Quick Take: The Pax World High-Yield Fund (PAXHX) is the first so-called socially responsible junk bond fund to be offered to the general public, according to Pax World funds.
The fund does not invest in companies involved in gambling, alcohol, tobacco, or weapons manufacturing. It also shuns those that hurt the environment.
Portfolio manager Diane Keefe said she proposed starting the fund because she wanted to show that it could perform as well as similar funds that don't use social screens. "I think we've done a pretty good job in proving that over the last two years," she said.
The fund's performance bears that out. Pax World High Yield was down 5.8% for the year ended in July, but that put it ahead of its low-quality bond funds peers, which were off 6.8%. The fund returned 5.7% last year, while its peers rose 1.6%.
The fund, which was started in late 1999, is too new to be ranked by Standard & Poor's.
The Full Interview:
Sometimes the social screens that Diane Keefe uses have helped her sidestep problem companies.
For example, she excluded Tyco Intl (TYC) from the Pax World High-Yield Fund because the conglomerate does business with the military. Tyco's bonds were downgraded in May and again in June, and their rating could be lowered again.
But the filters don't always separate out bad apples, as Keefe's investment in Adelphia Communications Corp. earlier this year shows.
The cable company originally made its way into the Pax World High-Yield Fund because the business looked attractive, Keefe said. But she sold its notes in June, at what she termed a "huge loss," following a series of abuses at the company.
Three members of the Rigas family, Adelphia's founders, resigned from the board in May amid allegations that the company inflated earnings, and questions about its bookkeeping. Subsequently, John Rigas, Adelphia's chief executive, and his two sons were were arrested last month on charges of using corporate funds for personal use.
Keefe is participating in a class action lawsuit against Adelphia's former auditor, Deloitte & Touche.
While investing along socially and environmentally friendly lines, or examining corporate governance, won't uncover criminal acts, it can still play a role in managing money, Keefe believes.
"The general morality of how somebody behaves in business is important," she said. "We tend to think that people who are antagonistic towards the labor unions and their employees generally are going to have more strife associated with their day-to-day operations than people who have more of a collaborative approach."
