When it comes to socially respon- sible investing, value isn't the first thing to come to mind. Yes, investors want to avoid companies that get their revenues from guns, pornography or pollutants, but whether those firms have low price-to-book ratios or sizable free cash flow isn't usually a factor. There is such a growth bias in the SRI world that just 13% of the category is invested along value principles.

That was a niche too good to pass up, according to the five managers of the $110 million Appleseed Fund of Chicago, which recently celebrated its third anniversary. The managers are true value hounds and have been since the launch of their advisory firm, Pekin Singer Strauss Asset Management, in 1990, where they run $600 million in separately managed accounts in a strict value discipline. When Joshua Strauss, senior vice president and one of the managers, proposed launching a socially responsible mutual fund, it was a given that the investments would be made in the firm's signature value style.

That proved to be a wise choice heading into the bear market. The fund gravitated toward companies with ironclad balance sheets and little need to tap debt markets for financing. It avoided businesses with precarious financial positions because they did not meet their value criteria.

Through the worst of the decline, Appleseed found plenty of deals to populate its portfolio. But now that equities are on the mend, the team is a little less enamored. As new money has flowed in-about $100 million over the past year alone-the managers have let it linger in cash, to the tune of 17% of assets. Another 14% of the portfolio is in gold. In all, just two-thirds of the fund's assets are actually invested in stocks. "If we are not finding names to buy, we are happy to sit on cash," Strauss says. "Right now we are having trouble finding cheap names."

Strauss's caution has paid off. Over the past three years, the Appleseed Fund is up an annualized 7.1% through Feb. 3, placing it in the top slot of the mid-cap value category for the time period, according to Morningstar. For the past 12 months, the fund is up 57.5%, in the category's top 14%.

GLITTERING GOLD

It's not easy finding socially responsible investments outside the growthy technology and alternative energy arenas, Strauss acknowledges. Many value companies are clustered in the industrial sector, in categories often seen as "dirty" by the SRI camp-utilities and energy, for example.

But that's where Appleseed's flexible mandate comes in handy. The managers are not beholden to any one industry or market cap.

Appleseed's 14% gold position reflects the managers' view that inflation is likely to make an appearance in coming years, given the immense stimulus in response to the recession. "There's plenty of upside for this investment, especially if inflation is on the rise as we think it is," Strauss says.

But gold mining isn't a very environmentally friendly move, is it? "Mining is terrible," he concedes, "but most of the gold in circulation was mined years ago. There's not a big environmental impact of owning gold now."

The fund doesn't own gold bullion locked away in some bank vault, as do other value hounds, most notably Jean-Marie Eveillard of First Eagle Global. Instead, Appleseed owns shares in three exchange-traded funds, each of which holds gold bullion.

BALANCE SHEET GUYS

Actual stock investments come from constantly trolling for companies that are temporarily selling at huge discounts to what the team believes is their intrinsic value. "We want to see at least a 50% upside with minimal risk," Strauss explains.

Once a name piques someone's interest, it is put through a series of SRI screens to rule out participation in alcohol, tobacco, defense or pornography. In addition, the managers look for companies with solid records on the environment, human rights and community investment. If a company passes, the managers then investigate if it meets their value criteria.

Among the characteristics the team looks for are low debt, plentiful free cash flow and a defensible competitive advantage. They especially like firms that have slipped temporarily, but not so much that their free cash flow is hurt. "We're big balance sheet guys," Strauss says.

In fact, Appleseed has focused so much on balance sheets that the stocks in the fund have higher return on equity, free cash flow yield and net margin than the S&P 500, while maintaining a lower debt-to-capital ratio.

GAINING ENTRÉE