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March 16, 2006

A Serendipitous Match: Davis Advisors Takes Over MMA Praxis Core Stock Fund
    by Bill Baue

The portfolio holding of Wal-Mart exemplifies (oddly enough) how both Davis Advisors and MMA Praxis emphasize the importance of stewardship and shareowner empowerment.

SocialFunds.com -- At the turn of the new year, socially responsible investing (SRI) firm MMA Praxis handed off management of its Core Stock Fund (ticker: MMPAX) from its in-house team to Davis Advisors, a money manager known for championing shareowners. The transition, which concluded a search process that began in early 2005, put the portfolio management reins in the hands of Davis CEO Chris Davis and Ken Feinberg, who are esteemed for generating strong long-term returns.

"As a proponent of stock ownership as the prudent way to invest, versus stock trading, MMA was drawn to Davis Advisors' sensible, long-term focused investment approach that has provided consistent performance through several full-market cycles," said Chad Horning, equity investment manager at MMA Praxis and former Core Stock Fund portfolio manager. "Another item that played an important part in MMA's decision was that Davis Advisors has been consistently recognized for its careful attention to acting in the best interests of all of its shareholders."

"They have been one of very few managers to receive Morningstars highest stewardship grades since the fund evaluation organization began rating this aspect of investment management firms," Mr. Horning told SocialFunds.com. "Months after MMA made the decision to hire Davis Advisors for the mandate, and on the very day they took over the Praxis Core Stock Fund, we were gratified to see that Morningstar announced Chris Davis and Ken Feinberg as their US Domestic Managers of the Year."

Fund rater Morningstar has not taken as sympathetic a view of the MMA Praxis Core Stock Fund, downgrading it from a three- to a two-star rating (out of five) in May 2005. The fund's financial performance has been sluggish, with three-year annualized returns of 11.77 percent placing the fund in the 91st percentile, meaning it outperformed only nine percent of its peer funds (both SRI and non-SRI). Its five-year annualized returns of 0.88 percent place it in the 58th percentile, meaning it almost reached the median of financial performance amongst its peers for the period ended February 28, 2006, according to data provided by Thomson Financial Network.

Time will tell if Davis' investment philosophy can turn around the fund's financial performance.

"As long-term investors who view stocks as fractional ownership in real businesses, we focus a great deal on shareholder friendliness and the overall adherence to principles of stewardship by corporations," said Peter Sackmann, Davis' director of institutional services, explaining the firm's philosophy. "We look for owner-operators who treat shareholders as their partners."

This approach complements that of MMA Praxis, the fund management arm of the Anabaptist denominations, which will continue to administer the fund's SRI activities (including screening, shareowner advocacy, proxy voting, and community development investing.)

"With respect to SRI, MMA sought a manager who not only would manage the fund to MMA Praxis' unique specifications, but who also would ideally have a personal interest in MMA Praxis' mission--after in-depth conversations with Chris Davis and his colleagues, together we discovered that the partnership was a serendipitous match," said Mr. Horning. "Also, as part of the due diligence Davis Advisors performed on MMA as an institution before even considering a response to a request for proposal, they estimated the hypothetical impact of MMA Praxis' screens on Davis' unconstrained portfolio."

"Having conducted an analysis of MMA Praxis' screens on our historical portfolios, we do not believe that MMA Praxis' particular SRI constraints should constitute a material hindrance to our ability to manage the Core Stock Fund," Mr. Sackmann told SocialFunds.

While the mandate of the Core Stock Fund remains unchanged, Davis has shifted the portfolio holdings into "those businesses in which we have the highest conviction as a firm and in which we feel we have a particularly deep knowledge," according to Mr. Sackmann. The fund's top five holdings include American Express (AXP), American International Group (AIG), Costco (COST), JPMorgan Chase (JPM), and Tyco (TYC).

The portfolio also holds Wal-Mart (WMT), a company screened by most SRI firms for its unsustainable business model and for treating shareowners as adversaries. This case illuminates a distinction between traditional SRI and MMA Praxis' Stewardship Investing approach. Whereas traditional SRI seeks to align with the values of individual investors, Stewardship Investing seeks to advance a greater good taking into account all stakeholders impacted by investment-- from company employees to suppliers to customers to communities to the environment.

"Indeed, we see our investment in Wal-Mart as a critical example of 'praxis'--putting beliefs into action," said Mark Regier, MMA Praxis' stewardship investing services manager, who wrote a long explanation of the MMA Praxis' Wal-Mart decision. "To invest without engagement--given Wal-Mart's list of challenges--would not be appropriate."

"To divest would seem to turn our backs on the millions that are affected by this corporate giant," Mr. Regier told SocialFunds.com. "In some ways, I guess you could say we stay invested in Wal-Mart for some of the same reasons other socially responsible investors have gotten out--because there are issues at Wal-Mart that are simply too important to ignore."

Mr. Regier points out that the company has been sufficiently responsive to shareholders. In February 2005, Wal-Mart CEO Lee Scott met 60 shareowners (including MMA Praxis) who are members of the Interfaith Center on Corporate Responsibility (ICCR), a coalition of 275 faith-based institutional investors to discuss the sustainability of the company's business model. The company has also agreed to issue its first ever sustainability report in 2007 in response to an ICCR shareowner resolution co-filed by MMA Praxis.

On a final note, the portfolio manager change affected not only the MMA Praxis Core Stock Fund, but also the Meritas US Equity Fund, a nearly identical portfolio (with a few minor differences in holdings) that MMA Praxis managed for its partner in the Canadian market.

"It only made sense to simultaneously replace the manager for these portfolios, which will continue to mirror one another, with a few exceptions, under Davis' management," MMA Praxis President John Liechty told SocialFunds.com.

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