The Christian Science Monitor

Jerry, you recently announced that you're going back into stocks even though the market is overvalued. Explain.

Dodson: Starting last summer I concluded that [stock] valuations were way too high. And I also concluded that the market was probably going to go down - about an 80 percent chance is how I assessed it.

Not only were valuations very high, there was a huge speculation element in the fund, because margin debt on the Nasdaq was at all time highs. So that meant that people were borrowing money to invest in highly speculative Nasdaq stocks, which is usually a sign of a market topped out. Also, insider selling had reached an all-time high. And when the people who know the most about a company, namely its top management and its directors, are selling the stock, that makes me very nervous.

“Ethical investing or values-based investing? It doesn't matter to me as long as you're taking a viewpoint that the companies you invest in have a positive social impact.” – Jerry Dodson REBECCA SWILLER

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So we went into cash, about 85 percent. So for 2003, we were up 16.5 percent. For a normal year, I think 16.5 percent sounds pretty good. But when the S&P is up 26 percent, that means we underperformed by 10 percent.

Now, the question came after six months [and a robust rise in the stock market]: What do we do? Well, George Soros, who I don't agree with very often, said something to the effect that the market is definitely overvalued, but that doesn't mean it can't get even more overvalued. And I think that's the dilemma I faced.

So I took a second look. The insider selling is still going on, the valuations are still high, the Nasdaq is high. However, the economy looks stronger than it did six months ago. So we went back to the drawing board and, look, we're finding some very good values in certain sectors. Healthcare is one area. Pharmaceutical [companies] are another area, some finance [firms]. And our idea is that, if the market keeps going up - which it may - we would get reasonably good returns. On the other hand, if the market goes down, we would probably not go down as much. So that's the strategy that we've taken, and we're now about 65 percent invested [in stocks].

Should the average investor do the same?

Dodson: I'd say keep half your money in cash. Because there may be some very good buying opportunities before the end of the year. But you also want to hedge your bets, and if you're picking a mutual fund - I hope you're picking the Parnassus Fund - or another good fund, but a very conservative fund. Stay out of the technology sector and the high fliers. If you're picking individual stocks, look at the P/E ratio. If it's up at 100 times earnings or 50 times earnings, I'd say stay away. If it's below 20 times earnings, consider it. I'd also look for a company that had fairly consistent returns. Also, I would consider dividend-paying stocks under the correct markets, as they tend to go down less in a market crash.

Ed, you manage risk by looking for absolute returns. What do you mean by that?

Easterling: This is actually a fundamental concept. Most managers, especially ones who categorize themselves as large-cap value or small-cap value [specialists], their objective is to deliver returns consistent with that sector. So their goal is to get returns relative to something. Absolute returns is an approach that says regardless of what happens to the market, your objective is to make a profit. It's a much more complex process, because in the relative case you're picking a basket of securities that is intended to perform like another index. In the other case, you are trying to realize returns that absolutely perform, regardless of what happens in the market.

Is the average investor really going to use the fancy hedging techniques your managers do?

Easterling: During the '80s and '90s we saw a proliferation [of mutual funds], and now people have become asset allocators. The next evolution will be a proliferation in risk-control products. And so, 20 years from now, I would say that investors will be talking about the way that they're managing risk and the way that they're managing absolute returns in their portfolio. And there will be the products and the services available to do that.

All three of you don't just look at financial performance but also social values. How do you do that?

Dodson: We tend to take a number of principles into account. The most important principle is how a company treats its employees. Sometimes as a screening device we use Fortune's annual "100 Best Companies to Work For." The second is the environmental policy, which means different things to different people. We look for things like recycling, low emissions, etc. The third area is community relations, and this would include charitable contributions, participation in the community.

We also have negative screens and we're very product oriented - more product-oriented than other social investment funds. Take a company like Coca-Cola, which many social investment funds put in their portfolio because they have some positive things, such as good employee and community relations. But for us, Coca-Cola does not have a positive social impact.