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| Feature |
Portfolios With Purpose
Catherine Curan
03/01/2008
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Evaluating Ethics and Options
Until recently, it was tough for investors to tailor their
equity portfolios to further such personal goals. That has changed, thanks to
advanced research from SRI-rating services such as IW Financial in Portland,
Maine, which provides the information used by the Aperio Group, and
sophisticated equity models from firms such as Barra, based in Berkeley, Calif.
By combining detailed evaluations of companies’ social
responsibility with cutting-edge financial models, Aperio offered the Jubitz
family a truly customized portfolio reflecting their specific concerns. After
selecting stocks based on the family’s preferences, Aperio modeled the stocks
using standard fundamental factors to predict performance. That allowed the
Jubitzes to reduce the projected tracking error on their portfolio to 0.6
percent—essentially creating a custom version of the Russell 3000.
To decide on the stocks, the family began by meeting with Mark
Bateman, the director of research at IW Financial, and filling out detailed
questionnaires. Topics ranged from whether a company made firearms to the
diversity of its board and workforce to its environmental track record. The
Jubitzes rated their feelings about each issue. Bateman guided them to put their
responses in context. Because they all strongly disliked firearms, he asked
whether they rated other negatives similarly. Corporate governance was one of
the few equally important areas.
The four family members had to negotiate differences. Jubitz
recalls that her father was extremely opposed to so-called sin stocks: gambling,
alcohol, tobacco and pornography. She and her sisters felt less concerned about
owning stock in such companies, viewing the products more as matters of consumer
choice. In this case, the sisters prevailed. "It was three against one," Jubitz
recalls.
Jubitz found that she also had to compromise. She disagreed
with her father and sisters, who were willing to invest in the nuclear energy
sector, so she was overruled.
The family spent about six hours on conference calls over
several months working through their stock choices. Though they started with
relatively similar beliefs, Al enjoyed the chance to hear and discuss the
nuances in his daughters’ philosophies. Late last fall, he scanned through old
and new lists of large-cap domestic holdings, happily ticking off Halliburton
and Sunoco as companies that the family had left off their personalized index.
So far, 25 percent of their portfolio is SRI, and he plans to make further
changes. It’s too soon to tell how well the investments will perform, but the
family expects healthy returns.
"What’s cool about that is that you cannot say it’s going to do
worse—it’s going to do what the market does anyway," he says. "If your stock
picker is doing better, great; I’ll take the index for now."
Davidson, on the other hand, has focused his SRI on small
private companies. As a managing partner in an early-stage technology venture
capital fund, he is well versed in venture deals and enjoys investing in small
socially responsible firms. Davidson has identified some of his investments
through Investors’ Circle, a network of angel investors and other wealthy
funders that backs socially responsible entrepreneurs. His areas of interest
include healthcare and food. Through the network, he invested in the hearing-aid
firm Sonic Innovations, yielding a 50 percent internal rate of return and
earning back 3.5 times his investment. Yogurt maker Stonyfield Farm also
generated a return of several times Davidson’s investment.
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