Return On Investment

Stocks of a dozen public companies that service nonprofits were up by almost 8.5 percent collectively by mid-year 2011 before tailing off to finish with a gain of less than 1 percent, lagging the Dow, yet besting most of the major indices.

The major indices were up by as much as 5 percent at the halfway point of 2011 before concerns about the European debt triggered roller coaster rides during the third and fourth quarters that leveled out by year’s end. The Dow Jones Industrial Average finished up 5.5 percent on the year, but the NASDAQ was down almost 2 percent while the Russell 2000 was off by almost 5.5 percent. The S&P 500 was essentially unchanged.

For the first half of 2011, eight of the 12 stocks were up (see the accompanying chart), led by Alliance Data Systems (ADS), which gained more than 32 percent despite news headlines of a data breach at Epsilon, its online email marketing division. Epsilon’s clients include nonprofits, including The Smithsonian Institution, San Diego Zoo and Save the Children. ADS’s stock price dipped some 5 percent a day after the breach was an­nounced but the Dallas-based firm closed the second quarter trading at $94.07 per share, after soaring almost 21 percent in the first quarter.

ADS was the biggest winner overall in 2011, closing the year at $103.84 per share, up 46 percent.

Five of the 12 stocks examined were gainers for 2011 but only one other stock was up by double-digits: Austin, Texas-based Convio (CNVO), by 33 percent. During the first quarter of 2011, the stock was up almost 40 percent, before dipping to $10.81 per share in the second quarter, and then closing out the year at $11.06. It went public in 2010 at $10 per share. Better news for the share price arrived in early 2012, when rival Blackbaud announced its intention to acquire Convio for $16 per share, a 49-percent premium from the Jan. 13 trading price.

Among the biggest decliners last year were Serenic (SER.V), down 42.5 percent, followed by Harte-Hanks (HHS) and Acxiom (ACXM), both of which were down almost 29 percent.

Salesforce.com (CRM) might have looked like a dog of a stock last year, down 23 percent, but that followed some huge gains in recent years, including 79 percent in 2010. Its three-year and five-year changes led the nonprofit index, with gains of 217 percent and 178 percent, respectively. Many of the stocks sport impressive three-year gains due to the nadir of the stock ex­changes during 2008. The smallest three-year jump was by Serenic (SER.V) at 9.5 percent. Not one of the stocks saw a loss.

It was another busy year in the nonprofit space for technology and software firms, which gobbled up smaller companies, but 2011 was just a prelude to the blockbuster announcement that kicked off this year.

Convio started using some of the $56 million it raised in a 2010 Initial Public Offering (IPO) to make acquisitions. It made the jump outside of the United States with a July 2011 announcement that it had purchased Baigent Digital, one of the United Kingdom’s leading digital strategy, design and technology implementation firms. Convio paid $2.9 million but based on performance incentives could pay up to an additional $400,000. Another purchase, announced in January 2011, was StrategicOne for $5 million, possibly $6 million if the Overland Park, Kan., database marking firm reaches certain targets during the next three years.

In February 2011, Blackbaud (BLKB) announced an acquisition of its own: $17.5 million cash for Alexandria, Va.-based Public Interest Data (PIDI), a database management, acquisition list and analytics services firm. The Charleston, S.C.-based software provider, could pay an additional $2.5 million based on performance of the company over the first two years. It was Blackbaud’s second acquisition in three months, after picking up Santa Bar­bara, Calif.-based NOZA, Inc., creator of a searchable database of charitable donations.

The deal included cash and the assumption of debt but the amount and other terms were not disclosed. NOZA generated $1 million in revenue in 2009 and was approximately breakeven, according to Blackbaud. The firm also sold the Blackbaud Donor-Advised Fund program, which was previously known as Giving Capital and later Kintera Donor Advised Fund before being acquired by Blackbaud in 2008, to Renaissance Ad­mini­stra­tion, LLC, in Indiana­po­lis, Ind.

Nine of the top 12 best performing social funds were from the domestic equity family. The lone top performer not in that family of funds was in the institutional fund category: MMA Praxis Small Cap Fund.

Domestic equity funds didn’t fare too poorly, with the vast majority of those tracked by socialfunds.com finishing in the positive for 2011. International and global funds, on the other hand, had no such luck. Each one showed a loss for 2011, led by Pax World Global Green, which was off by 0.01 percent and Pax World Global Green R, down 0.33 percent.

Balanced funds appeared to be the most consistent. While CSIF Balanced Portfolio might have “only” returned 6.33 percent this year as the leader in the category, no fund gained less than 1 percent last year. The same could be said for fixed income funds, which saw a range of 1 percent to almost 6 percent in annualized returns among individual funds.

The top 10 socially responsible funds of 2011 by annualized return, according to Social­Funds.com:

  • MMA Praxis Small Cap Fund I, 14.68%
  • MMA Praxis Small Cap Fund A, 14.07%
  • LKCM Aquinas Small Cap Fund, 12.73%
  • Calvert Capital Accumulation A, 10.82%
  • LKCM Aquinas Growth Fund, 10.38%
  • Sentinel Sustainable Growth Op­por­tuni­ty Fund I, 10.33%
  • Parnassus Mid-Cap Fund, 10.30%
  • Sentinel Sustainable Growth Op­por­tuni­ty Fund A, 10.21%
  • Integrity Growth & Income Fund, 9.88%
  • Calvert Capital Accumulation C, 9.80%

Three-year returns look most impressive, given the starting point of 2008, one of the worst years for the stock market and the overall economy. Most domestic equity funds had annualized three-year returns in the double digits and any funds that were down likely were to be found, again, among the international and global funds. Still, even among all SRI funds, few were down during the past three years.

Praxis screens many of the same things other faith-based funds do, such as alcohol, tobacco, pornography and gambling – typical “sin stocks” – but also military contracting defense and weapons. Somewhat unique to Praxis is that they focus be­yond traditional screens to include some screens on justice issues, employment equality and envi­ron­mental issues, said David Gautsche, senior vice president of products and services at Everence Financial and president of Praxis Mutual Funds.

Among the recent hot-button issues dealt with by SRI funds are predatory lending and fracking, a controversial method of using pressure, water and chemicals to extract oil and natural gas. “There’s some art, some science, to figure out where to draw the line,” Gautsche said. “It’s very black and white in some cases. You can’t influence a pornography company to not do pornography,” he said. But in the energy industry, Praxis can challenge those companies to use best practices to protect the environment.

When it comes to alcohol, for instance, rather than screen out the restaurant industry entirely, if more than a certain percentage of revenue is derived from alcohol, the stock would be screened out. Similarly, Praxis has set a threshold on trying to define whether a financial institution is involved in predatory lending practices, leading to some deeper analysis.

The small cap fund uses the Russell 2000 as the primary benchmark for the fund, and market capitalization of companies in the fund range from $400 million to $2.5 billion. Typically, a manager has to screen out no more than 10 percent of the universe in small caps while more are generally screened out among large caps, according to Steve Purvis, vice president/portfolio manager of Luther King Capital Man­age­ment, a sub-advisor of the Praxis Small Cap Fund, and lead manager on the Praxis Small Cap Fund.

Once a company exceeds $5 billion in market cap, the small cap fund sells its investment, reinvesting those funds into new small companies.

Purvis said the fund aims to stay diversified at sector levels and focuses on a “bottom-up perspective” of finding really good companies that have the potential to grow that are not fully recognized in the stock market. About 85 to 90 names are in the portfolio at any given time. Purvis aims for consumer related companies in the discretionary area that have a really good business that’s able to grow and duplicate. Some examples of companies in the small cap fund that have helped lead one-year returns:

  • Rosetta Resources in Houston, Texas (ROSE), which deals in oil and gas exploration, benefitted from a new discovery of Eagle Ford shale in southern Texas, around San Antonio. They’ve de­veloped the ability to use technology in fracking natural gas to also frack oil fields, said Purvis, and in the past few years have seen significant growth in their production and reserves. The stock was up 15 percent last year, closing 2011 at $43.50 per share, with a 52-week range of $30.82 to $58.04.
  • Birmingham, Ala.-based Hibbett Sports, Inc. (HIBB) is a sporting goods store that’s focused on medium and smaller markets. In small towns, Pur­vis said there are few outlets for people to get their hands on and feel better products, making the small-store format with high-quality prospects a winner. Hibbett closed 2010 at $36.90 per share, and a year later was $45.18 (up 22 percent), with a 52-week range of $28.83 to $47.22.
  • DSW Shoes (DSW) in Columbus, Ohio, closed 2011 at $44.21 a share, up from $37.20, almost 19 percent. The stock ranged from a low of $32.76 to a 52-week high of $55.90.
  • Another Houston, Texas-based company, Group 1 Automotive (GPI), is benefitting from the recovery in the number of new cars sold, said Purvis. The primary beneficiary of the automobile market bottoming out in 2009 and early 2010 are large dealership networks that have benefited from continued improvement, Purvis said, which he expects to continue into this year. GPI’s stock price was up more than 25 percent last year, ranging from $33.31 to $52.16 per share, and closing 2011 at $51.80 a share.

As for 2012, Purvis still expects the economy to grow, albeit slower than what people would like. Companies best positioned in their industries will be winners, and especially in a slower environment.