I hosted a discussion on the past, present and future of SRI at my local analyst society last month. I was fortunate to be able to have Cheryl Smith from Trillium who is also the new Chair of the Social Investment Forum board as well as Peter Kinder, cofounder of KLD.

It was a freewheeling and fascinating discussion. Cheryl focused more on the evolving body of knowledge around SRI that has been developed by academics and practioners over the years while Peter focused more on the people involved and key events in the history of SRI.

For me , one of the most insightful ideas to come out of the meeting was how the growing concern over global warming and carbon creation has created a whole new class of investors interested in environmentally friendly investing. This interest presents the possibility of a synergistic effect relative to SRI investing broadly. Intuitively, this would make sense. Many of the company policies related to sustainability practices dove-tail nicely with policies to promote good governance and ethical business practices.

Will green investing dramatically accelerate interest in SRI broadly? This remains to be seen. However, it certainly provides one more driver of growth for the industry.

Its been quite some time (almost nine months) since I have had the opportunity to post a new blog. I am making a renewed effort to blog at least once a month. Today, I just want to point out a few changes to the site.

First of all, I have changed the site slightly. It still will be focused primarily on alternatives, however I have broadened the mission of the site to also allow for discussion of more traditional SRI products as well. Selfishly, this enables me to blog more about clean-tech products. I am actively trying to reduce my own carbon print and am interested in discussing investment vehicles that are directly or indirectly focused on clean technology and/or global warming. Some of these vehicles are fairly traditional in their structure.

Another change is that I removed the market updates. I am too busy to reliably provide a quarterly update. Any volunteers out there? I will try to provide some market commentary in the blog at fairly regular intervals.

Lastly, I just wanted to mention that I am hosting an event through my local society on the history and future of SRI investing on Thursday, June 5th. Two great speakers, Cheryl Smith of Trillium and Peter Kinder of KLD will be speaking. Please check out the link http://www.bsas.org/events/programs_events.asp if you are interested and in the area.

Cheers!

Damon

While the recent turmoil in the credit market is worrisome, the sell off in equities looks like a good opportunity. Granted, home inventories are high and the August number for sales of new and existing homes will be ugly. However, this is all well understood by investors.

What investors seem to be ignoring right now is that U.S. corporations continue to be in excellent shape with lean inventories, strong export demand and very healthy balance sheets. These fundamentals drove a sharp increase in durable orders in July. Furthermore, the index of leading economic indicators was up 0.4% in July.

Lastly, a number of short term indicators I look at (stocks hitting lows versus highs, put/call ratio, bullish versus bearish investors, etc.) are strongly suggestive of a market bottom. Also, insider buying has been robust. Note the attached graph on insider buying. Lastly, Bloomberg put out an article yesterday indicating that stock purchases by executives at banks, consumer lenders and insurers in the Standard & Poor's 500 Index climbed this month to the highest in 12 years.

For there to be a sustained rally I think investors need two things: stabilization in the housing market which I expect to see by year end or early next year; and the availability of credit for prime borrowers. There was legitimate concern in August that even high quality personal borrowers could not get access to debt. It appears that the debt markets have opened up again to these borrowers.

One other factor to consider is the Federal Reserve's action at the upcoming September 18 meeting. I do not think there is a compelling reason for the Fed to cut rates. Inflation is currently in control and, despite investor fears, the economy is on reasonably good footing. A cut here would simply raise the specter of inflation again and do very little to alleviate problems in the housing market. The market is strongly discounting a cut and may be disappointed.

Despite the uncertainty regarding the housing market and future Fed action, economic strength, good valuations and short term indicators suggest that it is time to go shopping for stocks!

I just recently went to the Goldman Sachs health care conference in Laguna Beach, CA and was surprised to see an analysis of the pharmaceutical industry which incorporated an ESG component. I've attached a slide from the presentation that summarizes the approach.

In addition to drug companies, Goldman is using this framework to analyze energy, media, mining & steel, and food & beverages companies. Not surprisingly, the companies that score well along their ESG parameters, which they refer to as the "ESG framework leaders" have superior returns versus peers and the market. In some cases the return differential was substantial. Mining & Steel ESG leaders outperformed peers and the market by 32% and 44%, respectively.

It's certainly great to see that Goldman and some of the other bulge bracket firms see the value in including ESG factors when performing security analysis. I think it is particularly interesting that Goldman is now exploring this area in light of their leadership in providing hedge fund services. Hopefully, there will eventually be some productive cross fertilization between Goldman's hedge fund services and their small but growing ESG research team. The field of ESG hedge fund investing would grow a lot faster if Goldman established one or more funds based on this approach. Goldman was one of the early investors in alternative energy and is now reaping the rewards of this investment. It is not inconceivable that they would consider ESG hedge funds as a potential early investment opportunity.

Despite the recent volatility and increased investor fretting over the sub prime market, I continue to like equities here and suggest a net long position. Liquidity conditions globally still remain healthy. Yields are going up across the globe but the cost of and access to capital still remains attractive. This is in the context of equity valuations which are still very attractive. As a result, I still expect more M&A activity driven by both strategic buyers and private equity.

Global GDP growth also remains robust with the U.S. apparently accelerating out of a mid-year lull. ISM data continues to improve, implying that the corporate sector is in good shape. Regarding consumers, there is valid concern, near-term, that the consumer is weakening. Credit card debt is on the rise, retails sales are mixed and second quarter retail company reports have been poor. Combine this with increasing concern about the sub-prime market, and one could very easily paint a poor picture of the consumer. However, the long term drivers of consumer health are wage and employment growth, both of which remain healthy. Furthermore, sub-prime borrowers account for six percent of homeowners. According to the Mortgage Bankers Association, 35% of homeowners own their houses out-right. The real risk of the sub-prime deterioration is its potential indirect impact on investor perceptions of risky assets.

It is also worth noting that Inflation globally remains in check. I am fascinated by this idea that China is now exporting inflation, which is probably correct, but it is also probably a multi-year trend which is just starting. The Fed continues to be concerned about inflation in the U.S. but will probably not raise rates for the remainder of 2007. However, I now think that a rate increase in 2008 is possible which is a change from my prior view. Given the strength of the U.S. economy and the limited damage caused by the sub-prime debacle, I now think a rate cut is unlikely.

Lastly, market expectations appear to be fairly low. Consensus earnings growth for Q2 is 4%. While material costs and wage increases will certainly weigh on companies, revenue growth continues to outpace cost growth due to healthy global demand and a favorable environment for price increases. The fact that hedge funds are significantly short the major indices is also suggestive of low expectations.

In terms of what looks attractive currently, I still am biased toward growth stocks driven primarily by valuation. I expect large cap to out-perform mid and small cap which could under-performance as riskier assets get re-priced. A weak dollar also helps the large caps. I think industrials, particularly the infrastructure and water plays have run ahead of themselves. Technology stocks are looking more attractive and I continue to like healthcare. Soft commodities still look interesting here but metals look pricy. Energy is still attractive longer-term but some valuations, particularly in the alternative space, are looking rich. I would advise caution. I also continue to prefer international stocks over U.S. stocks. Valuations still look better abroad, economic growth is higher and it looks like the dollar will continue to decline. Need I say more?