FEATURE - Do-good mutual funds did not escape Enron fall
Date: 21-Feb-02
Country: USA
Author: Martha Slud
So it may come as a surprise that the socially conscious fund's top holding at one point in 2000 was Enron Corp. , the now bankrupt energy trader facing scores of shareholder lawsuits and intense scrutiny over its accounting practices.
The Pax World fund, unlike a lot of investors, actually was a net winner on Enron because it sold most of its shares long before the stock plunged.
Other socially conscious funds also bet on Enron - whose trading and natural gas operations made it one of the few energy firms that passed their environmental criteria. And it was a component of two socially screened stock indexes, the Domini 400 Social Index and the Calvert Social Index, until it collapsed.
Socially conscious funds, which have gained popularity with investors but still represent only a small slice of the fund industry's assets, generally shun companies involved in alcohol, tobacco, nuclear power or weapons. While these funds screen companies carefully, the Enron meltdown shows their screening efforts cannot necessarily help them sidestep stocks that become entangled in accounting probes or other financial problems, industry experts say.
"In this case, we felt that our screening process couldn't have done any more to identify these kinds of issues," said John Shields, president and chief executive officer of Citizens Advisers Inc., which runs the socially conscious Citizens Funds. "What we've got here is something that was so well hidden."
The Citizens funds did not own Enron stock, but Enron did pass its investment criteria and one of its portfolios held Enron debt, which it sold after Enron's proposed merger with smaller rival Dynegy Inc. fell apart in November, Shields said. Enron filed for bankruptcy protection in early December, the largest ever U.S. corporate bankruptcy.
Socially conscious mutual funds aimed at individual investors have about $11.3 billion in combined assets, according to the latest portfolio information available from research firm Lipper Inc. Some of these funds are managed through the index approach, meaning that stocks that make it into the indexes are automatically bought for the funds.
Enron was included in several socially screened indexes that viewed the company as a "clean" energy stock involved in natural gas and windpower - an alternative to other energy stocks like big oil companies.
"In looking around and trying to have something in the energy field, what we felt was the right approach was the focus on companies that had a greater dependence on natural gas and alternatives to petroleum fuel sources," said Amy Domini, founder of Domini Social Investments, which runs the Domini Social Equity Fund - which invested in Enron.
Fund managers invested in Enron even though some had concerns about alleged human rights problems associated with the treatment of protesters opposed to an Enron power plant project in India. Fund managers said they felt the best way to deal with the controversy was to engage in shareholder dialogue with the firm.
Enron also was a Wall Street darling in the 1990s - something that was hard for socially conscious fund managers to resist, said Catherine Hickey, an analyst at research firm Morningstar. Like other investors, these fund managers want to pick winners, she said.
And for some fund managers, it was a winner.
The $1.1 billion Pax World Balanced fund bought about 1 million shares for an average of $18 per share in 1994, but sold the majority of its stake when the stock soared near $80 in 2000, said portfolio manager Christopher Brown. Pax had about 300,000 shares left when Enron imploded.
Pax World and others didn't wholeheartedly endorse Enron's business, though. The fund was concerned about the Indian power plant situation, Brown said.
Another firm, the Calvert Funds, said Enron failed its investment criteria in 1996 because of the India situation as well as environmental concerns over a pipeline project in South America. Calvert, t