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Sierra Fund Lets Investors Put Their Money Where Their Hearts Are

The Sierra Club, America's oldest grassroots environmental organization, has always prided itself on being green. But as of the first of this year, it is also hoping to produce more green with the launch of The Sierra Club Funds.

The San-Francisco-based Sierra Club has partnered with Forward Management, also headquartered in the Bay Area, to offer socially conscious individuals the opportunity to put their money where their hearts are.

Both the Sierra Club Stock Fund and the Sierra Club Balanced Fund will be managed by Forward, which, bearing in mind Sierra's principles, will pay a portion of its management fees to the eco-friendly giant for identifying securities that meet its environmental-screening guidelines. The Sierra Club will apply a total of 19 screens, taking into account issues of nonrenewable energy, nuclear and chemical waste, global warming and the manufacture and distribution of military weaponry.

The Stock Fund, a rebirth of Forward's Garzarelli U.S. Equity Fund, is already primed with $20 million in assets. The Balanced Fund, a greenhorn in the investment world, will allocate more than half of its assets in stocks, the remaining portion going to fixed-income securities and cash.

Money doesn't grow on trees. Thus, the raison d'tre in launching a tree-loving fund at a time when returns are dismal is always a question. Craig Lamson, director of marketing at Forward Management, says "Regarding the performance issue, the timing is great. I'd much rather have launched [the funds] at the end of the three-year bear market than at the start. Research out in the market shows that socially responsible investing with screens has not inhibited performance."

In addition, with essentially two checkpoints in researching firms, one for sound environmental practices and the other for profitability, management fees are above average. Forward may charge shareholders a fee of as much as 2.36% of assets per year, though the rate was capped initially at 1.84%. A portion of this capped fee will be recycled into environmental action. Forward now returns 12 basis points on a graduated scale to the Sierra Club, and this scale could escalate to as high as twenty.

Sierra's environmental screens, however, are not hermetic. For instance, the Balanced Fund invests in U.S. Treasury Bonds, which fund the Defense Department and are therefore boycotted by many social investors. Although Lamson declined to comment, he said Sierra had a "very specific response" it wanted to incorporate.

Backing the Government

The Sierra Club's very specific response is as follows: Although "The Sierra Club doesn't agree with many of the current administration's policies, and [is] working every single day to change the policies that are harmful to the environment, the U.S. government plays a critical and unique role in protecting our environment, including the air we all breathe, our drinking water and our national parks.

"All Americans rely on our government to crack down on polluters and enforce our environmental laws, and we think it is important to invest in those efforts," according to the Sierra Club.

When socially responsible funds first entered the scene three decades ago, the concept of using money to make an ethical statement was fairly revolutionary. But for years, the investment industry touted SRI funds as practical substitutes for tree huggers and bible thumpers, and nothing more. According to critics, these funds' limited universe of potential investments marred returns.

Lamson's response to the less-options, bad-performance criticism is that the limited universe makes sense for the Sierra Club Funds, which seek to attract environmentally conscious investors. Moreover, he also mentioned the fact that research shows these funds are often run by well-managed companies. "The fact that they are environmentally responsible is a result of superior management," Lamson said.

"Because they are more advanced in terms of how they see their entire business, they take environmental factors into account. And that superior vision filters into performance," he said.

Notwithstanding, pastures do seem green. Social funds enjoyed similar double-digit returns as their peers during the bull market of the 90's and have done no worse since the downturn. Moreover, many have done better. According to data from Chicago-based Morningstar, 45 out of the 147 social funds tracked by the firm outperformed 75% of their category as of December 2002.