Financials, of course, account for more than half the preferred market. And while preferred stocks are generally less volatile than equities, this was not the case in either 2008 or 2011, when Herman says preferred stocks in the financial sector behaved like equity.

As a result, the HIP Preferred portfolio consists of the available universe of preferred stocks listed in the U.S. sans most financials. The firm applies the same methodology it uses for the HIP 100, adjusted for risk-rated return. The portfolio, which consists of 60 different securities, is 20% global and the rest US-based companies. Top holdings are First SpA, Bristol-Myers Squibb and DuPont, which account for 5.27%, 4.04% and 3.27% of the portfolio, respectively.

The HIP Sustainable Real Estate portfolio, on the other hand, focuses more on environmental sustainability. According to Herman, only 50 of 200 REITs provide sustainability data. To assess them, the firm also uses LEED certification and Energy Star data that shows how eco-efficient different buildings are.  And it applies a heavier weight to those REITs that are managing forests and other natural resources more sustainably and which are transparent.  Top holdings include Weyerhauser, Prologis, UDR,and Rayonier.

Thanks to factors like reducing energy costs, water consumption and waste, Herman says it's "pretty crystal clear" that sustainability has a high return on investment in commercial real estate. "I've talked to no less than three REITs or real estate management companies that said they could not share information because they consider it a competitive advantage."

Maslow's Hierarchy of Needs
Herman insists that investors can actually profit by doing good. In his book, The HIP Investor: Make Bigger Profits by Building a Better World (Wiley, 2010), he points out that companies are often so fixated on their financial and operating ratios that they become "disconnected" from the "true source" of a company's growth, which is finding solutions to customer needs.  

But if this sounds like Business 101, hang on. According to Herman, a Wharton grad who cut his teeth at McKinsey & Co. and later worked with eBay founder Pierre Omidyar's Network, many benefits of solving those needs can be quantified. Consider, for example, longer life from a medical device, more income from a savings account or lower fuel use (and carbon emissions) from a hybrid car.

"Companies that quantify these values and understand how they drive value are well-positioned for bigger profits and help to create a better world," he says.

HIP's methodology is inspired by Abraham Maslow's hierarchy of needs (physiological, safety, social and belonging, ego/self esteem and self-actualization). Herman has translated these needs into five categories--health, wealth, earth, equality and trust--and chosen indicators that represent each. Equality, for example, is represented by quantifiable metrics measuring gender balance and ethnic diversity. For trust, he focuses on a company's transparency that renders it more open and credible.

Some HIP indicators, such as employee health care, contributions to 401Ks by employers and customer service, are quite different than the environmental, social and governance (ESG) factors that socially responsible investors generally consider. But while others are similar, such as carbon emissions per unit of revenue, for example, Herman says there is a profound difference.

"Do-gooder investment approaches of the past tended to focus on policies and practices which are not methodically followed [by companies] and do not create a consistent output," he says. "The HIP approach prioritizes outcomes and results over inputs and process."

In fact, Herman does not even call his non-financial indicators "environmental, social and governance" (or ESG) factors. He calls them "Human Impact" indicators because they represent needs, what people need to be fulfilled and what society needs to thrive. For investors, he says, the key is to understand how these indicators drive profitability and shareholder value. He calls this analysis the "new fundamentals."