be for their actions.” Rue cites in particular his advocacy with utility companies to improve their transparency on environmental issues.
Transparency isn’t only a watchword for New Covenant’s environmental work. The fund has been active with banks, encouraging community reinvestment lending.
“A growing element of the work is global corporate accountability,” in the wake of the scandals of the first half of this decade, Rue says.
The funds also advocate for workers’ and human rights, and health care issues, including “pharmaceutical price restraint,” he says.
“We’re out there, pounding the pavement with those groups, who are natural shareholders for us.”