On May 1, Calvert Group of Bethesda, Md. was to introduce its flagship Calvert Social Index which includes predominantly large-cap companies that have passed social screens Calvert employs under its socially-responsible investment mandate. Although Calvert has been one of the pioneers of socially-responsible investments, this is the first social index Calvert has created.
The social index will be used for the development by Calvert of a new passive equity mutual fund that will track the index. The Calvert Social Index Fund is currently in registration awaiting approval from the SEC. Like Calvert's other funds, this new fund will be sold through the broker/dealer and financial intermediary distribution channels. Calvert manages eight other socially-responsible mutual funds with more than $2.2 billion under management.
On May 8, the Vanguard Group of Malvern, Pa. expected to introduce the Vanguard Calvert Social Index Fund, a no-load passive index fund that will track the Calvert social index, said John Demming, a spokesperson for Vanguard. Vanguard has an agreement to license the index from Calvert.
The Vanguard Calvert Social Index Fund is still in registration with the SEC. The fund will be sold directly to investors.
"The timing was consistent with our sense that there was a need for the construction of a social index," said Barbara Krumsiek, president and CEO of Calvert, last week. The creation of such a social index was something that Krumsiek said she knew the firm should undertake from the day she assumed her position three years ago at Calvert. She said that other social indices will probably be developed in the future.
Calvert's market-cap-weighted social index will initially include 467 companies that have passed seven social screens. These screens include assessing a company's environmental, labor relations, human rights and animal welfare practices and policies. In order to be included among the firms in the Calvert Social Index, companies will also have to pass an assessment of their practices with regard to the rights of "indigenous peoples" - the newest social screening criteria which Calvert adopted last year.
To develop an index of socially-enlightened companies, Calvert's executives first decided on a universe of 1,000 of the largest publicly-traded companies as of last May from which to choose companies, Krumsiek said.
Then, each of these companies was put through Calvert's screening process.
"If they are not on the list, then they didn't pass muster," said Krumsiek.
Calvert expected the universe would be whittled down to about 550 companies for inclusion in the index, according to Krumsiek. But significant merger and acquisition activity last year further reduced the number of companies in the index.
Calvert will use the same process each September, beginning with the 1,000 largest public companies at that time, to reconstitute its social index, Krumsiek said.
But it will make quarterly changes in the index if Calvert deems it necessary, said Krumsiek. Only social issues will be cause for changes. A change in a company's financial condition, such as its failure to meet its earning projections, for example, will have no bearing on whether a company is dropped from the index, she said.
There are already two socially-responsible indexes. The best known is the Domini 400 Social Index of 400 market-cap weighted companies assembled by Kinder, Lydenberg & Domini & Co. of Boston in 1990. Citizens Funds of Portsmouth, N.H. also developed a social index of 300 primarily large-cap socially-responsible companies in 1995. Both organizations created their own mutual funds to track their indices.
The Calvert index will have a more vigorous screening process than its peers, said Krumsiek. Also, the Calvert index does not include a fixed number of companies as do the Domini and Citizens indices.
Sector concentration was a concern for Calvert.
"Technology has emerged as a dominant sector in any market-cap weighted index," said Krumsiek. Tech stocks will constitute almost a third of the index initially, she said. To reduce the risk of sector concentration, Calvert built in automatic sector caps.
Calvert will limit any one sector to 40 percent, Krumsiek said. If any sector grows beyond that limit, Calvert will trim the index's position in each underlying company. Sector concentration will be reviewed yearly, Krumsiek said.
To provide shareholders with information about the companies in the index, Calvert will provide analyses of each company's proxy proposals on its website. The largest companies that make the index list will also be profiled at Calvert's site.
"Our intention is to provide enough information and data on indexed companies to have clout in the social arena," said Krumsiek.