(FORTUNE Magazine) – Who says you can't have it all? Just ask investors in the Pax World Fund, a $140 million ''socially responsible'' mutual fund in Portsmouth, New Hampshire. Over the past several years the Pax World Fund has given shareholders a bumper crop of guilt-free capital gains. Portfolio manager Anthony Brown invests solely in companies he believes will improve mankind's lot. By his lights, that excludes polluters, purveyors of alcohol, tobacco, or gambling, companies doing business in South Africa, and weapons manufacturers. The broad list of exclusions hasn't crimped performance. Last year Pax was up 10.5%, vs. a 3.1% loss for Standard & Poor's 500-stock index, making it the nation's top-performing balanced fund, according to Lipper Analytical Services. In an interview with Fortune's Andrew Serwer, Brown tells where he hopes to clean up next.

Don't your self-imposed restrictions limit your investing opportunities? We think our record speaks for itself. We do well because we are automatically funneled into companies that make a life-supportive product or service, like food stocks or health care stocks. There is a solid demand for such products in good times and bad. These are noncyclical, high-quality investments. I call them our engines. Shareholders of Pax World are in pursuit of a profit just like everybody else, but they want to invest in companies that have a product or service that adds to the quality of life, not detracts from it.

As a balanced fund, you're supposed to own some bonds. Which do you like? We own federal agency bonds like Federal National Mortgage Association and Federal Home Loan Bank. These bonds are very high quality and very liquid. We like to keep the maturities short, say five years or less, to cut down on interest rate risk. We also own bonds of the International Bank for Reconstruction & Development, otherwise known as the World Bank, rated triple A. The monies from these bonds are used exclusively to finance projects in developing countries, a constructive purpose, and the yields are 0.45 to 0.5 percentage points over Treasuries. Right now our fund is 65% in bonds and 35% in stocks.

Why so bearish? We really aren't bearish. We just think that stocks have gotten a little ahead of themselves. The Dow has gone up 600 points since last October without so much as a cough. The swamis say the market is going to 3200, and while we think it might, there will have to be some sort of correction along the way of about 10%. So we have hunkered down a bit. But over the long haul, we remain bullish.

Which stocks whet your appetite now? I like H.J. Heinz. It has averaged steady earnings growth of about 14% per year over the past ten years with no surprises. It has strong brands like its ketchup, StarKist tuna, and Ore-Ida frozen potatoes. It also owns Weight Watchers International. If you think about it, this company gets paid twice: Once when you put on the pounds and then again when you take them off. Heinz sells for 19 times 1990 earnings and 16 times my estimate for this year.

Isn't that a little pricey? It's not cheap, but it's less expensive than other food stocks. We have a rule that we won't buy any stock with a P/E above 20 unless it has a proprietary product. We like stocks that pay dividends because that enhances the price stability of the stock. We also like projected earnings gains of 10% or better. Heinz fits the bill.

Where else can you find quality companies at attractive prices? We own Hechinger Co., a do-it-yourself home and garden supply chain in the mid-Atlantic region. It was in a steady growth pattern until 1989; then management did a restructuring. They closed some obsolete locations and remodeled others. The company has also expanded into warehouse stores. The expense of these moves dragged earnings down from $1.30 to 95 cents per share last year, but I expect a rebound to $1.05 this year and $1.40 by 1993. Wall Street, however, is still wary. The stock has come up a bit now, but it still sells for under ten times 1990 earnings.

Are there any broad sectors where you're finding value? We own several natural gas stocks. They have been punished because of the warm winter, and most of the companies' earnings have dropped from the year before, but this is just temporary. I feel there are a lot of bargains out there at these prices, namely Bay State Gas, Brooklyn Union Gas, and Peoples Energy. Those are our three largest gas holdings. These companies are in areas where gas heating is not so prevalent, so they will benefit from the trend among oil users to switch to gas. The dividend yields are great right now, and eventually you will get capital appreciation too. These three yield 6.7% to 7.6%. We think interest rates will fall some more and that will benefit utility stocks, so we also own some non-nuclear electrics such as Dayton Power & Light, Sierra Pacific Resources, and Black Hills.

You said you like health care stocks? We sold most of our drug stocks because they have really run through the roof. We still like Baxter International. It's definitely getting up there, selling for 20 times earnings, but of course it does have proprietary products. It restructured last year and earnings were hurt, but now it's coming back strong. It's the largest hospital supply company in the world, and it makes most of its products itself, which allows it to keep costs in line.