Many clients are concerned about the type of investments held within their mutual funds. For these clients, we might offer a "socially responsible" fund. But what does "socially responsible" mean? Each fund will have its own particular set of screens, which may or may not agree with a particular client's requirements. Considering the costs, variability of screens and performance uncertainty, many of us simply discourage our clients from utilizing these funds.
But, what about investments in terrorist countries?
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Sure, we won't put our clients in a North Korea arms fund, but how about a mutual fund that invests in companies doing business in terrorist countries? According to investment advisor Mark Langerman, with the exception of his Patriot Fund, "terror-free" funds simply don't exist.
After attending an American Israel Public Affairs Committee (AIPAC) conference in Washington DC in 2007, Langerman became aware that almost all mutual funds hold investments in companies that do business in sanctioned terrorist countries. According to Langerman:
- Over 10% of the S&P 500 ($1.4 trillion of the market capitalization) is considered to be terror-infected stocks.
- 8 out of the 10 sectors in the S&P 500 contain companies that operate in countries identified as State Sponsors of Terrorism.
- Companies operating in terror states could be at risk of significant loss because of the instability in these regions.
- As the U.S. is fighting a war on terror, some U.S. companies are providing resources that help the opposition.
Over the following couple of years, Langerman learned more about sanctions and the futility of trying to convince mutual fund managers to divest of these investments. Discovering that fund managers and separate account managers simply didn't have the ability to look into each company's business activities, Langerman hired experienced managers to build the Patriot Fund (TRFTX) - a U.S. large cap mutual fund without any investments in companies connected to U.S. designated state sponsors of terror: Iran, Syria, N. Korea, Sudan.
Mirroring their long-successful SMA value momentum strategy, now excluding terrorist investments, Ascendant Advisors, LLC opened the Patriot Fund with Langerman in March 2012. Offering A, I and C shares, the Patriot Fund currently has investments of about $13 million. The goal of the fund is to deliver competitive returns while putting pressure on companies to stop doing business in terrorist countries. The fund has a high expense ratio of about 2 percent. In spite of this, returns have been impressive - the fourth quarter 2013 return was 11.61% and the full year 2013 return was 28.58%.
Langerman believes that terror-free investing will ultimately produce excess returns. In his opinion, these countries' economies are not sustainable since they need other countries' support in order to survive. The fund draws no distinction in terms of degree of involvement. Says Langerman, "Even small amounts of revenue ...where does it go?"
I don't typically write about particular mutual funds. In this case, I'm doing so because of the moral dilemma. Is it right for us as advisors to promote indirect investments in terrorist countries? Should our clients be informed? Is the Patriot Fund worth considering for clients?
If you have clients that feel strongly about terror-free investing, you might take a look at the Patriot Fund. For me, before considering any investments for my clients, I will research the manager's track record as well as the fund's prospectus. Even assuming these pass muster, I would only use a new fund like this for clients who express a keen interest and are willing to assume the risk.
For more information on the Patriot Fund, go to www.patriotfund.com.