The stars in the world of socially responsible investing are companies like Pax World, Parnassus and Ariel, which have leveraged the model to gain billions of dollars of assets under management.
American Values Investments, Inc., in Gray, Tenn., is tiny by comparison, managing a mere $25 million. Yet the advisory firm has succeeded, albeit on a smaller scale, by adding a twist to socially responsible investing: Rather than screening companies out, it focuses on screening them in.
There’s almost nobody in America today that targets the good guys and invests there,” says Carter LeCraw, who founded the business 15 years ago and is its chief executive.
To LeCraw, the good guys are “American Hero Companies” such as The J.M. Smucker Co., Lowes Cos., Inc., and J.B. Hunt Transport, Inc. The firm uses a 500-point scoring system to identify companies that reflect the values of integrity, humility, diligence and caring. Just 125 of the thousands of companies it has studied qualify for potential investment.
American Values Investments invests “primarily to help the companies who are in turn helping America,” according to LeCraw. Returns are its secondary aim. The order of those priorities might scare off some investors, but the company’s recent returns have been strong.
Its American Hero Index portfolio, which equally weights the 76 top-scoring American Hero Companies, returned 22.55% in 2010, beating its benchmark, the Wilshire 5000 Equal Weight Index, by nearly 10 points. Its American Hero Equity strategy, which uses 20 to 30 stocks, did about 13 points better than that same benchmark, returning 25.78% last year. The S&P 500 returned 15.1% last year.
LeCraw has enough faith in his firm’s research and asset management abilities that he allowed its retail advisory business to spin off in late 2009. “We were competing with other retail financial professionals,” he says. “We wanted to eliminate that competition so we could sell them our portfolios."
It’s easy to see the appeal of managing money for other advisory firms: It can be much more lucrative. “Instead of linear growth -- trying to pick up individual clients here are there, you’re looking at exponential growth,” says Zachary Gronich, CEO of RIA in a Box, a consultant to advisors. “RIAs that use me as a subadvisor give me a whole basket of clients.”
If it were easy, everyone would be doing it, of course. Industry experts say connections and credibility are key, and that a hefty marketing budget doesn’t hurt.
LeCraw’s firm, which has five employees, has grown modestly so far. Shortly after the spinoff, its assets stood at around $19 million, and they have since risen to $25 million, in part on the strength of the market recovery until the past month.
Most of the outside assets have come through the spun-off firm, Values First Advisors. But LeCraw hopes the end the year with $40 million of assets under management, in part by bringing additional advisor firms on as clients.
“(Values First Advisors’) business is growing a lot, so we’ve been feeding off that,” he says. “Now we’re trying to open other subadvisory relationships with other investment advisors.”
LeCraw acknowledges that not having a big marketing budget is a challenge, but says the firm is being creative to compensate. One project, for instance, invites people to nominate “current-day heroes with the same character, commitment and courage.” The plan is to choose 56 -- the same number as the signers of the Declaration of Independence -- by the end of the year.
American Values subadvises outside money mainly through Folio Institutional, a division of online brokerage FOLIOfn Investments, Inc. The platform allows outside advisors to access the portfolios run by American Values and others. It also markets its American Heroes portfolio through Covestor Investment Management, which lets individuals mirror the trades made by successful investors.
LeCraw incorporated the business in 1996 and adopted the name American Values Investments in 2002. After struggling at first, LeCraw’s venture got a significant boost in its early days from Tennessee resident John Gregory, the former CEO of King Pharmaceuticals, Inc.
Gregory “found out about us and asked if I would meet with him,” remembers LeCraw. After a short meeting, he took a 17% stake in the company, gave LeCraw $10 million to invest and promised to introduce him to friends. “He dumped a boatload of money on us, and we were able to ramp up and expand,” says LeCraw.
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