CALVERT'S BOND FUNDS

The Calvert Group of funds (800-368-2748) is best known for social investing and has been screening investment picks since the early 1980s. Today, the fund family offers 27 different funds, has $7.2 billion under management with $2.4 billion invested among 12 socially screened stock and bond funds. Currently, two of this family's bond funds are No. 1 performers; the Calvert Social Investment Bond Fund (CSIBX) and the Calvert Income Fund (CFICX).

Greg Habeeb is the portfolio manager on both funds and while they are managed similarly, there are differences between the two: One invests using social screens while the other doesn't. Let's start with the Calvert Income Fund. This fund's investment policy does not include social screening, the fund is classified as triple-B investment grade by Lipper, Inc., and, year-to-date is ranked No.1 with a total return of 9.77, through May 4.

Bonds that make it into the Calvert Social Investment Bond Fund's portfolio, on the other hand, have had to pass stringent social screens relating to things like the environment, product safety, and work place issues. The fund's year-to-date total return of 8.84 percent, through May 4, placed it in the top slot for A-rated bond funds.

Talk to Habeeb and you'll learn that one of the stark investment differences between the funds is that Treasury securities may be a part of the Income Fund's portfolio but don't pass the muster for the Social Investment Bond Fund's. " I can't own Treasuries in that fund because of defense programs," says Habeeb.

With roughly 50 to 60 positions in each portfolio, here's about how Habeeb manages these bond funds:

Q: You've got two funds ranked in top performance positions, how'd you managed to do that?

Habeeb: The question of style and technique is not different between the two funds, but our emphasis is on relative value.

Our goal is to buy the cheapest bonds and the ones that satisfy all the constraints that we have---like rating constraints and duration constraints or whatever.

Q: Can you give me an example of a bond that wouldn't make it past the social screens and into the Social Investment Bond Fund's portfolio?

Habeeb: Bonds from issuers like Seagrams and Anheuser-Busch, Hilton Hotels because they have casinos in some of their hotels, and Ford because it has labor problems.

Most brokerage houses and banks don't pass either. Paine Webber used to pass until they merged with UBS.

Q: Let's take that Paine Webber and UBS example. What happens if you have a security that passes all the screens and then mergers with one that doesn't? Do you have to get it out of the portfolio right away?

Habeeb: In cases where we own some bonds that have passed the social screens and there's a change in status, we're expected to move out when it's convenient for us. We're not ordered to move them out immediately and have at least a couple of months to do it.

Q: In managing the fund, have you been able to take advantage of lowering interest rates?

Habeeb: No, we don't sit there and time the market. Our incremental value is due to a number of different things. And, there are lots of ways you can realize relative value. One is a short-term perspective. Some times you'll find things that are out of line with a bond, say its trading pattern is broken and that offers a buying opportunity for us because the bonds are cheap. Then there's asset allocation.

Last year there were some real problems with bonds and the market was very risk averse. If a salesman called and said, I've got a bond for you and let me tell you a story about it, you hung the phone up because chances were the bond just suffered one-quarter of the damage that was yet to come. So, because of that and other problems, we reduced our allocation to corporates and started buying higher quality things, like mortgages. We actually fell in love with mortgages because, unlike corporates, there is virtually no credit risk.

We also play the curve. Things change much faster than they used to. Prices change much faster, bond yields change much faster, the spreads change faster and the volatility of spreads is much greater than it was so whenever we can we take advantage of those changes we do. We also look for niche-type bonds to invest in; ones that not everyone follows

Q: It sounds as though you trade the portfolios a lot.

Habeeb: Yes, we do trade because our theme is relative value and we're not shy about implementing it. That's what allows us to pick up incremental yield without having to put ourselves in high risk situations.

Q: Any advice for interested bond investors?

Habeeb: There are so many people out there that have not invested in a bond or a bond fund, a bank CD or a Treasury and they're making a mistake. There should be some bonds in their portfolios because it's very important to be diversified.

Calvert Social Investment Fund & Calvert Income Fund

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