Most would agree it is important to lead one's life with integrity. It is not only important that you have integrity in your personal life, but also in how you earn your money, how you spend it and how you invest it.

However, what discourages many from holding themselves to a higher standard in their investments is the lack-luster performance of mutual funds that are designated as "socially responsible investing" (SRI). It is especially discouraging when one sees such headlines as "Sin stocks pay off for investors," which appeared in the International Herald Tribune on June 5, 2005. The so-called "Vice Fund" claims an average annual return of 18.8 percent since inception in September 2002.

At Birkelbach Management Corp. we believe investors who choose to put their money where their values are do not necessarily have to sacrifice performance, if a proper methodology is utilized.

We have found that maintaining a socially responsible portfolio that takes into account factors such as corporate sustainability and shareholder accountability can be a foundation to mitigate investment risk. We believe that corporate sustainability is a catalyst for enlightened and disciplined management and is a crucial factor in the success of a company and of its stock performance.

The majority of companies have product, services and methods of operation that generate positive opportunities for economic growth and enhance the human condition. Such companies avoid vulnerability to government intervention, legal entanglements and the wrath of public opinion and, if properly selected, can show good returns.

Our Five-Point Strategy/The Process

Our strategy for superior performance uses our own proprietary methodology, while considering financial as well as socially responsible and corporate sustainability issues. We believe one can "invest in your values," and by listening to your "heart and
your brain," one can substantially outperform the Standard & Poor's 500 Index. Our Five-Point Investment Strategy follows a screening process as described below.

1. Avoidance Screening
We start with the stocks of the S&P 500 and perform an avoidance screening by eliminating companies whose main products involve the manufacture of alcohol and tobacco, or are involved with gambling or weapons production. All of these groups in the past have outperformed the S&P 500. However, we believe "the times they are a changing."
The collapse of Enron's stock in late 2004, and the legal activities of government officials such as Elliott Spitzer, will in our opinion lead to further government intervention, legal complication and public outcry that could damage the financial stability of these companies.

Although the 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. It is our belief that legal bills will rise to higher levels in the future and that it will be more difficult to pass legal costs on to the public through product price increases. Second, we believe there will be substantial curtailment in the misuse of these products through educational enlightenment.

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 budget through taxation of gambling establishments and lotto activities, it is just a matter of time before the kind of warning labels that appear on cigarette packages will appear on slot machines. The labels could say, "For every $100 deposited, the average gambler only gets $60 back."
Weapons manufacturing is a more difficult area to address. After all, none of us want our country to be defenseless. However, the effects of war are devastating to both sides. Aside from the controversial side of weapons production, there is the issue of the way contracts are distributed and priced. Over the years, there have been many news stories about the corruption of the way defense contracts are awarded and the controversy over such items as the "one thousand dollar wrench."

2. Quantitative Methodology/Buy and Sell Candidates
Next, we have our own proprietary methodology. The first methodology determines a list of stocks that exhibit returns highly correlated with the S&P 500 and should help the portfolio attain excellent returns during "up" markets. The second methodology determines a list of stocks which exhibit low correlation returns with respect to the S&P 500 and should outperform the market during "down" markets.
Our proprietary software, developed in-house, allows us to instantly either update our portfolio or quantify past performance with the press of a button. This methodology, in addition to giving us "buy candidates," allows us to monitor our portfolio for "sell candidates."

3. Technical Methodology/Buy and Sell Strategies
We use technical methodology to determine what phase of a "bell curve" cycle a stock is in, and what short-term, intermediate and long-term trend the stock exhibits. A summary of these methods is available on our brokerage services Website http://www.my-broker.com/
under Stock Market Forecasting through Charting. We also have our own proprietary overbought/oversold indicator, which can be viewed at our Website under The Strategy Index category.
Currently, we 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. We believe "the trend is your friend" for both buying and for selling strategies.

4. Qualitative Stock Analysis/Buy and Sell Candidates
Next, we use financial criteria, which continue to be important in determining buy and sell candidates. One can still be blind sided by unforeseen corporate news. However, the likelihood of big changes lessens, if one considers "value." Companies with consistent earnings and dividend announcement are preferred, but reasonable multiples, or stock price/earnings ratios, for growth possibilities should also be considered.
This is also the time to look at companies on a corporate sustainability basis. This can be a difficult process, as companies such as Wal-Mart may be dropped because of their controversial labor practices.

5. Macro Economic Analysis/Buy and Sell Strategies
Lastly, we determine through economic criteria and technical indicators the kind of investment strategy we should employ. During the 1990s Bull Market, almost everything went up with only minor setbacks. Likewise, in the early 2000s Bear Market, almost everything went down, with only minor up ticks.
We believe the current market is unlike either the old Bull or Bear Market. Selection and "buy and sell" strategies have become more important in achieving double-digit returns. We believe the old Bear Market ended in October 2002. Our technical methods "let the market tell us what to do," instead of "us telling the market what to do."
Presently, the market is at a critical stage and is at a trend line which stretches across time from January 2002 to March 2005, forming a Giant Head and Shoulders Bottoming Formation (See our Website http://www.my-broker.com/
under Investment Strategy Letters #539, #540 and #541). This trend line, which we call a "neckline," has a stranglehold on the market. However, if this stranglehold is broken, we believe the upside potential of the markets are above 14,300 for the Dow Jones Industrial Average (up 32 percent from its early July 2005 level), above 1512 for the S&P 500 (up 31 percent) and above 2191 for the NASDAQ Composite Index (up 45 percent).

There is plenty to worry about, but remember, "bull markets climb a wall of worry" and there is plenty of cash on the sidelines that is invested at unattractive rates.

Model Portfolio Performance

We have two strategies for our model portfolios. Our model Growth Portfolio strategy incorporates the "Five-Point Strategy" listed above with a fully invested position and only quarterly changes. Our model Aggressive Growth Portfolio incorporates the same "Five-Point Strategy" with quarterly changes and in addition incorporates a strategy that allows the model portfolio to go up to 30 percent cash.

Cumulative Model Growth Portfolio Returns (June 30, 2005*) vs. S&P 500

1 Year - Growth Portfolio up 15.32% vs. S&P 500 up 6.22%
3 Year - Growth Portfolio up 48.45% vs. S&P 500 up 21.39%
- (Annualized 14.1% vs. +6.7%)
5 Year - Growth Portfolio up 37.50% vs. S&P 500 down 16.10%
- (Annualized +6.6% vs. -3.5%)

Cumulative Model Aggressive Growth Portfolio (June 30, 2005*) vs. S&P 500

1 Year - Aggressive Growth Portfolio up 34.47% vs. S&P 500 up 6.22%
3 Year - Aggressive Growth Portfolio up 68.48% vs. S&P 500 up 21.39%
- (Annualized 18.9% vs. +6.7%)
5 Year - Aggressive Growth Portfolio up 44.44% vs. S&P 500 down 16.10%
- (Annualized +7.6% vs. -3.5%)

We Believe

We believe any strategy that incorporates social responsibility and corporate sustainability makes the world a better place. Most companies reap rewards for investors by enhancing the human condition and inspiring the values of initiative, equal opportunity and economic growth. For the other companies, government regulation is only part of the response to the crises of scandalous behavior of top corporate management
All of us bear the responsibility to influence the corporate culture by holding ourselves to a higher standard and putting our investment dollars in corporations that reflect our values. The good news is that today, more than ever before, investors looking for excellent financial performance can seek to obtain it while still addressing their socially responsible values.

*Be mindful that the performance of these two portfolios is hypothetical and does not represent an actual client account (as individual client objectives and instructions are customized). Past performance is no guarantee or indication of future results.

Article by Carl M. Birkelbach is founder, chairman and chief executive officer of Birkelbach Management Corp. (BMC), http://www.investmentvalues.biz/
a Chicago-based money manager since 1974, and a registered investment advisor, and of Birkelbach Investment Securities, Inc., http://www.my-broker.com/
a full-service NASD-registered broker dealer with safekeeping and execution services provided through its correspondent relationship with Pershing LLC, the world's leader in brokerage services. Featured among BMC's full range of investment alternatives and strategies is an innovative strategy for managing separate investment accounts seeking to obtain performance returns superior to those of the Standard & Poor's 500 Index while giving investors an opportunity to consider corporate sustainability issues.