What's the primary investment objective of the fund?
Henrich: The fund's primary objective is capital appreciation by investing in value-oriented stocks of small cap companies with market caps from $100 million to $1 billion. But we're going to achieve that objective by investing in companies that don't harm animals.
Q. How do you define 'cruelty-free'?
A. At the fund's inception, we worked with Dr. Alex Hershaft of Farm Animal Reform Movement (FARM) and David Faber of the Animal Legal Defense Fund to define the criteria for screening companies, which we list in the fund's prospectus. However, in its simplest terms, 'cruelty-free' means 'does not harm animals.'
Q: And what do you mean by 'value'?
A: When we say 'value', we mean 'value' in a financial sense: low price-to-earnings or price-to-book ratios and/or high dividends. Bargains stocks, not high-flying growth companies.
Q: What's the benchmark against which to measure performance of this fund?
A: We've been tracking to within 1/10th of a point of the Russell 2000 Index [of small company stocks].
Q: How is this fund different from other funds that screen for animal rights?
A: Most funds that say they screen for animal rights are really just screening for animal testing. We screen for that too, but our mission is much broader. Let me give you an example. We had a company we were considering. They have a subsidiary that makes binoculars. No problem there. But they also make scopes for hunting rifles. So we won't buy them.
Q: How do you pick stocks and how do you decide which are cruelty-free? Do you start with lists of "cruelty-free" companies and decide which are good investments, or do you start with a list of "good investments" and decide which are "cruelty free"?
A: Here's how it works. First we get a buy list from the investment advisor. We turn it over to a research analyst who's been doing ethical stock screening for 15 years. She categorizes the companies as "unacceptable" or "possibly unacceptable." We take a look at her recommendations and make our final decisions. If we say "no" then it doesn't get purchased. But we're different from other folks who say they're doing this. We're not just buying "animal friendly" companies. We're buying companies that don't harm animals. We're committed to making money but we're not going to limit ourselves to companies that claim to be pro-actively helping animals. If a company is not harming animals in any way, they receive a very strong endorsement from us.
Q: What size companies does the fund invest in?
A: Although we can hold some mid-sized companies, we'll probably have 60 to 80% in small caps. We can also have some short sales, but there's a 25% limitation on that, so we won't do much of it.
Q: What are the risks of the fund? Is the fund more appropriate for high or low risk investors?
A: While we expect performance to continue to track the Russell 2000 Index, as a result of the value-orientation, we expect the fund to have less risk than the index. We currently have about 15% of the fund in cash, so that helps to reduce volatility as well.
Q: Where do you expect to find the best stocks? Do you focus on US-based companies?
A: We can buy ADR's, but we expect to focus on US-based companies. At present, out holdings are pretty much evenly distributed across 33 or so companies, mostly in financial services, leisure, and technology.
Q: What are the biggest holdings?
A: As a small-cap fund, holdings are pretty evenly spread out. The complete list appeared in the semi-annual report we just published. [Some of the more recognizable names are Airborne Freight, Fedders Corporation, Haggar Corporation, Scientific Atlanta. Call the fund at 703-883-0865 for a complete copy of the Semi-Annual Report.]
Q: Does your approach tend to result in concentration in particular industries or sectors?
A: Not really, but at the moment, we probably have a little bit of an extra weighting towards financial services, in particular small regional banks. That's just a natural by-product of the value-orientation. These banks can be purchased for a reasonable price and are prime takeover candidates. Sort of a no-brainer.
Q: What would prompt you to sell a stock?
A: Zurich can sell any stock at any time for financial reasons. They don't even have to ask us. But if we find out that a current holding violates the cruelty-free factors, we sell it the next day, end of discussion.
Q: What's your track record in money management?
A: We have access to one of the best minds in the business [David Dreman]. Kemper-Dreman Small Cap is a Five-Star Fund. We're very happy with Zurich and Dreman. (Over the three year period ending December 1996, K-D Small Cap returned an average annual return of 23.6% and received the Five Star rating from Morningstar, the mutual fund rating service].
Q: What would you say are the primary advantages of your fund as opposed to holding individual stocks in cruelty-free companies, say those listed as "cruelty free" by animal rights organizations?
A: Well, we're currently paying about five cents a share in commissions. You can't beat that on your own. But we offer more than that. The advisor knows when to sell a stock, and when to rotate sectors, which is really the key to investment success. This is especially important when you're following a value-style of investing. You want to be able to sell when the stock becomes fully valued. Zurich takes care of this for us by selling the stock at the right time. That's what the fund investors are paying them for.
Q: What are the sales charges and annual expenses for the fund? Is there a minimum investment?
A: There are no sales charges and the annual expenses are capped at 1.95%, including any 12(b)-1 fees that we might pay to a fund supermarket for example. The minimum investment is $1,000, but it's going to take a lot of $ 1,000 dollar investors to succeed.
Q: Will you hold bonds as well?
A: We've been talking about a cruelty-free fixed income fund, but that would be a separate fund. We really don't want to manage a "balanced" fund.
Q: Your prospectus states that you will donate a percentage of the profits to animal rights organizations, after the fund reaches $20 million. When do you expect that to occur?
A: We don't know when it's going to happen but we have all the groundwork in place. We've established the necessary connections and have set up the foundation. All we need now is the money and it will happen.
Q: This may be stretching the point a bit, but do you think it's possible, through your investments, to actually influence companies to act in a cruelty-free manner?
A: Well, maybe if we were a billion dollar fund we might have that kind of power, but let's get realistic. It is our belief that the only way we're going to influence people is through education. That's why we're going to donate a percentage of our management fees to fund projects that directly help animals and raise public awareness of animal related issues [after the fund reaches $20 million].
As we were wrapping up the interview, Rob mentioned that he was "off to save some tigers." That sounded like an ambitious task for a hot July day in the nation's capital, so I had to ask one more question, "Save some tigers?" I asked. "Well, I got this call from Tiger Rescue. They have 90 tigers on a refuge in California, which has to be moved. I thought I'd start by calling the public relations director at Exxon." How many Managing Directors of mutual funds are trying to save anything...except maybe their jobs? When Beacon says they're going to save the tigers, they sound convincing. Hopefully they can make a lot of money too. A great management team, a top track record, and a dedication to not harm animals along the way. Indeed, who can argue with that? The Cruelty Free Value Fund can be reached at 1-800-662-9992, or visit website www.crueltyfree.com.
Copyright@1997 Cruelty Free Investment News, 11160-F South Lakes Drive, Suite 285, Reston, Virginia 20191. Email: CFINews@aol.com. Visit the website at http://members.aol.com/CFINews. Call (703) 401-5445.
Samir Sanghani, Sugar Land, TX, is devising an another innovative scheme for investing as a group of family and friends into such cruelty free stocks. We will cover that in a future issue. If you have any ideas, please share them with all of us. If anyone has any experience with Cruelty Free Value Fund, or Rocky Mountain Humane Investing Home, please share your experiences with all of us.