Good guys finish first

The consistent and long-term success of the Investors Summa fund goes a long way towards proving that Socially Responsible Investing (SRI) is more than just a moral statement. Manager Allan Brown, who took over the fund in September 1997, has delivered first-quartile performance in this diversified Canadian equity fund but the road there was, and still is, paved with obstacles.

"The biggest challenge in ethical investing," he says, "is that a lot of the companies you consider investing in don't actually qualify in the end." Allan refers, of course, to the fund's strict social responsibility screens. The fund has a mandate to avoid investments in companies that are involved or derive their income from tobacco, nuclear technology, alcohol, pornography, military activities, or gambling. Apart from these prohibition screens, Allan relies on Michael Jantzy, renowned expert in Socially Responsible Investing, for his in-depth analysis of each company's suitability. "He's the authority in Canada," Allan says. "He analyzes companies in terms of their environmental impact, international operations, community involvement, employee relations, and products." A nod from Michael Jantzy is required before an investment can qualify for the fund.

The result? 50 per cent of the companies in the TSE 300 don't qualify. This is a problem for Allan but, he says, also an advantage. "You can't sit around and be a closet indexer," he says. "You have to work twice as hard as the others in order to succeed." Allan cannot ignore this issue because his investors are serious about the ethical issues and demand constant vigilance. For instance, Allan cannot invest in Nortel Networks. "This is a big problem," he says. Nortel represents (post-spinoff) about a quarter of the TSE 300, making it very difficult to keep pace with the index, much less beat it without investing in the stock. Nortel sells communications equipment to the Miranmar (formerly Burma) government, which is notorious for its human rights violations and uses the equipment to oppress the population. "We have made sure that Nortel is aware of our concern and we are going to put our weight behind this issue, hopefully forcing them to change their policy of selling to Burma," Allan says.

The ability to make waves was not always there. "When I started out, we only had $250 million and nobody listened," Allan says. Now the fund is one of the largest Canadian equity funds in the country, with over $2 billion in assets. "Now I can flex some muscle," he adds.

Allan has rewarded investors with an average of 20.8 per cent return over the 29 months of his tenure with the fund, but he had to do it under these constraints. "In the future," he says, "SRI will continue to grow." He expects that as more investors feel good about the returns and become more educated about ethical investing, the amount of assets invested in the fund will increase, and so will his clout with companies. "If we can get Nortel out of Burma, it will be a big boom," he notes.

Allan spends most of his time during the day doing straight-up investment research. "We look for good companies, the leaders within each sector," he says. One of his favourites is Suncor Energy Inc. "It's a great story with great management," he says. The biggest drawback in the oil industry is uncertainty about the future as companies have to continuously replenish their reserves. "Suncor have unlimited resources, there is no limitation on how much they can produce, and they have plans mapped out to 2008." All their growth is generated internally and they hedge all that they need to in case the price of oil collapses. "Suncor is one of the few true Canadian growth stories in the oil patch," Allan says, "it's a low-risk stock and it has a great valuation." The company also impressed him by taking a leading role and setting a good example in the industry with their management and awareness of the company's environmental impact.

Another stock Allan likes is Varian Medical Systems (Varian Inc.) in the U.S. "It's one of my largest holdings," he says. "It’s a very ethical investment, a great story and very very cheap -- nobody seems to know about it yet." The firm is one of the largest cancer treatment companies using radiation treatment and linear accelerators, and they have made a full transition from analog to digital. "They were one of the first to do digital X-rays," he explains. They can do 3-D analysis of tumours with very little tissue damage and in a faster and less invasive way for the patient. "The company’s technology will enable tele-medicine in a big way," Allan says, "and open up a new area of medical research."

Levi Folk, Richard Webb and Peter Diplaros are Investment.com mutual fund specialists and editors of the Fund Counsel newsletter. They can be reached by e-mail at peterd@hqinvestment.com.