WHAT ARE WE LOOKING FOR?
Socially responsible funds that have beaten benchmarks over the long haul.
These funds may avoid companies involved in tobacco, alcohol, gambling or military equipment. Or they can invest in more ethical firms with strong environmental records.
We asked Globe Investor fund analyst Victor Tan to screen large- and small-capitalization Canadian stock funds, and looked at five- and 10-year records. We used the list of funds tracked by the Toronto-based Social Investment Organization to define the universe of eligible funds. Exchange-traded funds and duplicate versions of funds were excluded.
WHAT DID WE FIND?
Desjardins Environment was the star among large-cap Canadian stock funds. It was the only one to beat the S&P/TSX Total Return Index.
The fund garnered an average annual return of 10.4 per cent over five years, and 7.3 per cent over 10 years.
"It does not hurt returns to be environmentally friendly," said Jean-Philippe Choquette, a manager with Fiera Capital.
The fund looks at a universe of some 125 environmentally responsible companies on a list drawn up by an advisory committee. Mr. Choquette's team will screen these firms using financial criteria and meetings with management.
"We are usually close to the benchmark in terms of energy, materials and financial sectors," and then the rest comes from stock-picking, he said.
Names like Research In Motion, Royal Bank of Canada, Toronto-Dominion Bank and Rogers Communications have been in the fund for five years.
Among smaller-company Canadian stock funds, Ethical Special Equity has beaten the Nesbitt Burns Canadian Small Cap Index over 10 years with an annualized return of 12.7 per cent. But it underperformed slightly over five years with an annualized 5.2-per-cent gain.
Over the past year, the materials sector, which now represents 32 per cent of the index, has been a big mover for the benchmark. Ethical Special Equity's weighting in materials is now 11 per cent.
"We are essentially value investors" looking for quality businesses that can weather tough economic times, said Joe Jugovic of QV Investors Inc. and a co-manager of the fund.
His team will pick stocks first, and then look to see if they can pass socially responsible screens. Canadian Western Bank, Richelieu Hardware, Uni-Select, E-L Financial and Transcontinental are names that have been 10-year holdings.
In the past, the fund has been unable to buy some stocks like Magellan Aerospace Corp. because it obtained a certain percentage in revenue from military sources. But QV Investors bought it for other conventional funds.
The irony is that Magellan ended up as a bad investment, which Ethical Special Equity avoided. "We sold it at a loss," in the other portfolios, Mr. Jugovic recalled.