A value investment is a value investment no matter where you find it. Just ask the managers at the Appleseed Fund. When the financial services sector collapsed in 2008 and dragged many portfolios down with it, the Appleseed Fund, a mid-cap value fund with $27 million in assets, was benefiting from being in financials.
“We were very afraid of the housing crisis, going back to 2006 and 2007,” says Joshua Strauss, a partner with Pekin Singer Strauss Asset Management in Chicago, which manages the fund. The fund held overweight positions in mortgage real estate investment trusts (REITs), which benefited from the Federal Reserve’s aggressive interest rate cutting in the fourth quarter. While the stock prices of the REITs, including Annaly Capital Management and Anworth Mortgage Asset Corp., changed little they paid about a 16 percent dividend.
“Our out-performance was not based on sector allocation, but security allocations,” says Strauss. “We picked the right stocks, but not necessarily the right industries.”
It was that kind of a move that helped the Appleseed Fund not only to the first percentile among Morningstar’s mid-cap value funds, but to the top of all funds in that class as of June 30 with a year-to-date return of 24.8 percent. Appleseed, launched in late 2006, avoids all the sin sectors (gambling, pornography, weapons, alcohol), but also invests in sustainable, undervalued companies that might be working to lessen their environmental impact or creating products to combat dreaded diseases.
Only about 7 percent of the socially responsible investing funds that Morningstar tracks are value funds. But Strauss says that’s the sort of investing that he and his partners at Pekin Singer Strauss have been practicing since it was formed in 1990. Pekin Singer Strauss has about $550 million in assets under management.
The five managers of the fund started it with their own capital and still own about 17 percent. They intend to keep their money in the fund, but they expect the percentage to shrink as total assets grow. In December the fund held $11 million and has doubled with little marketing and PR.
As value investors the managers look for companies that have little downside. Then they apply their social screens. One of the companies they like is John B. Sanfilippo and Sons Co., of Elgin, IL, the largest nut producer in the U.S. and owner of the Fisher Nut brand. John B. Sanfilippo represents good value because “nuts are a high quality source of vegetarian protein and they help prevent heart disease” says Strauss. Additionally, they could also help to reduce the nation’s beef consumption, which would reduce the environmental impact it takes to feed cattle.
The Appleseed Fund has about 9 percent of its assets invested in John B. Sanfilippo, making it one of its largest holdings. However, as a concentrated fund the managers only own shares of 22 companies in its portfolio. For investors that means big winners can have an extraordinary impact, but big losers can as well.
Another Appleseed favorite is the Female Health Company, a Chicago-based maker of female condoms. The condoms are sold to governments and nongovernmental organizations in developing countries and then distributed to people for free. Not only are revenues growing at a 20 percent to 25 percent pace, says Strauss, “their business is to save peoples lives by offering women an option that they are in control of.” He says that in 2008 11 million female condoms produced by the Female Health Company were distributed in Zimbabwe, where sexually transmitted diseases have dramatically lowered the life expectancy for women.
In March the fund began buying shares of Coca-Cola Company and has enjoyed a 20 percent gain, says Strauss. He says management is demonstrating a commitment to corporate governance and running a global conglomerate in a responsible way.
“Coke uses 300 billion liters of water annually in their beverages and in the course of manufacturing and production,” he says Strauss. “They have a massive impact on the world from an environmental perspective in terms of water footprint neutrality. But they’re using recycled water and doing other innovative things to get themselves to water footprint neutrality. So we support them.”
As for the numbers, Strauss says Coke grows its revenues “through economic cycles at a high double digit to low double-digit clip” and the stock is trading at a 20-year valuation low.
As the Appleseed Fund’s assets continue to grow, Strauss says a challenge will be to maintain their investment diligence and not feel compelled to buy merely to put the money to work.
“You see lots of funds whose assets balloon, they get their (Morningstar) stars and then performance tanks,” he says. “We have a large cash position now, about 19.8 percent at the end of June, and we did not during 2008. We buy when we think there’s a 60 percent appreciation. If we don’t find that we’ll stay in cash.”