In an industry clogged with look-alike mutual funds, an ESG focus helps Calvert Equity Fund (CSIEX) stand out. The $2.2 billion fund bases its buy decisions not only on fundamental financial analysis but also on socially responsible criteria.
X ESG refers to environmental, social and corporate governance criteria. “Investors are attracted to this approach (using ESG factors) because they want to invest in companies that are solving these pressing ESG challenges,” said Anthony Eames, director of responsible investment strategy for Calvert Research & Management. “Over time, companies that get ESG factors right benefit from that, and that’s good for the companies and their shareholders.”
The financial fundamentals that the fund’s four managers screen for are designed to find “companies with consistent growth and stability in earnings,” said Joseph Hudepohl, one of four Atlanta Capital Management co-managers who subadvise the fund for Calvert. Both Atlanta and Calvert are units of Eaton Vance.
“Companies like that can thrive in any environment,” he added. “They’re not reliant on the capital markets for funding, so they can withstand periods like (the financial crisis of) 2008-09, and they can compound over time.”
Those traits are reflected in fund performance: strong, not dazzling, with lower downside risk than many of its peers.
Calvert Equity outperformed the broad market in the form of the S&P 500 for the past year going into Thursday, up 30.87% vs. 26.95%. Large-cap growth mutual funds tracked by Morningstar Direct averaged 32.56%. And the fund provided shareholders with a smoother ride than its peer group has over time periods stretching from three to 15 years. Over the past three years, for example, the fund has gone down less than 85% of the S&P 500 in downturns, while its peers have averaged declines of more than 110% vs. the big-cap bogey.
Calvert analysts sift through a universe of about 2,500 stocks. They pass a pool of 100 to 150 stocks that meet its ESG standards to the fund’s Atlanta Capital co-managers. “Then, based on our financial criteria and (low) valuation, we gravitate to the 45 to 50 names that make it into our portfolio,” Hudepohl said.
“Our universe of high quality businesses overlaps a lot with Calvert’s universe of businesses that meet their ESG standards,” he added.
He says companies that satisfy the criteria tend to have tail winds because of those traits. “There are long-term benefits to focusing on clean water like Danaher (DHR), for example, and on clean air like Praxair (PX).”
Danaher’s products include water treatment and vapor recovery systems. Its earnings per share rose 8%, 10% and 15% the past three quarters. Shares are up 27% in the past 12 months.
Praxair makes atmospheric gases, process gases and industrial gas production equipment. EPS grew 7%, 5%, 6% and 8% the past four quarters, which followed eight quarters of EPS declines. Share price rose 37% in the past 12 months. The stock yields 2%.
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Calvert Equity’s thesis for Facebook focuses on what Facebook excels at. “Advertising dollars go where the eyeballs are,” Hudepohl said. “The internet is taking (consumers) eyeball time away from other media. And Facebook is one of the top truly global platforms after Google (for attracting consumers). It benefits from worldwide growth in attracting advertising dollars.”
Equity managers like the steady earnings growth prospects for both Mastercard (MA) and Visa (V). “They’re two of the better examples of high-quality growth stocks and what we’re looking for from a financial perspective,” Hudepohl said about the credit card giants.
Both companies also appear to have long runways in front of them. “Amazingly, half of all transactions in developed markets are still in cash, so there is a lot of opportunity there,” he said. “And within emerging markets like India, China and South America, 90% of transactions are still done in cash.”
And the two companies avoid taking on consumers’ credit risk. “They don’t carry loans (from consumers),” Hudepohl said. “They are paid on each swipe of a card because of their technology. And the number of swipes is increasing.”
Also, the companies have huge free cash flow, Hudepohl says. “So they don’t depend on capital markets to grow their businesses,” he said. That means they don’t have to issue stock or pay interest on loans or bonds to pay for capital expenditures or develop new technology.
Charles Schwab (SCHW) benefits from a long-term secular tail wind of online brokers gaining market share, Hudepohl says. Also, Schwab stands to gain from rising interest rates. “(The) low interest rate environment forced Schwab along with the rest of the industry to grant fee waivers on money market funds,” Hudepohl said. “As rates rise, those fees are being reinstituted.”
“Secondly, the low rate environment also compressed net interest margin,” he added. “As rates rise, the spread that Schwab earns on its assets should continue to expand. Both benefits carry very high incremental margins to Schwab.”
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