NEW YORK (CNNfn) - Healthcare stocks may have been stars in 2000 and healthcare funds may be second only to technology funds in terms of performance over the past five years, but investors in the Humane Equity Fund are steering clear of the sector.|
That's because many healthcare companies conduct animal testing, and that's precisely what shareholders in the New York-based fund, which is managed by Salomon Smith Barney, don't want to back.
Taboo, too, are many cosmetic businesses as well as firms that kill animals for meat or produce products that run counter to the humane treatment of animals, such as trapping equipment manufacturers. Also on the radar though not a strict screen: firms whose business practices might disturb natural animal habitats.
Screening within reason
But like many socially responsible funds charged with the task of making money for investors, there is just so far the fund, which has only $10.5 million in assets, can apply its screen without undermining its mission.
"The ethic is not intended to go to the Nth degree because it wouldn't be practical," said Tom Waite, chief financial officer for The Humane Society of the United States, a consultant to the fund. "Once you get too far down the chain, it's hard to invest in anything."
For instance, Waite explained, the fund might consider investing in a company that makes leather products since leather is a byproduct of animals who are killed primarily for their meat. But it will shun a meat-packing business.
Or consider the U.S. government, he said. It uses animals for testing but that doesn't mean the fund would write off investing in U.S.Treasurys.
On the other hand, portfolio manager Chad Graves chose to withdraw the fund's investment in the Bank of New York when he discovered the bank sponsored the American Depositary Receipts program of a company that conducted animal testing. "I didn't want to own a slightly contentious stock in the fund," Graves said.
But, Waites noted, that was an example of Graves going the extra mile for shareholders, adding that the ethics guidelines for the fund do not dictate such divestiture.
Beating the S&P
In Graves' view, animal-friendly and other socially aware policies make good business sense. "They're business-building issues," he said, noting that in addition to the animal-testing screen, he also looks at how a company interacts with the environment, its community and its workplace before deciding to invest in it for the fund. "If they handle these challenges well, they handle other business issues well. I think you've found a well-managed company," he said.
And so far, that philosophy has paid off, relatively speaking.
During its short history – it launched in February of this year – the fund has beaten its benchmark, the S&P 500. From the day of inception, Feb. 2, through Dec. 1, the Humane Equity Fund was down 3.5 percent. During the same period the S&P 500 fell 6.6 percent.
Look hard for diversity
For socially responsible investors, there are more funds than ever to satisfy their particular concerns. But fund analysts caution they still may have a hard time creating a fully diversified portfolio in what is still a limited universe. The Humane Equity Fund, for instance, while technically a multicap offering, has a large-cap bias.
Plus, said Todd Larsen, spokesman for the Social Investment Forum investors should examine how screens are applied, since that varies from fund to fund.
Several other funds screen for animal testing and the humane treatment of animals, but most don't do so exclusively nor are their criteria uniform.
HUMANE EQUITY FUND AVOIDS:
Cosmetic companies that use animals for testing in an inhumane manner
Companies that use animals in an end product
Companies making products adverse to the humane treatment of animals, such as hunting equipment
"For some funds, it's basically an on/off switch" when it comes to animal testing, Larsen said. But for others, he noted, the screen may be less strict, allowing, for instance, companies that adopt a best-practices approach to animal testing, meaning they do so in what is considered a humane manner.
But for shareholders concerned about animal welfare who want to put their money on their principles, funds like Humane Equity may provide a "a way you can make money, help animals and make a statement about animals," Waites said.