By Ellie Winninghoff

It should be no surprise that Robert Brooke Zevin, the grandfather of socially responsible investing, does not play by Wall Street's rules.

After all, in l967 he co-authored The Call to Resist Illegitimate Authority, a declaration of civil disobedience against the Vietnam War. Zevin has gone to jail for participating in a protest against Dow Chemical. And the Harvard PhD in economics played a key role in the South Africa divestment campaign by writing major studies to justify it and by serving as the expert witness for the city of Baltimore in its successful legal defense of divestment in l987. Meanwhile, he found time to start the first SRI unit at a U.S. bank.

What may be a surprise, however, is that Zevin Asset Management's (ZAM) low-risk strategy of avoiding loss--something that conventional wisdom suggests should result in low returns--has actually resulted in beating the firm's equity benchmark, the Dow Jones Global Index. Since the firm's inception 14 years ago, its Global Appreciation composite has beaten the benchmark by more than 90%.

According to ZAM, its success is based on a strategy that participates in 80% of the increases in positive markets and avoids more than half of the losses in bad markets.

Since ZAM's inception, the Dow Jones Global Index jumped at an annual rate of 34.4% per year during the 34 quarters when the markets rose versus 27.2% for the firm's non-taxable accounts. But during the 21 quarters when the markets declined, the Zevin composite's average annual drop of 14.9% was less than half as much as the benchmark, which plummeted at an average rate of 31.3%.

As a result, $100,000 invested with ZAM at the firm's inception would now be worth $330,000 versus $170,000 for the benchmark.

"The important thing always is not to lose money [when the market is] on the way down," he says.

SRI Neither Helps Nor Hinders
Zevin dabbled in investments as an economics professor at Cal-Berkeley, and later at  Columbia University. He originally started investing professionally because he thought it would provide him with more time than teaching and research could to pursue political interests and be an activist. And he only started doing socially responsible investing when his clients, who he often met through his political causes, insisted upon it.

"I will do whatever you want, especially since you are trying to align what you're doing with the causes I'm trying to raise money for," he recalls telling them. "But it's probably going to cost you money to do that."

Five years later, he realized they were not losing money by doing that; in fact, performance was actually better. Even so, he doesn't believe SRI helps or hinders performance.

"I think you can [perform however] you would have done with whatever investment strategy you follow whether or not you apply social screens," he said on a radio broadcast last year. In general, he believes that companies that care about issues such as the environment, labor standards and the like are better companies and, therefore, good long-term bets. But that doesn't mean Wall Street will always reward them for being good citizens.

In l975, Zevin started and built what later became Walden Asset Management, the first SRI unit at a bank (U.S. Trust of Boston). While at the bank, he played a key role in designing the Calvert Social Investment Fund, the first socially screened mutual fund in the country.

But since the 1960s, he has also pioneered the use of Modern Portfolio Theory as a way to reduce risk.

"From the beginning of my career, I was calculating Markowicz's efficient frontiers in portfolios," he says. "But unlike Markowicz, I wasn't doing it with historical data. I was doing it with scenario forecasts."

Strategic Foresight
According to Zevin, most professional investors under perform because they take too much risk in pursuit of short-term gains. They either try to bet on the most likely outcome with the most possible leverage, or they invest in fashionable sectors of the economy that are by definition expensive--and therefore risky.

In contrast, ZAM seeks to avoid loss and find reliable long-term gains. Rather than preparing for what is most likely to happen, it prepares for whatever may happen. In this light, it develops political-economic scenarios, or stories, that describe what may occur during the following year.

It models these stories into a series of equations and correlations among assets and sectors, and plugs in relevant macro-economic, financial, historical and forecast data. Using a top-down approach (general allocation between stocks, bonds and cash; then sector and region; and finally individual securities), the firm then chooses investments that work based on each of the scenarios it lays out. A portion of the portfolio is designed to do well in each scenario.

"Most of what happens to a particular investment is determined by these larger circumstances," Zevin says. "We expect to lag the market in the good outcomes. We think it's the same as paying an insurance premium on the house. If the house doesn't burn down, you lose the premium and that's fine."

ZAM generally works with five or six scenarios--three core stories that are most likely to happen, and two or three "outliers" that are less likely to happen but are still possible.

One possibility is a major military conflict. But ZAM's more likely core stories right now include the unraveling of the euro zone, sovereign defaults in Europe without an unraveling of the euro zone, and a double-dip recession. By Zevin's reckoning, the potential unraveling of the euro zone would have the most severe impact.

The euro zone will only unravel, he says, after a few sovereign defaults have taken place. The defaulting countries will be tempted to leave the euro zone in order to avoid the tight fiscal policies imposed on them, and after they do so they'll begin to recover as did countries that left the gold standard during the l930s. But a wave of defaults would have troubling effects for the global economy.

Based on such a scenario, ZAM believes the best strategy is to be long U.S. government bonds and those of sound governments such as the U.K., Germany and Australia. And the firm is invested in gold, which marks the first time Zevin has gone that route during his 40-plus years in the investment business.

"These scenarios we are forecasting are really incredible unusual events, and we've got fairly high probabilities of them," Zevin explains. He adds that like with 2008-2009, we're confronting extremely unusual circumstances. But this time it's mostly revolving around Euro-centric problems, as well as "the world's sudden love affair with fiscal rectitude, when exactly the opposite is what's needed."

Boils Down To SRI
In the case of a double-dip recession, ZAM is betting on high-yield areas such as master limited partnerships (MLPs), telephone companies and utilities and, to a lesser degree, defensive consumer staples. It has core positions in Enterprise Production Partners and Kinder Morgan, two MLPs. It likes AT&T, Rogers Communications and Vodafone. And it owns Colgate, a long-time favorite that's the epitome of the kind of company Zevin likes to own.

"Industry dominant companies are more likely to do what a sector will do," he says.

Zevin notes that high-quality companies with high return on equity and well-established brands that produce consistent, reliable growth often tend to be socially responsible.

"Our natural preference is [for] large well-managed companies which are environmentally sensitive, which have good labor relations, which are law-abiding and do have good community relations," he says. "They are more likely to be much more safe and reliable companies over the long run and less volatile in the short run."

A former investment banker and veteran financial reporter, Ellie Winninghoff is a writer and consultant. Her work about responsible and impact investing can be found at: www.DoGoodCapitalist.com. She can be contacted at: ellie.winninghoff (at) gmail.com