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GreenMoney Journal - publishing since 1992
Fall 2010 issue
Socially Responsible Investing – Better Companies, Better Communities
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Appleseed Fund: A Value-Oriented SRI Approach
by Adam Strauss and Joshua Strauss
When we formed the Appleseed Fund (Nasdaq: APPLX) nearly three years ago, we knew very clearly that
our Fund's objective would be to generate market-beating returns by investing in sustainable,
undervalued companies. The idea grew naturally out of our firm's tradition as committed value
investors and our longstanding interest in companies that generate social and environmental
benefits for their stakeholders.
Thus far we have been quite pleased by the Fund's results. Based on the Fund's environmental and
social screens, the Appleseed Fund recently earned a four-heart (out of a possible five) social
rating by Natural Investments.* In addition, our investment performance has also been strong in
the midst of a simply horrendous market environment. The Appleseed Fund generated a one-year
positive return of +7.5% through June 30, 2009, versus a one-year negative return of -26.2% for the
S&P 500 Index. During that same one-year period ending June 30, 2009, Morningstar ranked Appleseed
as the #1 performing mid-cap value domestic equity fund in comparison to 399 of its mid-cap value
peers (including SRI and non-SRI), and it ranked Appleseed the #1 performing SRI domestic equity
fund compared to 197 of its peers (including value, core, and growth).
We have been
encouraged by the warm reception we have received from investment advisors and retail investors due
to Appleseed's value approach towards investing. While value investing comes naturally to us, we
are finding that many SRI investors have been frustrated by the fewer number of value-oriented SRI
funds available. We simply do not know any other way to prudently invest except to purchase shares
in companies that are significantly undervalued by the market. In addition, research has
demonstrated that value-oriented stocks tend to outperform growth-oriented stocks over the
long-term. ** As a result, we believe that combining the disciplines of value-investing and SRI
investing makes enormous sense for investors.
The Appleseed Fund is managed with a
team-based approach by five portfolio managers. Our professional backgrounds are quite diverse and,
in our opinion, uniquely suited for a fund whose goal is to generate strong financial and social
returns. Our team has almost 100 years of investing experience collectively, but we also have
decades of operating experience, including operating experience in managing socially responsible
companies. For example, Adam formerly worked on the management team at Frontier Natural Products
Co-op and currently serves on Frontier's Board of Directors; Frontier Co-op has been a leader in
the natural and organic products industry since the 1970s. Joshua played a key role at Color
Kinetics, an industry pioneer in energy-efficient LED lighting technology. We have found that the
combination of operating experience and Wall Street experience provides us with helpful insights
both as value investors and as SRI investors.
When selecting candidates for our
portfolio, we believe the most effective approach is to include a carefully considered blend of
positive and negative, qualitative and quantitative sustainability screens. We also look for
companies that offer products and services that promote better health, improve the economic
well-being of impoverished populations, and reduce their environmental impact. On the negative
screening side, we eliminate companies that generate material revenues from tobacco, alcohol,
gambling, weapon systems, or pornography. We also avoid companies which have company operations or
direct investments in Burma or in Sudan. On the positive screening side, we look for companies that
have solid environmental records, strong human rights records, and/or a community investment
component to their business. In addition, the Appleseed Fund dedicates at least 1% of its
investments to community development investments as a participant in the Social Investment Forum's
1% or More in Community Investing Campaign.
From a stock selection standpoint, value
investors look to invest in well-managed companies with minimal business risk and a long-term
viewpoint. Of course, many SRI investors value the same goals. Our value discipline and our
commitment to SRI causes us to avoid companies that tend to violate the law or market products that
have questionable value or that are likely to lead to costly litigation. Our value and SRI
screening process both help us identify companies with management teams that are more long-term
thinking, more transparent, and more honest in their dealings with shareholders. This investment
approach leads us to invest in companies that are engaging their employees, customers, and vendors
in mutually beneficial relationships which add long-term franchise value. So there are many
similarities between these two approaches to investing. To further highlight our investing
approach, we would like to discuss three of our portfolio investments:
o The
Appleseed Fund owns a significant position in John B. Sanfilippo (JBSS), owner of the Fisher Nuts
brand and the largest private label nut producer in the United States. Nuts are a high quality
source of vegetarian protein, and researchers have found that people who consume nuts regularly
have lower risks of heart disease. Growing nuts as a source of protein is far more sustainable than
raising cattle or chickens; the Center for a Livable Future at Johns Hopkins estimates that
producing 1 pound of feedlot beef requires as much as 2,400 gallons of water and 7 pounds of grain,
which is far more than the resources required to grow peanuts and tree nuts. In addition, the
Company trades at about half of its tangible book value, trailing twelve-month earnings have been
increasing on a year-over-year basis for the past seven quarters in a row, and the free cash flow
yield is running at a rate of over 20%.
o We also own Annaly Capital Management
(NLY), a real estate investment trust that invests in agency residential mortgage-backed
securities. Foreclosures have clearly become not just an economic issue, but also a social issue
because of the impact that foreclosures and falling home prices have on local communities. By
investing in agency mortgages through Annaly, we are indirectly contributing to lower mortgage
interest rates for homeowners, which should eventually help to lower foreclosure rates. From a
value perspective, Annaly's earnings increase significantly when its cost of borrowing declines.
Given the Fed's zero interest rate policy, Annaly's borrowing costs are at rock-bottom levels, and
the Company is generating very healthy interest rate spread income. In addition, Annaly pays out
all of its income to shareholders in the form of a dividend, and the company's dividend yield is
over 14% today.
o Another one of our favorite holdings is the Female Health
Company (FHCO), which makes female condoms that are distributed to women in developing countries
through NGOs and government agencies. We believe The Female Health Company's core business
involves saving people's lives by reducing HIV transmission rates, as research demonstrates that
women with additional prevention options are less likely to contract sexually transmitted disease.
As a result of significant increases in government funding, we expect unit demand for the company's
FC2 product to increase at a 20% compounded growth rate or more for at least the next five years.
Finally, we think one of the most important characteristics of the Appleseed Fund is that
its portfolio managers are among the Fund's largest shareholders. By "eating our own cooking" with
our investments, we are particularly disciplined in the companies whose shares we choose to
purchase, and we are especially careful about the price we pay for those shares.
We hope
we have piqued your interest in the Appleseed Fund. More details can be found at
http://www.appleseedfund.com.
Article by Adam Strauss and Joshua Strauss, portfolio
managers of The Appleseed Fund, a no-load mutual fund that seeks to generate market-beating returns
by investing in sustainable, undervalued companies. Since the fund's inception in 2006, returns
have outpaced the S&P 500 Index by over 14% per year through June 30, 2009. The Fund is managed by
Pekin Singer Strauss, a Chicago-based value-oriented investment firm established in 1990. The
Appleseed Fund's portfolio managers share risk and reward with investors by making significant
personal investments in the Fund.
* The Natural Investments Social
Rating is based on the number and quality of social screens applied. Financial performance is not a
part of this rating. More information at http://www.naturalinvesting.com.
**
Source: Common Risk Factors in the Returns of Stocks and Bonds, by Eugene F. Fama and
Kenneth R. French, 1992.Fund performance was +7.5% during the twelve months through 6/30/09, and
fund performance was +0.6% per annum since inception. Three year, five year, and ten year
performance is not applicable; fund inception date was 12/09/06. Appleseed's #1 Morningstar
ranking is based on its 1-year performance through 6/30/09.
You should carefully
consider the investment objectives, potential risks, management fees, and charges and expenses of
the Fund before investing. The Fund's prospectus contains this and other information about the
Fund, and should be read carefully before investing. You may obtain a current copy of the Fund's
prospectus by calling 1-800-470-1029. Past performance is no guarantee of future results. The
investment return and principal value of an investment in the Fund will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original cost. Performance
data to the most recent month end may be obtained by calling the same number listed above or by
visiting http://www.appleseedfund.com.
The gross expense ratio of the fund is
3.13%, and the net expense ratio after contractual fee waivers is 1.28%. The advisor has contracted
with the fund to waive fees to maintain a 1.24% expense ratio (excluding indirect expenses) for
shareholders of the fund through March 2010.
Distributed by Unified Financial Securities,
Inc., 2960 North Meridian Street, Suite 300, Indianapolis, IN 46208. (Member FINRA)
Source: Appleseed Fund
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