A: That's right. Some of the alternative energy investments can be quite risky and speculative, but we have found a good way to play the solar energy theme through larger companies with the expertise and the ability to make significant investments.

The same refers to the weak dollar theme. Economically, we have seen soaring budget deficits and substantial spending by this administration. We felt that the dollar would be under significant pressure years ago, and we believed that was a long-term theme. Therefore, we implemented our strategy of international exposure to protect the shareholders against a weak dollar.

The greatest challenge with thematic investing is getting in at a positive turning point and getting out at a negative one. At PAX, we have a team approach, where I draw on the expertise of portfolio managers with different disciplines. While I have a top-down approach, I also rely on value managers with bottom-up approaches, high-yield managers that look at the fixed income markets, etc.

The crucial part is that we always look at the themes from different perspectives, and that adds value. Applying the ESG criteria has also been a good identifier of turning points and themes, such as water, for example. With all the focus on oil, people often forget that water is probably a more important concern, so the ESG research has definitely added value to our process.

Q:  What benchmarks do you use and what is your buy and sell discipline?

A: Our benchmark is the Lipper Balanced Funds Index, which is comprised of the 30 largest balanced funds in the U.S. We are one of its members, so that's the right index to be compared to. The portfolio includes about 103 equity positions and 200 bond positions. However, those are mainly government and agency bonds with different maturities, so it wouldn't be fair to count them as 200 different positions.

We have a very strict sell discipline. When we buy a company, we write a buy report with the reasons for investing. Once the stocks are included in the portfolio, we establish price targets. When they reach those price targets, we review them to decide whether to reduce or eliminate those positions.

As a risk-control measure, we wouldn't invest more than 5% of the fund in any single issue. When a position reaches 3% of the portfolio, that's a trigger to review the company. Even if it is still undervalued and has good growth prospects, we would typically trim the position. For example, America Movil has been in our portfolio for about eight years, but we have systematically trimmed it. Capital appreciation that resulted in an overweight, is a great reason to trim a stock.

We would also sell a company if it fails to meet our ESG criteria because of a merger or a change in the policy. In that case, we must eliminate it in six months.

Q:  What risks do you perceive and how do you control them?

A: The GARP approach is part of the risk control as we wouldn't invest in a company's growth at any price. The other major risk control is diversification, which is crucial for running a balanced fund. We use asset allocation as a way to mitigate risk, and we utilize our fixed income component as a buffer for volatility.

On the sector level, I don't agree with the managers who totally avoid sectors they don't like. I feel that we have to be represented in all sectors but with different weightings. We look for companies that can still thrive, even when the sector is out of favor.

A perfect example of that approach is our long-term holding GameStop, which sells video gaming software and hardware. The consumer has been hurt by higher food and energy prices, but he still buys video games. The company makes a lot of money from used games, which have even higher margins, and became one of big dealers in this market. So, we are down on consumer discretionary, but there are still pockets worth of exposure, especially in a potentially recessionary environment.

We run the portfolio thorough various shock scenarios, and we do the Value At Risk measurement, which keeps us aware of all the sector and industry risks we take, and we may trim positions based that analysis. Also, we don't invest in companies with less than three years of continuous operations, and we primarily invest in very liquid equities and in high quality, liquid bonds.

Q:  What are the components of the ESG criteria and how many companies meet those requirements?

A: We look at the company's corporate governance, its environmental record, its work force diversity, its health and safety track record, and its policy on remedying past problems. We have a database of about 700 to 800 stocks that currently meet our ESG criteria and this is a large enough universe. It is a bit more challenging to get the necessary data in the emerging markets, but we have found plenty of international companies that meet our criteria. We don't need to sacrifice performance because our universe is smaller; we can participate in most areas and benefit from the additional analysis.