By-Pass Energy with Socially Responsible Funds

01/01/2015 8:00 am EST

Focus: FUTURES

Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

One way to avoid large exposure to energy stocks is to invest in so-called socially responsible funds, most of which limit their energy investments due to environmental concerns, explains Mark Salzinger, editor of The No-Load Fund Investor.

Among actively managed funds, perhaps the most prominent such fund is Parnassus Core Equity (PRBLX), which includes a few natural gas stocks among its 40 or so holdings, but is otherwise essentially devoid of exposure to the sector.

The fund’s managers look for companies with excellent products and services, strong competitive advantages and only minuscule chances of permanent capital impairment.

While they avoid stocks engaged in various industries, like tobacco, alcohol, gaming, weapons, and nuclear power generation, they add a more sophisticated layer to their social screening.

Namely, they strongly favor firms that compare positively on environmental, social, and governance factors, including how they treat their employees and suppliers and how they impact the physical environment. The latter criterion likely disqualifies many major energy companies.

While we take no moral position on the concept of socially responsible investing, it is beyond debate that this fund has produced very good results.

In the three-year period ended November 2014, Parnassus Core Equity generated an annualized total return of 21.4%.

The Vanguard FTSE Social Index Fund (VFTSX) is an index alternative for those interested in avoiding much energy exposure through socially responsible investing.

Like the Parnassus offering, this fund avoids stocks engaged in tobacco, alcohol, gambling, and weapons manufacturing.

It also excludes companies that are considered by a major, independent outside service of having poor environmental, human rights, and labor relation records. Because of the environmental criteria, energy stocks recently accounted for less than 4% of assets.

Compared to Parnassus Core Equity, FTSE Social Index has a much higher percentage of assets in financial services stocks (27% versus 5%), which Parnassus tends to avoid because of the lack of transparency in such companies’ balance sheets.

FTSE Social Index has much less than Parnassus Core Equity in industrials (7% versus 15%) and technology (15% versus 25%). Over the past three years, FTSE Social Index produced an annualized gain of 23.1% (more than two percentage points better than the S&P 500).

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