Calvert Equity Fund (CSIEX) is an ESG-focused portfolio that's built to make it through tough times. The best mutual fund's steely defense, though, is also an offensive weapon. It drives market-beating returns over the long haul.
The fund's stock-picking strategy can be summed up in one word: "quality," says manager Joe Hudepohl. It buys high-quality stocks at reasonable prices that also score high on environmental, social and governance measures. Calvert has been a leading voice in ESG investing for four decades. "We use sustainability as a quality lens," said Hudepohl, referring to the fund's focus on limiting ESG-related risks.
Best Mutual Fund Looks For Consistent Growth
The $5.6 billion Calvert Equity Fund buys and holds businesses with a history of consistent and sustained earnings growth. The goal? To take advantage of the power of compounding.
Hudepohl says the portfolio has a Warren Buffett-like streak to it, as it also prefers companies with moats that shield them from rivals. Fund holdings must have an enduring competitive advantage. The recipe for success? Dominant franchises with recurring revenues, high profit margins, strong cash flow, long product life cycles, strong management, and low debt.
"Compounders," is the way Hudepohl described the roughly 45 names in the fund. "Companies that do the same thing year in and year out. They hold up better in tougher recessionary times. We want high-quality, growing, sustainable businesses. Not just one of those traits; all three."
This year, Calvert Equity Fund's 21.4% decline in total return lags the S&P 500's 19.1% loss, according to fund-tracker Morningstar. The fund, however, stands out among its large-growth peers, outpacing 87% of similar funds, Morningstar data shows. What's more, the fund has produced better total returns than the benchmark S&P 500 in the past 3-, 5- and 10-year periods.
Don't Overpay For Stocks
Calvert Equity Fund builds in downside protection by not overpaying for stocks. "We pay attention to what we pay," said Hudepohl, who manages the fund with three other portfolio managers. Nor does the fund chase companies with big growth potential but unproven track records. "We're not interested in a little software company that is brand new, has no history, or has an astronomical valuation," Hudepohl said. The fund also limits holdings to 40 to 50 names. "We want a portfolio of high-conviction names," Hudepohl said.
The fund's valuation discipline also means it currently has a much smaller weighting in technology stocks than broad market benchmarks. At the end of the third quarter, for example, the fund did not own popular megacap tech names such as Apple, Tesla, and Amazon.com. And its environmental focus means it has zero dollars invested in energy, the top-performing S&P 500 sector this year.
All holdings in Calvert Equity Fund meet Calvert's ESG standards. Ignoring risks related to the environment, supply chain human rights violations, or unethical business practices, is too big a risk to take, says Hudepohl.
"Investors must understand that there are risks out there that you don't see looking at financial statements," Hudepohl said.
Best Mutual Fund Layers On ESG
Marrying top ESG credentials with top investment fundamentals is the fund's recipe for success.
Take Danaher, the fund's top holding as of Sept. 30, and a member of IBD's 100 Best ESG Companies for 2022.
The global life sciences company is a "long-term play on the aging of the population," Hudepohl said.
Danaher's diagnostic equipment business (e.g., tests for Covid-19 and Covid-19 antibodies) and life sciences research that serves the pharmaceutical and biotech business are appealing, says Hudepohl. The reason: Danaher's products are used in countless labs looking to solve societal problems, which creates recurring revenue streams no matter what the outcome of the research. Danaher's profit stream isn't reliant on coming up with a breakthrough drug.
"We don't want to build bridges, we want to collect fees at the bridge tolls," said Hudepohl, using an analogy to highlight Danaher's recurring revenue.
Scanning Retail Opportunities
TJX Companies, the parent of retailers Marshalls and TJ Maxx, continues to thrive in an e-commerce driven retail world despite its store format. "Everyone thought Amazon would take over the world and end it for pretty much all brick-and-mortar retailers, but TJ Maxx won't go away," Hudepohl said. To the contrary, TJX Companies has been the biggest beneficiary of the decline in malls. The retailer's "treasure hunt model," and strategy of selling name-brand goods at below-department store prices, continues to thrive, Hudepohl says.
And from an ESG perspective, TJX gets high marks for its supply chain management, strong corporate governance, and board diversity, which includes a female board chair and 46% female board representation. "It's one of the more diverse boards out there," Hudepohl said.
Big-Cap Opportunities For Best Mutual Fund
Visa and Mastercard (another member of IBD's 100 Best ESG Companies for 2022) are also top-10 fund holdings. Credit card companies are "a long-term growth play on the movement from cash to credit," Hudephol said. The business benefits from its low capital intensity, high barrier to entry for competitors, and recurring revenue steam.
"Visa gets paid every time you swipe your card," Hudephol said. Its ESG credentials include low energy usage and the role it plays in expanding access to financial transactions to more people around the globe, Hudephol says.
Alphabet, which dominates the internet search business and is hard to replicate, is another moat-like, top-10 holding in Calvert Equity Fund. It gets high ESG marks on data security, Hudepohl says. Microsoft, a long-term play on the growth of cloud computing and which has been carbon neutral for a decade, is also a top-10 fund holding.
"There aren't many companies that can grow revenues in the low-double digits," Hudephol said. Both Alphabet and Microsoft made IBD's 100 Best ESG Companies for 2022 list.
