Best Mutual Funds: ESG Investing Helps Calvert Equity Top S&P 500 By 50% (2024)

Calvert Equity Fund (CSIEX) — a champion of ESG investing — has been among the best mutual funds in terms of performance. Better yet, manager Joe Hudepohl says we are entering the part of the market cycle in which his fund does its best.

X

"We feel this is a great portfolio for this part of the cycle," Hudepohl said. "Ten years into a bull market, you want downside protection. This fund is perfect for that market."

That's because Hudepohl sees an increasingly volatile market ahead, and because he says his $2.7 billion portfolio is built to play defense. "It's definitely fair to say we emphasize playing defense," said Hudepohl, who runs the fund with fellow managersLance Garrison, Jeffrey Miller and Robert Walton. "We're willing to give up some upside potential for our downside protection."

Building in downside protection has worked for this fund. Amid heightened market volatility during the past month, when the S&P 500 slumped 5.24%, the fund limited its own setback to 2.64%, according to Morningstar Inc.

So, the fund outperformed the broad market by 50%.

A key ingredient in that defensive recipe: "Buying stocks at the right valuation," Hudepohl said.

Best Mutual Funds: This One Plays Defense

Playing defense also means focusing on what Hudepohl calls high-quality stocks. "We look for businesses with strengths that can thrive through extended periods," he said. "To do that, they must have characteristics we look for. We're looking for businesses with consistent growth, stability in earnings growth."

Some key characteristics that lead to such consistency and stability are high free cash flow, low debt and high returns on invested capital.

High-quality stocks with traits like those tend to score high in ESG investing attributes. "We don't look for strong fundamentals and for ESG traits separately," Hudepohl said. "It's all tied into one. Companies tend to be high quality because they have strong ESG traits, and vice versa."

Best Mutual Funds: ESG Investing Tactics

ESG investing means that the fund invests in stocks that meet Calvert's environmental, social and governance standards. Those ESG investing traits go hand in hand with the growth and quality factors that the managers also seek.

That approach has turned the fund into a winner. This year going into Thursday, the fund was up 17.73%, walloping the S&P 500's 11.94%. It also dwarfed the 14.34% average gain by the fund's large-cap growth peers tracked by Morningstar Inc., 86% of which lagged the fund.

This strategy has outperformed in the long run as well. The fundbeat the S&P 500 last calendar year. The fund's average annual return also topped the big-cap bogey for the three, five and 10 years ended Dec. 31.

That fourfold victory led the fund to the winner's circleas one of IBD's 2019 Best Mutual Funds.

It won distinction as one of the best mutual funds in three mutual fund categories— U.S. diversified stock funds, growth funds and large-cap funds. Only 10% of qualifiedU.S. diversified stock funds, for instance, earned one of IBD's blue ribbons.

Hudepohl points out the ESG investing traits he seeks and what enables various holdings to grow earningsconsistently.

Mastercard's Strong ESG Investing Traits

Take Mastercard. "We own both Mastercard and Visa (V)," he said. "We're trying to capitalize on a long-term trend, which is the movement of transactions away from cash to credit. Mastercard and Visa are the backbone of that transition."

He added, "That transition will continue for many years, so these stocks have a huge runway of growth ahead of them. It's a worldwide opportunity."

Hudepohl also added, "On ESG investing, Mastercard has strong diversity and good human capital management."

Comcast Copes With Cord Cutting

Telecommunications services giant Comcast's (CMCSA) growth stability is rooted in the monthly checks that customers mail in. "For Comcast, it really comes down to its recurring revenue. That's the focus there," Hudepohl said. "Despite the headlines about (cord cutting) issues on the cable side, revenue growth on the internet side has been phenomenal. It's still close to 10%."

He added, "That's been able to drive their margins. Late in a (market) cycle, that's a good business to have. In a downturn, people hold onto their internet and cable."

As for ESG, Hudepohl says Comcast is satisfactory but not special. "Their ESG characteristics are nothing dramatic," he said. "They're kind of an average performer."

ESG Investing Points: Microsoft's Gender Diversification

Microsoft's (MSFT) growth stems from Azure, its web services business, Hudepohl says. "Azure, which competes with Amazon's (AMZN) AWS (Amazon Web Services), has been in a huge growth mode," he said.

It also benefits from its shift to recurring subscription payments, away from one-time purchases of software. "That provides a lot more sustainability to the business," Hudepohl said. "That, with the shift to the cloud and Azure, have been the key drivers. Those are the long-term trends we're playing."

On the ESG investing side, Hudepohl said, "Microsoft has good governance practices. They have a lot of women on their board. It's a diverse board."

Fund Bets On Pets, Livestock

Zoetis (ZTS) sells medicines for pets and livestock.

Its earnings growth stability is rooted in high demand for its products and the absence of regulatory interference with its pricing and cash flow.

"Unlike the human pharmaceuticals business, Zoetis' business is not subject to reimbursem*nt risk from the government," Hudepohl said. "And there's no risk of (government imposed) caps on its drug prices."

Hudepohl says the split in Zoetis' focus between pets and livestock provides the company with diversification of its revenue sources. "And those are pretty recession-proof," he said. "People tend to take care of animals no matter what's happening in the economy. Whether times are good or bad, this should be a good-growth business."

And the company scores high on ESG investing factors due to strong governance ratings and the integration of sustainability practices into its business, Hudepohl says.

Please follow Paul Katzeff on Twitter at@IBD_PKatzefffor more tips about growth stocks, growth mutual funds and active mutual fund managers who outperform the market.

YOU MIGHT ALSO LIKE:

You Need This Much Retirement Savings At Your Age And Income

Do's And Don'ts For Retirement Savings Withdrawals

Find Winning Stocks With MarketSmith Pattern Recognition & Custom Screens

Short-Term Trades Can Add Up To Big Profits. IBD's SwingTrader Shows You How

What Makes Calvert Equity Fund Tick?