Doing Good And Beating The S&P
IPS Millennium Fund has done something surprising for a socially responsible mutual fund: For the year through Apr. 23, it beat the market. The four-year-old fund, with $100 million in assets, gained 33.84%, vs. 10.79% for the Standard & Poor's 500-stock index and 9.68% for the Domini 400 Social Index. Manager Robert Loest's portfolio is loaded with such Internet stocks as Yahoo!, Amazon.com, and Network Solutions. Sam Jaffe, staff writer at Business Week Online (www.businessweek.com), spoke with Loest about his ethical-investing philosophy.
Q: You've made a success of buying Net stocks, but you're not running a Net fund. When do you sell shares so the fund doesn't become too weighted with Net stocks?
A: We start selling shares when they get to 5% or 6% of the portfolio. We just sold a bunch of AOL [America Online] for that reason. We're a growth-and-income fund, and the Internet just happens to be where most of the growth is right now. I worry about becoming too focused in one sector. We've also been adding a lot of real estate investment trusts and electric utilities for balance.
Q: Does a philosophy of ethical investing interfere with your ability to pick good stocks? And what do you mean by ethical investing?
A: I mean a concern for the environment, a concern for how employees are treated, and for animal rights. There's an ongoing debate about whether you should invest primarily in ethical issues or have a two-level screen. I and others have been arguing that you should have a two-level screen....We worry more about the company's success first, and then we worry about the ethical issues.
Q: Would you pick a stock of, say, a pharmaceutical company that is doing animal testing but might also be on the verge of a cure for cancer?
A: I don't care if they're about to cure cancer or not. If they test on animals and are intransigent about it, I'm adamant about [not investing in them].... If we see a company that is doing something we are opposed to, like animal testing, if they show a concern for animals and are trying to move away from that, then we will buy the stock and try to [start a] dialogue with management. [Abbott Labs is an example of such a company.] That also gives us an opportunity to vote on shareholder resolutions and proxy statements. If I were an animal, I think I would much rather that someone like me own the stock.
Q: You have a PhD in biology. How has that affected your stock-picking skills and economic world view?
A: A biologist tends to view the world as an ecosystem. That has profound implications for how we model the economy, primarily as a complex adaptive system instead of a fancy machine, like classical trend economists do.
Q: One of your best-performing stocks is Amazon.com. When do you expect to see it reach profitability?
A: I couldn't care less about its profitability. In fact, if Amazon announced a profit anytime soon, I would vote to fire [CEO] Jeff Bezos. The reason is simple: Anytime you are faced with a fundamentally new technology where the rewards for investment capital are so enormous, a company has no business showing earnings. Of course they are cash-flow negative and earnings negative--and that should continue as long as they have these outsize opportunities to invest at very high returns.
Q: What about Yahoo!? Can it maintain its market capitalization with every media company trying to compete?
A: Yes. Yahoo! can continue to dominate because it was the first one there in that space....It's a homegrown Internet company. It doesn't have a bunch of old guys who grew up in a print world and will be difficult to convince that they ought to do this or that.