BIRKELBACH MANAGEMENT CORP.

"INVEST IN YOUR VALUES"

"LISTEN TO YOUR HEART AND YOUR BRAIN "

WHY SOCIALLY RESPONSIBLE INVESTING CAN BE
A GOOD CHOICE FOR RETIREMENT PORTFOLIOS

Media Contacts:
Carl M. Birkelbach
(312) 853-2820 x 105 or (800) 458-2358 x 105
CarlBIS@aol.com

E. William Hammons
(847) 577-1932
ewhammons@compuserve.com
(To avoid identification as spam, please write “CB:” at start of subject line)

Commentary from Carl M. Birkelbach,
Chairman and Chief Executive Officer,
Birkelbach Management Corp., Chicago

Today’s investors are trying to build retirement nest eggs that may have to last 30 years or more after they quit working. Virtually every financial advisor tells them that they have to buy equities of publicly held companies to generate the kind of returns that will beat inflation over the long haul. But, as the still-fresh wounds of the 2000-2002 Bear Market remind investors, reducing risk is equally important.
Birkelbach Management Corp. has found that one of the best ways to ways to achieve long-range growth and at the same mitigate investment risk is to maintain a socially responsible portfolio that takes into account corporate sustainability and shareholder accountability.
The Dow Jones Sustainability Indexes (DJSI) track the performance of companies worldwide that value social and environmental issues as well as the financial bottom line. DJSI defines corporate sustainability as “a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments.” The DJSI United States index consistently outperformed the Standard & Poor’s 500 Stock Index from DJSI’s 1999 inception through December 2005.
More and more investors are catching on, according to the Social Investment Forum 2005 Report on Socially Responsible Investing [SRI] Trends in the United States. U.S. SRI assets rose more than 258 percent from $639 billion in 1995 to $2.29 trillion in 2005, or nearly one out of every ten dollars under professional management. The entire universe of assets under professional management in the U.S. increased less than 249 percent from $7 trillion to $24.4 trillion over the same period.
“Incorporating corporate social responsibility and sustainability into the investment management process provides the added value of social and environmental risk analysis, additional layers of due diligence, and tools for uncovering the ‘materiality’ of often intangible factors that nevertheless shape an enterprise’s long-term value and growth,” the Report says.
“Recent research has found statistically significant correlations between corporate financial performance and social and environmental performance,” it adds.

Researchers Debunk Anti-SRI Myths

Some highlights of this research (sources footnoted below):

  • Inclusion of an SRI strategy in defined contribution retirement plans is now generally accepted.1 TIAA-CREF, one of the nation's largest pension plans, offers an SRI option to its retirement annuity participants, primarily educators. Approximately $6.2 billion is invested in the "Social Choice Account," a portfolio applying social and environmental screens.
    Among public pension funds already including such options are New York City, Chicago, San Francisco, King County, Washington, the states of Alaska, California, Colorado, Illinois, Indiana, Tennessee, Vermont, Washington, Wisconsin, and the Commonwealth of Massachusetts.2
    (The SRI Trends Report adds that pension funds are not only offering SRI accounts, they are working to reduce retirement risk by calling for improved shareholder proxy access and fuller disclosure of the risks associated with global warming and climate change or with operations in repressive regimes such as Sudan.)
    • Investors should suspect any claim that SRI portfolios will "necessarily" underperform their non-SRI counterparts. Two arguments frequently raised against SRI are (1) that SRI portfolios will necessarily underperform non-SRI ones, because of limitations on their stock selection universe and (2) that it is impossible to construct an adequately diversified SRI portfolio.
    In fact, companies that hold themselves to the highest environmental standards have the highest return in market value. And while SRI investment managers may be precluded from holding certain asset classes, piecing together the ones that are well represented in the SRI universe can still create portfolios without asset-class gaps that should overly concern investors.3
    • Adoption of socially responsible codes of conduct can help reduce overall business risk. Combining socially responsible stocks into portfolios can reduce their diversifiable risk component, that is, the risk of price change due to the unique circumstances of a specific security, as opposed to the overall market.4
    • Comparison of six sustainable indexes in Europe, where SRI has been accepted longer than in the U. S., shows that screening for social responsibility doesn't have to come at the expense of poorer risk-return characteristics.5
    • Analysis of 52 studies yielding a total sample size of 33,878 observations showed that corporate virtue in the form of social and environmental responsibility is likely to pay off by accounting-based measures of corporate financial performance.6
    • Good corporate social performance may be both a cause and an effect of good financial performance. The highest correlation is found between social performance and financial performance measured during the same time period. This suggests that causality occurs simultaneously and does not exhibit long lead-lag cycles.7
    • Corporate social performance benefits the organization financially because a firm's reputation is important with investors, analysts, researchers, business teachers, consumers, current and prospective employees, and other stakeholders.8

    • Surest Way for SRI to Outperform Market

    BMC has found that the surest way for socially responsible stocks to outperform the market is to flow with inevitable market cycles instead of clinging to the "buy and forget" strategy that lulled many investors into holding stocks that plunged after the 1990's bubble burst.
    BMC’s Five-Point Strategy for Superior Performance uses the firm’s proprietary methodologies while considering financial as well as socially responsible and corporate sustainability issues:
    • Avoidance screening of the S&P 500 companies eliminates those whose main products involve the manufacture of alcohol and tobacco, or are involved with gambling or weapons production.
    All of the groups BMC avoids have in the past outperformed the S&P 500. However, the collapse of Enron’s stock in 2001 and the legal activities of government officials such as Elliott Spitzer may well spur further government interventions, legal complications and a public outcry that could damage the financial stability of these companies.
    Although excessive use of tobacco and alcohol causes dramatic health problems to those with addictive tendencies, these companies continue their aggressive advertising campaigns and deal with legal costs through price increases. These spiraling costs should become more difficult to pass on to the public at the same time educational enlightenment curtails misuse of these products.
    Gambling is equally devastating to addictive personalities, comprising a segment of the population that can least afford to lose. Although many state governments balance their budgets through taxation of gambling establishments and lotto activities, eventually the kind of warning labels that appear on cigarette packages will show up on slot machines. The labels could say, “For every $100 deposited, the average gambler only gets $60 back.”
    Weapons manufacturing is more difficult to address. None of us want our country to be defenseless. However, war’s effects devastate both sides, and news stories about corrupt awarding of defense contracts, as well as outrageous pricing (witness the “one thousand dollar wrench”) raise distracting controversies.
    • Next, BMC’s proprietary quantitative methodologies identify buy and sell candidates. Two different methodologies determine two lists of stocks. One list shows returns highly correlated with the S&P 500 and should help the portfolio attain excellent returns during “up” markets. Stocks on the other list exhibit low correlation returns with respect to the S&P 500 and should outperform the market during “down” markets.
    • BMC’s technical methodology determines buy and sell strategies by showing what phase of a “bell curve” cycle a stock is in. It also shows what short-term, intermediate and long-term trend the stock exhibits.9 BMC’s proprietary overbought/oversold indicator comes into play as well.10
    Currently, these indicators favor issues that have ended their old Bear Market trend, and have left their Accumulation Phase, in which they came down from their highs and, after making new lows, resisted going lower. Now they have entered the upward Progression Phase of a new Bull Market.
    • Qualitative stock analysis determines buy and sell candidates. BMC uses financial criteria to gauge stock value, preferring companies with consistent earnings and dividend announcements but also considering reasonable stock price/earnings ratios for their growth possibilities. This is also the time to look at companies on a corporate sustainability basis.
    • Finally, macro economic analysis determines buy and sell strategies. Economic criteria and technical indicators reveal the kind of investment strategy BMC should employ. BMC’s view is that individual stock selection and buy and sell strategies have become critical in achieving double-digit returns.
    In technical terms, the “neckline” of a Giant Head and Shoulder Bottoming Formation11 has had a stranglehold on the market. However, if this stranglehold is broken, the upside potential of the markets is above 14,300 for the Dow Jones Industrial Index, above 1572 for the S&P 500 and above 2892 for the NASDAQ Composite Index.

    BMC’s two model portfolios -- Growth Portfolio and Aggressive Growth Portfolio -- have been built following these five steps. Holdings of each may be changed quarterly. The portfolio strategies differ in that the Growth Portfolio takes a fully invested position while the Aggressive Growth Portfolio may go up to 30 percent cash.
    Cumulative returns for both portfolios have consistently outperformed the S&P 500 in tests since the first quarter of 2004 and in back tests to January 1998. (Whereas some of the back-tested results are hypothetical, the more recent returns are actual). For further information read the Disclosure Agreement and Form Adv Part II on the BMC Website, www.InvestmentValues.biz.

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    Carl M. Birkelbach is founder, chairman and chief executive officer of Birkelbach Management Corp., a Chicago-based money manager since 1974 and a registered investment advisor, and Birkelbach Investment Securities, Inc. (BIS). BIS is a securities broker-dealer since 1978, registered with the U.S. Securities and Exchange Commission and a member of NASD, the leading private-sector provider of financial regulatory services. BIS provides safekeeping and execution services through its relationship with Pershing LLC, the world's leader in correspondent brokerage services.
    He became known to the investment community as the “Lone Bull” by being one of the few stock market commentators who, in the sideways-moving market of the 1970’s and early 1980’s, foresaw the bull market of the rest of the 1980’s and 1990’s.
    Mr. Birkelbach has applied his nearly 40 years of investment experience as author of "Stock Market Forecasting Through Charting” and editor of more than 500 BIS Investment Strategy Letters. He also has appeared frequently as a market commentator on television and radio news programs and as a quoted source in business/financial journals and periodicals.
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    REFERENCES

    1. Foundation for Fiduciary Studies, Prudent Investment Practices: A Handbook for Investment Fiduciaries, Pittsburgh, PA: Foundation for Fiduciary Studies and University of Pittsburgh Katz School of Business (2003).

    2. Keefe, Joseph F., and Steven D.Lydenberg, "Corporate Governance, Social Responsibility, and Obligations of Ownership: Background Paper for State Treasurers and Legislators," New York: Domini Social Investments, LLC (September 2003).

    3. Gay, George R., and Johann A. Klaassen, “Retirement Investment, Fiduciary Obligations, and Socially Responsible Investing,” Journal of Deferred Compensation. New York: Summer 2005

    4. Boutin-Dufresne, Francois, and Patrick Savaria, “Corporate Social Responsibility and Financial Risk,” Journal of Investing. New York: Spring 2004.

    5. Vermeir, Wim, Eveline Van de Velde and Filip Corten, “Sustainable and Responsible Performance,” Journal of Investing. New York: Fall 2005

    6. Orlitzky, Marc, Frank L Schmidt and Sara L Rynes, “Corporate social and financial performance: A meta-analysis,” Organization Studies. Berlin: 2003, Vol. 24.

    7. Orlitzky, Marc, “Payoffs to Social and Environmental Performance,” Journal of Investing. New York: Fall 2005.

    8. Turban, Daniel B., and Daniel W. Greening, “Corporate Social Performance and Organizational Attractiveness to Prospective Employees,” Academy of Management Journal, 40 (1997).

    9. A summary of these methods is available on the BMC brokerage services Website, www.my-broker.com, under Stock Market Forecasting through Charting.

    10. Can be viewed at www.my-broker.com under “The Strategy Index” category.

    11. See www.my-broker.com under Investment Strategy Letters: Mid May 2005 (#541), Early April 2005 (#540) and Early March 2005 (#539).

    February 2006

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