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HISTORY OF WALDEN ASSET MANAGEMENT/SRI, November 1999
SOCIAL TOPICS (Archive): HISTORY OF WALDEN ASSET MANAGEMENT/SRI
Published, November 1999 Our Spring edition of Values introduced readers to the unique social research challenges of international social investing in Crossing the Black Waters. In this article we continue our voyage across uncharted territory, this time focusing on the quantitative characteristics of the Walden/BBT International Social Index Fund (WISIX). WISIX, for which we serve as Advisor, is designed to provide social investors international diversification equivalent to that of the Morgan Stanley Capital International Europe, Australia & the Far East (EAFE) index. We chose EAFE as our target index because it is the most frequently used international index, possesses a long track record, and includes the most widely followed international stocks. Matching EAFE with a socially screened universe of stocks proved to be a challenging assignment. In particular, we needed to adjust for 211 of 1004 EAFE companies (approximately 21 percent of the index’s market value) that did not pass our social screening criteria. While this investment prohibition is moderate relative to typical actively managed domestic portfolios with comprehensive screens, a significant portion of EAFE’s market value is screened out in high social impact industries as illustrated in the table below. To fill the gaps in the screened EAFE list, we added acceptable companies from under-represented countries and industry sectors. To further round out the universe of acceptable stocks, we added additional companies with exceptionally positive social records. For example, MoDo, a Swedish forest products company was included for their early decision to eliminate elemental chlorine and gas from the bleaching process. MoDo switched completely to oxygen, chlorine dioxide, and other safer paper bleaching agents. The next task was to take our screened universe and construct a portfolio that would match the investment performance of the EAFE index. Fortunately, we knew from experience with other stock market index funds that it is possible to track an index’s performance without holding every stock in that index. This is particularly important in composing an international index because high overseas transaction costs make it prohibitively expensive to hold the stocks of many smaller companies. The stocks (currently 440) chosen for the WISIX portfolio are selected using quantitative “optimization” techniques that maximize the portfolio’s projected ability to perform in line with the EAFE index. This process also serves to minimize the sector and country biases introduced by our social screens. Since inception in June of 1998, the Fund is ahead of the EAFE index, helped by its modest overweighting in the financial and services sectors and its underweighting in energy. In August 1999 the Fund was converted into a publicly available mutual fund. Our journey into international waters is an ongoing effort to balance the competing demands of social research and index composition. We think we are off to a promising start. High Social Impact Industry and % of Index Market Value Eliminated
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