At the Money: Aligning Investments With Personal Values

0:00I'm Hannah Fry, and as we rely more and more on artificial intelligence in every facet of our lives and businesses, I'm on a mission to find out how we can build the internet that AI needs. Learn more later in the podcast. You can't always get what you want. You can't always get what you want. But if you try sometimes, you might find you get what you need. I'm Barry Ritholtz, and on this episode of At The Money, we're going to discuss how our portfolios can reflect our personal values. Our relationship with money is complicated and sometimes conflicted. We want to invest in the highest performing stocks and indices, but sometimes we may not love how some of those companies earn their money.

0:56Meyer Statman, professor of finance at Santa Clara University, wrote the book, What Investors Really Want. He observes that investors want more than utilitarian benefits and returns. They want expressive benefits as well. They want value-based investments. I'm Barry Ritholtz, and on today's edition of At The Money, we're going to discuss how to align your portfolio with your personal values. And no, we're not talking about being woke. To help us unpack all of this and what it means for your investments, let's bring in Ari Rosenbaum of O'Shaughnessy Asset Management, now a division of investing giant Franklin Templeton.

1:40And full disclosure, my firm at Hiltz Wealth Management was one of the first clients in O'Shaughnessy's direct indexing product, Canvas. We currently have over a billion dollars on that platform. So last time we had you on, you discussed what direct indexing was. Give us a really quick refresher. So direct indexing is the ability to have a portfolio of stocks professionally managed following an investment strategy similar to an index, like, say, the S &P 500. But instead of it being one packaged product and price, we're buying the individual components through stocks. We can use those individual components to generate a tax benefit by selling losers, offsetting gains.

2:25You can't do that in a vehicle that just sets one price throughout or at the end of the day. So let's talk about the customization that you can get with direct indexing. A lot of people talk about ESG investing or socially responsible investing or woke investing. Those are very broad rubrics. And what I've observed in direct indexing is those are shotguns. This is like a laser-guided rifle. You can really tune a portfolio very, very precisely. Tell us a little bit about the ability to have a portfolio reflect an investor's personal values. You're able to create in a direct index a diversified, professionally managed portfolio, something that might look like the S &P 500, but in a mutual fund or ETF, you don't have the ability to customize.

3:17Here you're able to dial up or down particular components of the portfolio for your preferences. Let's say you want to avoid stocks with certain characteristics and concentrate into stocks with others. I know everybody tends to look at this as left versus right, but let's take a different approach. An investor comes to you and says, hey, me and my family are pro-life. We don't want to invest in anything that assists abortion or stem cell research, what can you do for an investor like that? So we have the ability to set custom screens. The investor would work with their financial advisor to avoid all of those.

3:55This is a common screen for us with people that are affiliated with Catholic bishops, as an example, and they can avoid contraceptives, abortifacients, certain testing parameters that would pharmaceutical companies that invest in these kinds of drugs to avoid exposure to any companies that are involved in abortion. So this isn't a left right thing. This is whatever your values are, be they left or right, you can express them in a portfolio. Exactly correct. Let me throw a couple of other curveballs at you. We've seen a lot of school shootings and an investor comes to you and says, I don't want to invest in gun stocks.

4:36What do you say to those folks? It's the most popular actual. Oh, really? That and tobacco are the two most popular screens to avoid on our platform. So I can own either something that looks like the Vanguard total market or the S &P 500 or whatever it is, no tobacco or no. What about defense stocks? Hey, listen, we're sending a lot of arms around the world, say some investors. I don't want to be involved in funding those companies. Defense stocks, weapons manufacturers, cluster bombs. These are all the kinds of things we can screen out of. I recently read a few studies that noted that companies that have no women on their board of directors or in senior management underperform those that did.

5:17How can I take advantage of that? We actually have a client that has done pretty extensive research on understanding values that their female clients are most interested in. We created a portfolio. She's actually written books on this topic. We created a portfolio that matched those values. And in fact, gender diversity was one of them. By creating this portfolio, we were able to build an investment for her where she had no exposure whatsoever to any companies without women on their boards. Huh. That's really interesting. Is there a performance price you pay for making these changes or do they more or less just affect it around the edges?

5:59In the area of governance, We've actually seen that good corporate governance does help to improve returns. With environmental and social, it's really more preference-based. So let's talk about environmental. Of all the things we've discussed so far, we haven't talked about environmental investing. What are our options? If someone says, I'm concerned about global warming, I'm concerned about carbon, I'm concerned about the destruction that we're doing to our environment and the world we're going to leave to our kids and grandkids. How can I make a portfolio reflect those sorts of issues? Carbon intensity is one way to screen, both avoiding companies that are the worst offenders and tilting towards companies that do better.

6:42So you're not just talking about removing all of the carbon producing companies. You're talking about some of the companies that also consume carbon as well. That's right. We can also do similar work where we're screening out of companies that are leading in pollution and tilting towards companies that do less of that. Water stress is another way of being environmentally aware. There are a multitude of screens. We have about 20 different components that are not just avoid, but lean into. In other words, you overweight the things you like or underweight the things you don't like. So let me throw another one at you.

7:20My wife is a big animal rights advocate. There are certain companies that she won't use because she knows they're kind of not great for how they test their products. Someone like that says, I want a kinder, gentler to animals portfolio. What can you do with those? They can go right to the platform, select animal testing and remove those companies from the portfolio. What have I missed? Give me some other topics that are relevant for someone who says, I want my portfolio to reflect my values and I value this. So we have another client who built a social justice model. And this is screening out of weapons manufacturers, companies that have better diversity and inclusion practices as a whole for their own corporate governance.

8:07That's a popular set of screens as well, social justice. So what are you removing when you're pro-social justice? What kinds of companies come out? Weapons manufacturers, riot gear, actually. Private prisons? Are those still a thing? Private prisons, riot gear manufacturers. These are the kinds of screens that would come out. Really interesting. So to wrap up, you don't have to be woke to want to align your portfolio with your values. you can get, in Professor Statman's words, expressive benefits by simply owning a broad index of individual companies, removing those companies whose work you're not comfortable with, or weighting your portfolio towards those companies that have the characteristics that you like.

8:50And you could do this for a small price, 20, 25 basis points, in a broadly diversified portfolio. It's a great way to express your values, and you don't have to be woke. It's from the left. It's from the right. It's whatever your personal values are. These sorts of portfolios can be customized to reflect your desires and your beliefs.

9:19You can listen to At The Money every week. Find it in our Masters in Business feed at Apple Podcasts. Each week, we'll be here to discuss the issues that matter most to you as an investor. I'm Barry Ritholtz. You've been listening to At The Money on Bloomberg Radio.