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Of Mutual Interest

Socially responsible fund bars big banks

By Mark Jewell
Associated Press / July 18, 2010

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Should socially responsible stock investors’ no-buy lists bar more than just companies peddling alcohol, tobacco, gambling, weapons, and the like? What about “too-big-to-fail’’ banks?

The Appleseed Fund touts itself as socially responsible in part because it refuses to invest in traditional “sin’’ stocks.

There’s nothing unusual about activist-oriented funds barring any stock that profits from human vice. But Appleseed (APPLX) went a step further this month. It expanded its stock blacklist to five megabanks that it says are too big for it to own: Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, and Morgan Stanley.

Appleseed’s managers says the government and banks haven’t tackled problems that helped trigger the 2008 financial crisis. The financial overhaul bill that cleared Congress on Thursday doesn’t adequately address underlying causes that could lead to another debacle, said Adam Strauss, a comanager of the $140 million mutual fund.

Appleseed’s move is partly symbolic. Its small portfolio of 23 stocks doesn’t include any big banks. But Appleseed’s move could spark a new direction for the growing socially responsible-investing movement. It is the first fund that follows socially responsible-investing guidelines to screen out big banks.

The new thinking: Don’t merely screen out stocks of companies profiting off vices like smoking and drinking, or those with lousy environmental or human rights records. Also boycott those whose risk-taking could jeopardize the broader economy.

“I think it’s very important for investors to consider the systemic risks they create with their investments,’’ said David Wood, director of Harvard’s Initiative for Responsible Investment.

Wood and others tracking funds that screen investments using social criteria said there’s growing interest in expanding socially responsible investing beyond its traditional approaches.

Laura Nishikawa, an analyst with RiskMetrics Group, sees a shift among the foundations and other institutional investors she advises. Increasingly, they want to know whether banks are taking risks that could endanger not only their stock prices, but the broader financial system.

Interest in scrutinizing oil and coal-mining industry stocks is also growing, said Noel Friedman, a RiskMetrics Group analyst.

As for banks, Appleseed’s Strauss said his fund is targeting the five biggest ones because they’re the biggest holders of derivatives, which are private bets between two parties over how interest rates, crop sizes, or the value of a bond will change over time. Speculative derivatives trading has been blamed as a key trigger of the financial crisis.

“Warren Buffett has described derivatives as financial weapons of mass destruction, and we agree,’’ Strauss said.

It’s hard to say whether Appleseed’s move will spur other funds to screen out big bank stocks. But Appleseed could prove influential if its strong performance invites imitation. Through last month, Appleseed had the top three-year record among all socially responsible US stock funds.

In part, the 3 1/2-year-old fund owes its results to avoiding financial stocks that tanked in 2008. Appleseed finished that year in the top 1 percent among its peers.

So far this year, the fund lags 96 percent of its peers. One reason: The bank stocks Appleseed has been passing up have been strong performers.

Appleseed won’t be picking up any Bank of America or Citigroup shares for now. The fund may drop its boycott of big banks if they change, or regulators force them to.