Friday, January 20, 2006

Chuck Jaffe gives us a knee-slapper...

I can forgive Jaffe now for his pan of PXN...he's got a really stupid investment here.

The Free Enterprise Action Fund opened last March, and has remained so small that it has yet to have a ticker symbol. It has, however, made plenty of noise, following a strategy that, politically speaking, is pretty much the antithesis of most social investment funds.

The fund claims on its Web site -- -- to be the first mutual fund seeking "long-term capital appreciation through investment and advocacy that promote the American system of free enterprise."

It's hard to find anyone in this country who is against "free enterprise," but the audience for this young fund actually is the viewers of Fox News and the audience of talk-show host Rush Limbaugh. The fund's advocacy stance boils down to opposing many of the things supported by traditional "social investment funds," because issues like global warming or corporate governance distract business from its real role of operating in the best interests of shareholders...

In the case of Free Enterprise Action Fund, shareholders who believe strongly in the fund's mission probably will want to stay put, as their values are not about to change.

Alas, the value of their investment portfolio is not going to change much either.

Free Enterprise Action Fund is, effectively, an advocacy group in search of assets.

Co-manager Steve Milloy, a columnist, adjunct scholar at the Cato Institute and publisher of, acknowledges that his job has much more to do with the fund's advocacy than with the actual investing (money management is farmed out to Thinkorswim Advisors in Chicago).

What's more, he's not trying to beat his benchmark; he's focused on the politics. This is where the concept falls apart from an investment perspective.

Milloy says that investors should expect the fund to deliver a stock-market return, akin to its appropriate benchmark, the Standard & Poor's 500. The problem is that the fund's money is not exactly where its mouth is; if Milloy feels strongly that a company is following the wrong path, he doesn't pull money from that stock. Likewise, a company standing up for the values Milloy espouses doesn't get an extra share of the asset pool.

Strip away the rhetoric and you're getting a very expensive, underperforming index fund, while Milloy and his partner Thomas Borelli get a platform for raising their pet issues.

An expense ratio capped at 2% -- ridiculously high for a portfolio of corporate giants like General Electric , Wal-Mart and Exxon Mobil makes stock-market returns unrealistic. From inception on March 1 of last year through Dec. 31, Free Enterprise Action was up 2.32 percent; the S&P 500 was up 4.72 percent.

That's ugly.

It's also fairly typical for a fund with a gimmick. Those types of funds -- and clearly some social investment funds with a more liberal point of view are equally focused on the hook rather than the investment process -- get a lot of ink and then disappear in a sea of lackluster performance.

That might be Free Enterprise Action Fund's future too, but Milloy is neither apologetic nor concerned.

"For people who are interested in public policy, the fund is much better than making a contribution to a think-tank," he says. "They get to keep their money, have control of it, they get a market return, and their money is helping to make a difference.

"In a perfect world, we wouldn't do this, but there are people on the other side of these issues doing this already, and we feel we need to fight fire with fire."

My basic principle: unless there's market reasons to assume trends are contrary to what you can intuit from the trends themselves, the trends will continue... you know, a body in motion tends to stay in motion and all that.

BTW, socially responsible investing does work, as long as there's a good business plan as well as a conscience.

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