Green Mountain SRI Summit

September 8-10, 2002

Managing Risk and Return for Socially Responsible Investors

SRI Value Investing

Doug Wheat802-251-0500

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SRI is “style neutral”

• The only comprehensive study to look at SRI value investing found that “…it appears that SRI can provide competitive returns to both growth and value style managers relative to their respective benchmarks.”

– Socially Responsible Investing: Viable for Value Investors? By Lorne Abramson and Dan Chung

• SRI value funds and SRI value managers have demonstrated that competitive rates of return can be achieved using sustainable and responsible investment strategies.

• Many institutional investors may decide to select traditional value managers and work with them to customize screens:– There is a dirth of existing value investment options for social investors.

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Selecting under-priced stocks is the key to value investing

• Value investors identify under-priced stocks by focusing on absolute book value, comparative market value using price ratios, and cash flow rather than on forecasts of earnings growth rates. – P/E, P/B, and price to cash-flow ratio and are kings.

• Value investing was championed by Benjamin Graham and David Dodd in their 1934 book Security Analysis. – They theorize that in the short term markets are based on emotion and are

not “efficient.” Thus, some securities can be purchased cheaply.

• Observing that the market was frequently efficient, [financial scholars] went on to conclude incorrectly that the market was always efficient. The difference between the propositions is night and day.– Warren Buffett, 1988

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SRI value managers have performance results above and below the Russell 1000 Value Index

-40%-35%-30%-25%-20%-15%-10%-5%0%5%

10%15%

1 Year 3 Year 5 Year

Russell 1000 Value

Christian Brothers Value Equity

Lowell BlakeGabelli SRI Value

SKBA SRI Value

Ariel Fund

Parnassus FundCitizens Value

MMA Praxis Value Index

Annualized returns through June 30, 2002

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Things to consider in SRI value investing

• Social investment indexes contain many value companies – not just growth companies.

• Selecting a manager without a social investment focus places more demands on the investor to develop in-house capability to evaluate companies based on social and environmental criteria.

• A manager that focuses on dividends may be more likely to be exposed to tobacco, defense, and utility securities.

• An SRI value strategy can be effective when using either a passive or active investment approach:– Passive investment with social screens leaves many companies available

for investment:• Optimization models can be used to find replacements and eliminate wholes.• Be prepared for short-term tracking errors.

– The active investment approach generally has concentrated portfolios:• Look for money managers with few holdings in companies that don’t pass

social screens.