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Socially Responsible Investing: 3 Funds That Are Beating The Market

There’s a powerful trend emerging in the investing world. Investors are building portfolios based on their morals and values. Dubbed “socially responsible investing,” or SRI, these investors align their investments with their values by avoiding companies with poor environmental, social or governance practices. Like their counterparts, sustainable investors also want to earn a good financial return on their investment. They don’t want to sacrifice performance for social impact. And these days, they don’t have to. For the last several years, the returns on socially responsible investments have risen sharply – and many are beating the S&P 500 What’s driving the boom in Socially Responsible Investing? Socially responsible investing funds have been enjoying increasing popularity, largely due to the emergence of “impact investing” – a feel good concept that started in the U.K. The difference between the two is that socially responsible investing avoids investments that are inconsistent with the values of the investors while impact investing actively pursues a specific positive impact. For example, funds that don’t invest in companies that make alcohol, tobacco, gambling and weapons are considered socially responsible investments. A more targeted approach, impact investing addresses specific issues like sustainability, women’s rights, the environment and more. Just how popular is SRI? In 1995, there were only 55 mutual funds that engaged in SRI, with $12 billion in assets. Today there are nearly 500, with assets exceeding $500 billion. What’s In It for Investors? Socially responsible investing looks a lot different than it did just a decade ago. As SRI has evolved, the advantages for investors are numerous: SRI investors now have more investing options, with the number of funds growing rapidly. There is also increased diversification of the investments within the funds themselves, which results in less risk to the investor. Investors can now invest in socially responsible Exchange Traded Funds (ETF). There are funds of various market capitalizations and investors can choose from domestic, foreign and global funds. Investors can select a fund whose strategy and social responsibility agenda are similar to that of their own social and financial objectives. Socially Responsible Investing Is Beating the Market Socially responsible investing no longer means you have to sacrifice returns on your investment. The once meager returns of socially responsible investments have improved considerably, even beating the S&P 500. Consider the following: The Index which tracks the equity performance of socially responsible funds, Focus iShares MSCI USA ESG Select Social Index Fund (NYSEARCA: KLD ), has outperformed the S&P since 1990, with an average annual total return of 10.46% compared with the S&P 500’s 9.93%. Benchmark performance of the MSCI KLD 400 Social Index, which includes firms meeting high Environmental, Social and Governance (ESG) standards, has outperformed the S&P 500 on an annualized basis by 45 basis points since its inception (10.14%, compared to 9.69% for the S&P 500; July 1990-Dec. 2014). Not all SRI funds beat the index, but it is remarkable how closely most of them track the market as a whole. Here are some ways to add socially responsible investing to your portfolio. At the time of this writing, I do not own a position in any of the funds mentioned in this article. Socially Responsible Investing: iShares MSCI KLD 400 Social ETF For investors looking for an easy way to add socially responsible investing to their portfolio, the iShares MSCI KLD 400 Social (NYSEARCA: DSI ) is worth a look. DSI posted a 35.5% return in 2013 – beating the S&P 500. DSI posted a 12.2% return in 2014, underperforming the S&P 500 by less than 2 points. The ETF’s underlying index tracks 99% of all the stocks in the United States and includes firms with a variety of market caps. The socially responsible ETF currently tracks 400 different firms and charges 0.50% in expenses. Technology and health care firms make up the bulk of DSI’s holdings. Socially Responsible Investing: iShares MSCI USA ESG Select ETF Investors wanting to eliminate the volatility of owning smaller firms from their portfolios should consider the iShares MSCI USA ESG Select ETF. The $350 million ETF includes U.S. large-cap and some mid-cap stocks which have been screened for positive SRI characteristics. It currently includes almost a hundred different stocks – with top holdings in 3M (NYSE: MMM ), Microsoft (NASDAQ: MSFT ) and renewable energy utility NextEra Energy (NYSE: NEE ). Expenses for KLD are also 0.5%. The socially responsible investing fund has consistently posted solid returns over the last several years. In 2013, KLD posted a 31% return, which was slightly less than the benchmark index, although KLD had beaten the index for the past 5 years. In 2014, KLD posted a total return of 13.5%. Socially Responsible Investing: Huntington EcoLogical Strategy ETF The often overlooked Huntington EcoLogical Strategy ETF (NYSEARCA: HECO ) focuses on various firms making efforts on environmental issues and sustainability. It’s a well-diversified, moderate risk, capital appreciation fund. HECO focuses on “ecologically focused companies,” firms that have positioned their businesses to respond to increased environmental legislation, cultural shifts toward environmentally conscious consumption and capital investments in environmentally-oriented projects. HECO holds more than 50 different companies including Starbucks (NASDAQ: SBUX ) and Texas Instruments (NASDAQ: TXN ). The returns have been strong. HECO returned nearly 30% in 2013 and narrowly outperformed the benchmark in 2014. Expenses for the ETF are slightly high at 0.95%. Final Thoughts You don’t have to give up performance to invest with your conscience and make a difference. Serious investors interested in socially responsible investing no longer have to sacrifice investment returns for their morals. And the easiest way to add SRI to your portfolio is an Exchange Traded Fund such as the funds mentioned above. The information provided is for informational purposes, not a recommendation. As always, investors should consider their own financial objectives and time horizon when making investment decisions. Diversification and asset allocations are important considerations. Sources: 5 ETFs for the Socially Responsible Investor by Dan Kaplinger Socially Responsible Investing With ETFs by Greg Lessard Socially responsible investing has beaten the S&P 500 for decades by Jennifer Openshaw.

Finding Value With The Piotroski F-Score: Results

The final results of the Piotroski F-Score experiment. The portfolio lost half of its value mainly due to the fall in the price of oil. The experiment wasn’t a total failure. It has been a year since I began my Piotroski F-Score experiment (Finding Value With The Piotroski F-Score). Unfortunately, the results of the experiment are less than impressive, although the unexpected collapse in the price of oil is partially to blame. You can find the first part of this series, which explains the methodology behind the F-score, as well as an initial summary for each company, here . The second part, assessing the portfolios performance up to the beginning of February can be found here. Part three. Part four. The thesis behind my F-Score experiment was simple. The Piotroski F-Score was designed to hunt out value opportunities that are profit-making, have improving margins, don’t employ any accounting tricks and have improving balance sheets . As a contrarian value investor, I was interested in seeing how this strategy performed in the real world. It is both a way to discover value stocks and trade them without fundamental analysis, the screening criteria and investments are based purely on the financials (something Benjamin Graham recommended). Piotroski recommended scoring the bottom 20% of the market in terms of price to book value and rating these companies based on how many F-Score criteria they passed. The criteria looked at points such as leverage, liquidity, profitability and operating efficiency. One point is awarded for each criterion the company passes and the stocks that score the highest, eight, or nine are regarded as being the strongest candidates for recovery. Using the following system, Piotroski’s April 2000 paper Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers, demonstrated that the Piotroski score method would have seen a 23% annual return between 1976 and 1996 if the expected winners were bought and expected losers shorted. This time last year I selected 20 companies that passed Piotroski’s criteria and were, at the time of initial investment, trading below book value per share. I constructed a hypothetical portfolio investing $1,000 in each company excluding commissions. The positions were based on financial data only with no weighting to fundamental factors. The companies selected were: Noble (NYSE: NE ), Ternium SA (NYSE: TX ), Unit (NYSE: UNT ) Ocean Rig (NASDAQ: ORIG ), CYS Investments (NYSE: CYS ), Pacific Drilling (NYSE: PACD ), Hornbeck Offshore Services Inc (NYSE: HOS ), OM Inc. (NYSE: OMG ), Speedy Motorsports (NYSE: TRK ), Gulfmark Offshore Inc (NYSE: GLF ), Schnitzer Steel Industries Inc (NASDAQ: SCHN ), Bill Barrett (NYSE: BBG ), Penn Virginia (NYSE: PVA ), Steel Excel Inc (OTCQB: SXCLD) McClatchy Co (NYSE: MNI ), Ducommun Inc (NYSE: DCO ), Vantage Drilling Co (NYSEMKT: VTG ), Nuverra Environmental (NYSE: NES ), Willis Lease Finance (NASDAQ: WLFC ) and Ellington Residential Mortgage (NYSE: EARN ). How did the portfolio perform? (click to enlarge) Values taken after market close 11/20/2015. A 49.32% loss in 12 months is a terrible performance. Dividends received over the period totaled $61.20, although these cash payments didn’t do much to soften the blow. OM Group was taken p rivate by Apollo Global . It’s clear that turbulent oil markets were to blame for this underperformance. There’s no way the strategy could have identified or prevented the carnage in the oil sector over the past year or so. And there is no reason to give up on the F-Score after just one year of poor returns, so I’m going to continue the experiment for another year but make several adjustments. A new crop of stocks will be selected using the same criteria as the ones that qualified last year. However, this time around I’m also going to short hypothetically the 20 worst stocks — as the original F-Score study suggested. Moreover, I’m going to run another portfolio alongside the one described above which will exclude all resource stocks. I’ll be publishing the details of these two portfolios over the next week. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Profitable Trades Based On USD Changes

Summary A strong USD will affect the value of commodities. Commodities are traded in USD and will therefore be more expensive for non-USD countries when the USD goes up. Changes in commodity prices will affect countries that are highly dependent on export/import of commodities. Many asset classes are affected by changes in the USD, and therefore great investing opportunities. During the last year, the USD had a massive rally. The USD Index hit a multi-year high in March 2015 of 98.66, up 23.6% from the 79.81 level in June 2014. Why did the USD have this strong rally? To answer this question, it is good to look at the USD Index breakdown. The Euro has a weighting of 57.6%, and is therefore able to move the USD Index very easily. One of the reasons why the USD rallied is the fact that the Fed started tapering. It stopped doing POMOs (Public Open Market Operations). During the taper phase, traders and investors expected the ECB to do QE. This would put double pressure on the EUR/USD. Fed tapering lowers the money growth rate of USD in the markets, and the ECB’s QE would push the EUR even lower. The BoJ is doing stimulus too. The main target: devalue the JPY to stimulate exports. QE from both BoJ and ECB means that the two biggest components of the USD Index are too high according to BoJ and ECB. The fact that the USD soared was therefore not really a surprise. Of course, it is easy to predict things after they happened. So that is not the reason I write this article. I want you to understand which asset classes are affected by the USD, so you can avoid “stupid” mistakes and make trades to profit from central planning and major macro changes. Rising USD When the US Dollar rises, commodities, which are priced in USD, will get relatively more expensive. Therefore, demand will decline, which will put downward pressure on commodities. The chart below shows the correlation between USD and commodities. I used the iShares S&P GSCI Commodity-Indexed Trust ETF ( GSG) to display the Goldman Sachs Commodity Index (GSCI) and the PowerShares DB USD Bull ETF ( UUP) for the USD Index. (click to enlarge) Commodities have a high correlation with the USD as shown above. With this info in mind, it makes sense that commodity-related countries and companies have a high correlation too. A country which highly depends on commodity exports will suffer when commodity prices decrease. Most of the commodity-dependent countries are emerging markets. The emerging market is therefore a good tool to trade an USD impact. Not only do many emerging markets export commodities, but they also have a part of their debt in USD because it is cheaper to borrow. If the USD gets more expensive, their debt will weigh heavier and put pressure on their balance sheets. If you want to trade emerging markets, it is very important to know where to invest. Not all emerging markets are the same. If you look at the correlation vs. the USD, you will see huge differences. Brazil, Russia, Malaysia and Poland have by far the highest (negative) correlation vs. the USD. It would not make sense to short an ETF like EWT when you are bullish USD. In fact, it is all about leverage and volatility. Let’s say you expect the USD to rally. Therefore, you want to short emerging markets. There are a few options you can choose from (and many more): Trade the i Shares MSCI Emerging Markets ETF (NYSEARCA: EEM ) By shorting EEM, you short an emerging markets ETF. By doing so, you are shorting all emerging markets, in particular China, because the weighting of 23% is by far the heaviest. Why would you want to short? You have less volatility because the ETF contains many countries, and therefore a huge amount of companies. On the other side, you are shorting countries that have a low correlation vs. the USD. Trade the iShares MSCI Brazil Capped ETF ( EWZ)/the Market Vectors Russia ETF ( RSX)/the iShares MSCI Malaysia ETF ( EWM) As mentioned in option 1, by shorting, you short countries that have almost no correlation with the USD. You solve this problem by shorting a country like Brazil or Russia. The volatility is higher, but you get way more momentum in case of bigger changes to the USD. Trade single stocks If you have a strong feeling about a certain USD move, i.e. a rally, you can choose to short a single stock. This can be a component of one of the most affected ETFs like EWZ/RSX/EWM or stocks from developed countries that are affected by the USD changes. The table below shows a few options: (click to enlarge) As you can see, most of the companies in my list are oil and gas drilling related. Most of them offer drilling services or provide drilling equipment. These companies are more dependent on a high oil price than the actual drillers. Since drillers can cut production easily when oil prices decline, the actual providers of the services and drilling products however lose a tremendous amount of business. With this in mind, you can short oil drillers in a USD rally or choose to short a Brazilian company for example. Itau Unibanco Holding S.A. (NYSE: ITUB ) has a weighting of almost 10% of EWZ and a 24-month correlation of 90% ( Sources: iShares, TradingView ). ITUB data by YCharts To summarize everything, I made an easy overview: (click to enlarge) On top, you see USD. That’s what it is all about. When the USD rallies, commodities and emerging markets are likely to dip since the correlation is negative. US Bonds and real estate however will profit when the USD goes up. Hence the positive correlation. The table above gives you an overview of possible trades. The higher the position in the table, the lower the volatility. For example, shorting commodities can be done by shorting GSG. If you do so, you are shorting an entire basket of commodities, and have therefore lower volatility. The next step is trading a single commodity. By doing so, you increase not only the potential returns, but also the volatility. If you want to maximize returns, trading a single stock gives the highest potential returns. The chart below confirms the table above: EEM data by YCharts This article gave you an overview of the different asset classes that can be traded in case of an expected USD change. Both the long- and short-side deliver interesting choices that can be trades as outright long/short trades as well as spread trades. Of course, there are way more options than I discussed in this article, but these are the basics of understanding price changes and researching profitable trades.