At the Money: Aligning Investments With Personal Values

Episode Summary

Executive Summary: On this episode of At the Money, host Barry Ritholtz discusses aligning investment portfolios with personal values through direct indexing with Ari Rosenbaum of O'Shaughnessy Asset Management. They explore how investors can customize portfolios to reflect specific ethical, social, and environmental preferences—from excluding gun stocks and tobacco to promoting gender diversity and avoiding carbon-intensive companies. Rosenbaum emphasizes that this approach offers 'expressive benefits' beyond returns and is available for a small fee, regardless of political orientation.

Main Topics: Introduction to Direct Indexing (Priority: 4/5): A refresher on direct indexing, which allows investors to own individual components of an index (e.g., S&P 500) for greater flexibility compared to packaged ETFs or mutual funds. Customization for Personal Values (Priority: 5/5): How direct indexing enables precise customization, enabling investors to avoid or tilt toward specific companies based on ethical, social, or political values—described as a 'laser-guided rifle' versus broad ESG approaches. Common Screens: Pro-Life, Guns, Defense, and Animal Testing (Priority: 4/5): Discussion of specific screens such as excluding companies involved in abortion/stem cell research (e.g., for Catholic clients), gun manufacturers, defense/weapons producers, and animal testing companies. Gender Diversity and Corporate Governance (Priority: 3/5): How investors can build portfolios that avoid companies without women on boards, with evidence suggesting good governance may improve returns. Environmental Screening: Carbon, Pollution, Water Stress (Priority: 4/5): Options for excluding high-carbon or polluting companies while tilting toward environmentally responsible firms, including screens for carbon intensity and water stress. Social Justice and Other Value-Based Models (Priority: 3/5): Examples of portfolios built around social justice, excluding weapons, riot gear, and private prisons, while emphasizing diversity and inclusion. Performance Impact and Cost (Priority: 4/5): Addressing whether customization incurs a performance penalty; good governance may enhance returns, while environmental/social screens are primarily preference-based. Cost is 20–25 basis points.

Key Arguments: Direct indexing allows investors to express personal values through precise portfolio customization, offering 'expressive benefits' beyond utilitarian returns. Common value-based screens (e.g., avoiding guns, tobacco, abortion-related companies) are not politically exclusive; they can serve any orientation. Good corporate governance (e.g., gender diversity on boards) can improve returns, while environmental/social screens are mostly preference-based without clear performance penalty. Customization is feasible at a low additional cost (20–25 basis points) and can be applied to broad index-like portfolios. The ability to both exclude undesirable companies and tilt toward desirable ones (e.g., low carbon) provides granular control. Social justice models demonstrate how multiple screens (weapons, private prisons, diversity) can be combined to reflect specific values.

Data Points: Cost of customization: 20–25 basis points - Additional cost for direct indexing with customization, as stated by Ari Rosenbaum. Most popular screens: Tobacco and guns - Rosenbaum notes these are the most common screens on their platform. Number of environmental screen components: About 20 - Rosenbaum mentions approximately 20 different components for environmental screening, including carbon intensity and water stress. Assets on platform: Over a billion dollars - Barry Ritholtz discloses his firm currently has over a billion dollars on O'Shaughnessy's Canvas platform.

Pivotal Quotes: "Investors want more than utilitarian benefits and returns. They want expressive benefits." — Barry Ritholtz (quoting Meyer Statman): Introduction of the concept that investors seek value alignment beyond financial returns. "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." — Ari Rosenbaum: Emphasizing that value-based investing is not exclusive to any political orientation. "So, to wrap up, you don't have to be woke to want to align your portfolio with your values. ... it's from the left, it's from the right, it's whatever your personal values are." — Barry Ritholtz: Conclusion underscoring the universal applicability of customized value-based investing.

Implications: For investors, direct indexing enables precise value alignment at low cost, potentially increasing engagement and satisfaction. The approach democratizes customization, allowing any investor to exclude or favor companies based on personal ethics. Future use will likely grow as demand for expressive benefits rises, and as technology lowers costs further.