Stupid investment theses, poorly executed

May 6 2008

In an item in the May 5, 2008 WSJ, I saw the “Fund Track” column, by Daisy Maxey, entitled “Democratic Booster Blue Fund Group Has Been Singing the Blues Lately

The focus of the story was on a small Washington DC based fund that’s done poorly of late.

Blue Fund Group is having a rough year.

Blue Investment Management LLC, the fund group’s Washington, D.C., investment adviser, has liquidated Blue Small Cap Fund, which managed less than $1 million.

It is now in the process of changing the name of its Blue Large Cap Fund, which has a little more than $10 million in assets, to, simply, Blue Fund. So far this year, that fund has underperformed both its large-cap growth category and the Standard & Poor’s 500-stock index, according to Chicago investment-research firm Morningstar Inc.

Odd, that. Not the results, particularly, but the fact that the story appears at all. “What’s the problem?”, I wondered, and what makes this tiddler of a fund worthy of coverage in the WSJ? I read on…

In addition, in a rather odd development, $9.5 million of the large-cap fund’s assets were invested recently by a trust that has said it may hedge its bets on some of the fund’s holdings.

Blue Investment Management was formed in 2006 to invest in companies that “act blue” and “give blue,” those that engage in practices consistent with progressive values and give the majority of their political contributions to Democratic candidates.

Following a proprietary managed index of U.S. companies, the large-cap fund invests in “blue” companies in the S&P 500 index, while the small-cap offering had invested in “blue” companies in the Russell 2000 index.

Additional info, according to an April 2007 article at Morningstar:

The Blue funds (Blue Large Cap and Blue Small Cap), launched late last year, invest in companies that give a majority of their political contributions to Democratic candidates and organizations, in addition to passing various standard social screens. There are no funds focused specifically on Republican-leaning companies, though the Free Enterprise Action fund (FEAOX), launched two years ago, promotes free enterprise and opposes shareholder resolutions that might dampen companies’ profitability, including most SRI-type proposals. Also, the Camco Investors Fund (CAMCX) specifically uses socially conservative screening criteria, as do several of the religious funds we looked at in our earlier column, notably the Ave Maria and Timothy Plan funds.

Quintuple odd.

No “Republican-focused” funds? Because nobody would buy them, I presume, preferring instead to just focus on companies well-situated to make money.

Aside from the fact that the new biggest investor in Blue Funds may choose to hedge its bet, taking contrary positions to that of its now-majority owned fund, the slack-jawed investment thesis behind the fund is a real eye opener.

How is it, I wonder, that someone was able to correlate the political contribution tendencies of companies, and then to target them for investment? Wait – I’m not done yet: Of course it’s simple, though a bit labor-intensive, to do such a thing, but having done such a thing, how could someone have done such a bang up job of choosing a thesis with a correlation apparently approaching -1? And then put client money behind such a spastic idea? And still slept at night?

It’s possible to grotesquely overthink investment theses, even when, unlike the strategists of the Blue Fund, you leave political proclivities out of the mix. Running such a tiny fund, and apparently running it nearly into the ground, causing closure of the “small cap” side of the fund, abandonment of the “large cap” moniker on the other half, and causing the new largest investor (sort of) to consider hedging its exposure to your attempts at splitting atoms with your mind (and political views) seems like an item one would leave off one’s resume.

The same goes for all “Socially Responsible Investing”, if you ask me, not that you did.

Unless, of course, the goal isn’t to make money at all.

Granted, it’s been a tough year in the markets, but it’s not been impossible to make money. For comparative purposes, one of the things I do on a daily basis, with a very small portion of my time, is participate in running a proprietary hedge fund. The assets under management seem similar to those reported for the Blue Fund family by the WSJ, yet our focus is solely on making profits. And overall, we’re up more than 40% so far this year.

It’s not impossible, and properly done, it’s not even particularly difficult. The difference might be that there’s no ideology behind our investment choices, and no attempts at claiming correlations that don’t exist in the real world.

There’s nothing wrong with social, or political, responsibility. Neither has much of anything to do with investing, however. I don’t invest to help those in need or to advance a political point of view – I invest to make profits. To help those in need, I give to the Red Cross. And to advance a political point of view, I vote.

In investing, as in many other things, avoiding confusion about why you’re doing it is a fundamental prerequisite to being even mildly competent.