At the Money: Investing With Personal Values – The Big Picture

At the Money: Investing With Personal Values with Ari Rosenbaum, O’Shaughnessy Asset Management (Nov 1, 2023)

The term ‘ESG’ gets thrown around in investing all the time. But, there’s a better way to align your investments with your personal values. In this week’s episode, Barry Ritholtz speaks with Ari Rosenbaum, principal at O’Shaughnessy Asset Management, about how to tailor investments to your ideological preferences.

Full transcript below.

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About this week’s guest:

Ari Rosenbaum is the Director of Private Wealth Solutions at O’Shaughnessy Asset Management, now a part of Franklin Templeton. He helps manage Canvas, their direct indexing product.

For more info, see:

OSAM Bio

LinkedIn

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Find all of the previous At the Money episodes in the MiB feed on Apple Podcasts, YouTube, Spotify, and Bloomberg.



Transcript:

I’m Barry Ritholtz, and on this episode of At the Money, we are gonna 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.

Myer Statman, professor of finance at Santa Clara University, wrote the book, What Investors Really Want. And 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 Ritoltz 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 and full disclosure, my firm, Ritholtz 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.

Ari Rosenbaum: 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.

You can’t do that in a vehicle that just sets one price throughout or at the end of the day.

Barry Ritholtz: So let’s talk about the customization that you can get with direct indexing. Um, 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.

Ari Rosenbaum: 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 here.

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.

Barry Ritholtz: 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?

Ari Rosenbaum: So we have the ability to set custom screens. The investor would work with their financial advisor to avoid all of those. This 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.

Barry Ritholtz: 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 curve balls 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. What do you say to those folks?

Ari Rosenbaum: It’s the most popular actual. Oh really? That and tobacco are the two most popular screens to avoid on our platform.

Barry Ritholtz: 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 gun. What about defense stocks? “Hey, listen, uh, we’re sending a lot of arms around the world,” say some investors. I don’t want to be involved in funding those companies.

Ari Rosenbaum: Defense stocks, weapons manufacturers, cluster bombs, these are all the kinds of things we can screen out of.

Barry Ritholtz: 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. How can I take advantage of that?

Ari Rosenbaum: 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.

Barry Ritholtz: That’s really interesting. Is there a performance price you pay for making these changes, or do they more or less just affected around the edges?

Ari Rosenbaum: In 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.

Barry Ritholtz: 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?

Ari Rosenbaum: Carbon intensity is one way to screen, both avoiding companies that are the worst offenders and tilting towards companies that do better.

Barry Ritholtz: So 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?

Ari Rosenbaum: 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.”

Barry Ritholtz: In other words. You overweight the things you like or underweight the things you don’t like. Exactly. So let me throw another one at you. My 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?

Ari Rosenbaum: They can go right to the platform, select animal testing and remove those companies from the portfolio.

Barry Ritholtz: 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.

Ari Rosenbaum: 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.

That’s a popular set of screens as well, Social justice.

Barry Ritholtz: So what are you removing when you’re pro-social justice? What kinds of companies come out?

Ari Rosenbaum: 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.

Barry Ritholtz: 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 Stattman’s words, expressive benefits from your portfolio. 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.

And 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.

I’m Barry Ritholtz. You’ve been listening to At the Money On Bloomberg Radio.