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Speaker 1: You can't always get what you all. You can't always

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Speaker 1: get what you want.

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Speaker 2: Your mind.

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Speaker 1: You get that. I'm Barry Riddholts and on this episode

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Speaker 1: of At the Money, we're going to discuss how our

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Speaker 1: portfolios can reflect our personal values. Our relationship with money

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Speaker 1: is complicated and sometimes conflicted. We want to invest in

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Speaker 1: the highest performing stocks and indices, but sometimes we may

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Speaker 1: not love how some of those companies earn their money.

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Speaker 1: Meyer Statman, Professor of Finance at Santa Clara University, wrote

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Speaker 1: the book What Investors Really Want. He observes that investors

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Speaker 1: want more than utilitarian benefits and returns. They want expressive

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Speaker 1: benefits as well. They want value based investment. I'm Barry Riudholts,

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Speaker 1: and on today's edition of At the Money, we're going

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Speaker 1: to discuss how to align your portfolio with your personal values.

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Speaker 1: And no, we're not talking about being woke. To help

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Speaker 1: us unpack all of this and what it means for

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Speaker 1: your investments, let's bring in Ari Rosenbaum of O'Shaughnessy Asset

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Speaker 1: Management now a division of investing Giant Franklin Templeton and

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Speaker 1: full disclosure, my firm, Rehults Wealth Management was one of

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Speaker 1: the first clients in O'Shaughnessy's direct indexing product canvas. We

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Speaker 1: currently have over a billion dollars on that platform. So

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Speaker 1: last time we had you on, you discussed what direct

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Speaker 1: indexing was. Give us a really quick refresher.

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Speaker 2: So, direct indexing is the ability to have a portfolio

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Speaker 2: of stocks professionally managed following an investment strategy similar to

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Speaker 2: an index, like say the S and P five hundred,

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Speaker 2: but instead of it being one packaged product and price,

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Speaker 2: we're buying the individual components through stocks. We can use

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Speaker 2: those individual components to generate a tax benefit by selling

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Speaker 2: losers offsetting gains. You can't do that in a vehicle

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Speaker 2: that just sets one price throughout or at the end

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Speaker 2: of the day.

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Speaker 1: So let's talk about the customization that you can get

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Speaker 1: with direct indexing. A lot of people talk about ESG

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Speaker 1: investing or socially responsible investing or well investing. Those are

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Speaker 1: very broad rubrics, and what I've observed in direct indexing

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Speaker 1: is those are shotguns. This is like a laser guided rifle.

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Speaker 1: You can really tune a portfolio very very precisely. Tell

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Speaker 1: us a little bit about the ability to have a

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Speaker 1: portfolio reflect in investors personal values.

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Speaker 2: You're able to create, in a direct index, a diversified,

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Speaker 2: professionally managed portfolio something that might look like the S

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Speaker 2: and P five hundred. But in a mutual fund or ETF,

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Speaker 2: you don't have the ability to customize. Here, you're able

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Speaker 2: to dial up or down particular components of the portfolio

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Speaker 2: for your preferences. Let's say you want to avoid stocks

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Speaker 2: with certain characteristics and concentrate into stocks with others.

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Speaker 1: I know everybody tends to look at this as left

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Speaker 1: versus right, but let's take a different approach. An investor

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Speaker 1: comes to you and says, hey, me and my family

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Speaker 1: are pro life. We don't want to invest in anything

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Speaker 1: that assists abortion or stem cell research. What can you

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Speaker 1: do for an investor.

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Speaker 2: Like that, So we have the ability to set custom screens.

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Speaker 2: The investor would work with their financial advisor to avoid

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Speaker 2: all of those. This is a common screen for us

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Speaker 2: with people that are affiliated with Catholic bishops as an example,

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Speaker 2: and they can avoid contraceptives, abort efficients, certain testing parameters

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Speaker 2: that would pharmaceutical companies that invest in these kinds of

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Speaker 2: drugs to avoid exposure to any companies that are involved

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Speaker 2: in abortion.

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Speaker 1: So this isn't a left right thing. This is whatever

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Speaker 1: your values are, be they left or right, you can

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Speaker 1: express them in a portfolio.

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Speaker 2: Exactly correct.

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Speaker 1: Let me throw a couple of other curveballs at you.

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Speaker 1: We've seen a lot of school shootings, and an investor

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Speaker 1: comes to you and says, I don't want to invest

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Speaker 1: in gunstocks. What do you say to those firsts?

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Speaker 2: It's the most popular actual?

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Speaker 1: Oh real?

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Speaker 2: That and tobacco now are the two most popular screens

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Speaker 2: to avoid on our platforms.

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Speaker 1: So I can own either something that looks like the

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Speaker 1: Vanguard Total Market or the S and P five hundred

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Speaker 1: or whatever it is, no tobacco, or what about defense stocks? Hey, listen,

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Speaker 1: we're sending a lot of arms around the world, say

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Speaker 1: some investors, I don't want to be involved in funding

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Speaker 1: those companies.

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Speaker 2: Defence stocks, weapons manufacturers, cluster bombs. These are all the

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Speaker 2: kinds of things we can screen out of.

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Speaker 1: I recently read a few studies that noted that companies

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Speaker 1: that have no women on their board of directors or

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Speaker 1: in senior management underperform those that did. How can I

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Speaker 1: take advantage of that?

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Speaker 2: We actually have a client that has done pretty extensive

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Speaker 2: research on understanding values that their female clients are most

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Speaker 2: interested in. We created a portfolio. She's actually written books

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Speaker 2: on this topic. We created a portfolio that matched those values,

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Speaker 2: and in fact, gender diversity was one of them. By

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Speaker 2: creating this portfolio, we were able to build an investment

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Speaker 2: for her where she had no exposure whatsoever to any

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Speaker 2: companies without women on their boards.

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Speaker 1: Huh, that's really interesting. Is there a performance price you

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Speaker 1: pay for making these changes or do they more or

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Speaker 1: less just affected around the edges.

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Speaker 2: In the area of governance, we've actually seen that good

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Speaker 2: corporate governance does help to improve returns. With environmental and

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Speaker 2: social it's really more preference base.

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Speaker 1: So let's talk about an environmental Of all the things

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Speaker 1: we've discussed so far, we haven't talked about enron mental investing.

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Speaker 1: What are our options If someone says, I'm concerned about

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Speaker 1: global warming, I'm concerned about carbon I'm concerned about the

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Speaker 1: destruction that we're doing to our environment and the world

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Speaker 1: we're going to leave to our kids and grandkids. How

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Speaker 1: can I make a portfolio reflect those sorts of issues.

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Speaker 2: Carbon intensity is one way to screen, both avoiding companies

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Speaker 2: that are the worst defenders and tilting towards companies that

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Speaker 2: do better.

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Speaker 1: So you're not just talking about removing all of the

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Speaker 1: carbon producing companies. You're talking about some of the companies

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Speaker 1: that also consume carbon as well.

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Speaker 2: That's right. We can also do similar work where we're

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Speaker 2: screening out of companies that are leading in pollution and

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Speaker 2: tilting towards companies that do less of that. Water stress

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Speaker 2: is another way of being environmentally aware. There are a

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Speaker 2: multitude of screens. We have about twenty different components that

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Speaker 2: are not just avoid but lean into.

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Speaker 1: In other words, you overweighth the things you like or

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Speaker 1: underweight the things you don't like exactly. So let me

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Speaker 1: throw another one at you. My wife is a big

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Speaker 1: animal rights advocate. There are certain companies that she won't

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Speaker 1: use because she knows they're kind of not great for

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Speaker 1: how they test their products. Someone like that says, I

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Speaker 1: want a kindler, gentler to animal's portfolio. What can you

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Speaker 1: do with those?

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Speaker 2: They can go right to the platform, select animal testing

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Speaker 2: and remove those companies from the portfolio.

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Speaker 1: What if I miss Give me some other topics that

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Speaker 1: are relevant for someone who says I want my portfolio

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Speaker 1: to reflect my values and I value this.

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Speaker 2: So we have another client who built a social justice model,

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Speaker 2: and this is screening out of weapons manufacturers, companies that

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Speaker 2: have better diversity and inclusion practices as a whole for

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Speaker 2: their own corporate governance. That's a popular set of screens

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Speaker 2: as well. Social justice.

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Speaker 1: So what are you removing when you're pro social justice?

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Speaker 1: What kinds of companies come out?

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Speaker 2: Weapons manufacturers, riot gear? Actually, private prisons are those prisons?

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Speaker 2: Riot gear manufacturers? These are the kinds of screens that

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Speaker 2: would come out.

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Speaker 1: Huh, really interesting. So to wrap up, you don't have

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Speaker 1: to be woke to want to align your portfolio with

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Speaker 1: your values. You can get in Professor Statman's words, expressive

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Speaker 1: benefits by simply owning a broad index of individual companies,

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Speaker 1: removing those companies whose work you're not comfortable with, or

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Speaker 1: waiting your portfolio towards those companies that have the characteristics

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Speaker 1: that you like. And you could do this for a

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Speaker 1: small price twenty twenty five basis points. In a broadly

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Speaker 1: diversified portfolio. It's a great way to express your values,

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Speaker 1: and you don't have to be woke. It's from the left,

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Speaker 1: it's from the right, it's whatever your personal values are.

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Speaker 1: These sorts of portfolios can be customized to reflect your

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Speaker 1: desires and your beliefs. You can listen to At the

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Speaker 1: Money every week, finding in our Master's and business feed

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Speaker 1: at Apple podcasts. Each week, we'll be here to discuss

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Speaker 1: the issues that matter most to you as an infestor.

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Speaker 1: I'm Barry Rittolts. You've been listening to At the Money

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Speaker 1: on Bloomberg Radio.