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Archive for the ‘fixed income’ Category

In the last few months, a number of major stockbroking houses in the United States, including JP Morgan and Citi, have quietly cut their ethical investment research teams.

Job losses at these beleaguered financial services giants are hardly surprising, but the decision to completely slash these teams rather than just reducing their size could be taken as a sign of Wall Street’s attitude towards ethical investing – wealthy clients might like the idea of portraying themselves as investors with a conscious when markets are booming, but in tough times, making money is all that counts.

There is little doubt that wealthy investors have flocked to ethical and socially responsible investing in recent years. Europe provides a good example of this trend. Research by the European Social Investment Forum (EuroSIF) found that high net worth individuals in Europe have around 8% of their portfolios in ethical assets, or around €540 billion.

This looks set to grow sharply. EuroSIF’s survey of wealthy investors and wealth managers taken by EuroSIF in the middle of last year found huge interest in ethical investing. In spite of the tumultuous conditions on financial markets, 87% of respondents said interest for sustainable investments would grow in the next three years and 75% of surveyed family offices said sustainable investment will increase in the generational transfer of their family’s wealth.

EuroSIF estimates that by 2012, wealthy investors will have 12% of their portfolios in ethical investments, or more that €1 trillion, with the bulk of the funds coming from newly wealthy entrepreneurs and existing investors.

It’s a bold prediction, particularly given the shocking performance of equity markets in Europe and around the world, which is likely to have lopped between 30% and 50% off the fortunes of most wealthy entrepreneurs.

Many in the ethical investment industry are worried about how their relatively immature market will cope with a downturn of this magnitude. Will spooked investors simply retreat to familiar investments and dump their commitment to socially responsible investing?

So far, it appears wealthy investors are sticking to their ideals.

In October, at the height of the credit crisis, outflows from European managed funds hit €154 billion, or 0.11% of total funds. By contrast, outflows from green funds were €834.7 million or 0.05% of total funds, and socially responsible investment (SRI) funds lost €496.3 million, or just 0.01% of their total.

Exactly how long wealthy investors remain committed to ethical investments probably depends on whether these funds can hold their own against non-constrained investment options.

While measuring the performance of SRI investments is a fairly contentious issue (mainly because of the huge variety of SRI funds out there) research from fund research firm Lipper shows that between 2003 and the peak of the US equity market in 2007, the median SRI fund underperformed the median regular fund by around 2%.

Further to this, there is some research to suggest that ethical investments funds may be at a disadvantage during a downturn because they exclude so-called sin industries such as alcohol, tobacco and casinos, which tend to do rather well during recessions. Indeed, analysis released last year by Merrill Lynch shows that, during the six recessions since 1970, alcohol, tobacco and casino stocks have, on average, returned 11%, compared with a 1.5% loss for the S&P500.

However, this recession appears to be a little different, and cigarettes, whisky and punting just aren’t holding up like they used to – in Australia, gaming and alcohol stocks have been particularly savaged in recent months.

Ethical investments, on the other hand, appear to be holding their own. The editor of British SRI site Responsible Investor, Hugh Wheelan, says SRI funds have actually outperformed their mainstream counterparts, returning -40.7% compared with -41.8%. They are not exactly pretty results, but wealthy ethical investors can take heart that they won’t lose out too badly if they follow their convictions with their portfolio.

The debate about whether investing ethically can deliver better returns over the long term is unlikely to be solved any time soon – a quick internet research reveals any number of academic papers and pieces of broker research supporting both arguments.

Anyway, the rise in ethical investing among the wealthy appears to be driven by more than raw figures. A generational change appears to be taking place in the high net worth individual community, and this younger breed want to be seen to do the right thing.

As one wealthy respondent told the EuroSIF survey: “Successful entrepreneurs of today are not the industrialists of yesterday.”

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Listed below are standout SRI funds that I feel are well positioned to gain from the current economic environment.  These mutual funds and ETFs are grouped into different categories that reflect their holdings, strategy, and geographic region.  I also include categories that are unique to responsible investing such as environmental activism, humanitarianism, community development, and alternative energy.  With over $2.71 trillion is assets subject to social criteria and over 260 socially monitored funds, it can be difficult to navigate all the options out there. 

I’ve picked the following funds based on a number of fundamental criteria such as management track record, MPT statistics, and industry outlook.  However, the “niche” nature of each SRI sub-categories must be taken with a grain of salt due to the lack of competition.  The youthful nature of many funds in this sector also hiders forecasting. 

An important litmus test for any “alternative fund” requires determining if management has jumped on the “green bandwagon” for short-run gain.  Unfortunately, this last quarter has seen a number of self proclaimed SRI funds mislead investors.  To ensure these imitation funds don’t show up on my list, I’ve dug into each fund’s holdings to confirm consistency with the fund strategy.  Ultimately, I’m looking for funds that demonstrate a long-run commitment to well articulated objectives that are consistent with socially responsible investing.        

These “top picks” are not a static snapshot of the current SRI industry.  Rather, it is an evolving list that I hope to refine over time.  I welcome suggestions and recommendations.

Alternative Energy/ Resource

  • PowerShares Wilderhill Clean Energy Portfolio Fund (PBW)
  • Van Eck Global Alternative Energy (GEX)
  • PowerShares WilderHill Progressive Energy Portfolio (PUW)

Global/International

  • Calvert International Opportunities Fund (CIOAX)

Fixed income (Bonds)

  • Calvert Social Investment Bond A (CSIBX)
  • AHA Full Maturity Fixed Income Fund – Institutional Class (AHFMX)
  • AHA Limited Maturity Fixed Income Fund – Institutional Class (AHLFX)

Equity Large Cap.

  • Calvert Large Cap Growth I (CLCIX)
  • Pax World Growth (PXWGX)
  • MMA Praxis Growth Index Fund A (MGNDX)

Balanced Funds

  • Walden Social Balanced Fund (WSBFX)
  • Calvert Social Investment Equity Fund (CSIEX )
  • Pax World Balanced (PAXWX)

Environmental

  • Winslow Green Growth (WGGFX)
  • Portfolio 21 (PORTX)

Technology

  • Clean Edge U.S. Liquid Series Index Fund (QCLN)
  • PowerShares Cleantech Portfolio (PZD)

Religious Funds

  • Guide Stone Int’l Equity GS4 (GIEZX)
  • Amana Trust Growth (AMAGX)
  • Amana Trust Income (AMANX)
  • New Covenant Funds (NCGFX)
  • Ave Maria Mutual Funds (AVEGX)
  • LKCM Aquinas Fixed Income (AQFIX)
  • LKCM Aquinas Value (AQEIX)

Copyright © 2008 David van der Roest

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Following Hurricane Katrina, New Orleans and the rest of the Gulf Coast was devastated.  Access Capital Strategies, a SRI community investment firm, decided to use the tragedy of Katrina to showcase the power of community investment strategies.  The Boston-based asset management firm joined forces with Liberty Bank and Trust, a large local African American Bank.  Together, they played a key role in the reconstruction of the devastated areas by providing bridge loans, financial support, and commercial and residential rebuilding.  Other community investment groups, including The Calvert Foundation, Jewish Funds for Justice, and Hope Community Credit Union, joined in to further stimulate the region with more then $2.4 million in capital.  Hurricane Katrina provided a glimpse into an investment sector that has grown in the last 5 years from a $4 billion sector to nearly $20 billion.           

 

Historically, socially responsible investing (SRI) has referred to a set of approaches used in investment decisions that consider social, ethical, and environmental issues.  One of the latest incarnations of SRI is Community Investing.  This strategy involves using investment funds to provide capital or loans to communities that lack access to conventional funding sources or are overlooked by traditional financial institutions.  SRI values are incorporated into community based investments by concentrating capital toward housing projects, development banks, and infrastructure in order to strengthen a specific micro-economy.  Some of the successful strategies of Community Investing include micro-financing and the fortification of local credit unions.  The regions that have benefited most include Bangladesh, South Africa, sub-Sahara Africa, and the rural regions of Kentucky and Tennessee.  From a SRI perspective the primary goal of community investing is to apply responsible investing strategies to improve the standard of living within a micro-economy while earning competitive returns.  

 

Despite its rapid growth, community investing remains uncharted territory for most investors.  As world economies are experiencing inflationary pressure on food and increased energy prices, fragile economies are suffering the most.  Paradoxically, these struggling economies will act as proving-grounds for community investment strategies in the coming years.  Of the 84 Community Investment funds currently operating, listed below are a few that I think represent the best positioned funds to take advantage of the current economic climate.

 

Partners with international micro-finance institutions; accepts individual investments

Calvert Foundation – http://www.calvertfoundation.org

Offers community investment notes where investors can specify that their capital be directed to international loans or one of seven U.S. regions e+Co.

http://www.energyhouse.com

Offers investments based on loans to clean

energy entrepreneurs in developing countries

 

Finca International – http://www.villagebanking.org

Manages village banking programs in Africa, Latin America, Asia and Eastern Europe; offers investments that fund village banks

Fonkoze USA – http://www.fonkoze.org

Manages a socially responsible loan fund that lends to Haiti’s largest micro-finance bank

Shared interest – http://www.sharedinterest.org

Guarantees bank loans for low-income communities in South Africa; accepts investments for periods of three to ten years

Underdog ventures – http://www.underdogventures.com

Designs and manages customized single-investor social venture funds for HNW investors

Coalition of Community Development Financial Institutions – http://www.cdfi.org

Offers facts and figures on community investing

Community Investing Centerhttp://www.communityinvest.org

Accion international – www.accion.org

 

Copyright © 2008 David van der Roest

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As bond funds and foreign debt are becoming more accessible to the average-Joe investor, the fixed income industry has overlooked some fundamental social considerations.  In many cases, fixed income is seen as a more passive alternative when compared to equity markets.  Upon further inspection, it becomes clear that a lack of social due diligence regarding your bond portfolio can lead to the same social pitfalls as a hastily selected stock portfolio.    

 

In my opinion, there are two main mistakes that even the sincerest investor could make when selecting bonds.  Fortunately, there are some valuable resources available to help prevent oversight.  The following examine the social pitfalls and then looks at practical solutions for every-day investors:

  

                Corporate Debt:

It is important to be wary of corporate debt that may support firms that leverage questionable labor practices.  This is most prevalent in unregulated emerging economies where astronomical GDP growth is overshadowing labor issues that include high risk activities and child labor.  Today, the returns coming from developing economies can cloud even the most grounded fund manager’s judgment. 

 

Many international organizations and think-tanks are striving to keep pace with developing economies by creating new and updated labor indices to assist investors with ethical decision making.  I have aggregated some of the leading labor indices and databases for reference:   

 

·        International Labour Organization Child Labour Database

·        The US Bureau of International Labor Affairs

·        Calvert Social Index (great for on-shore portfolios) 

 

Emerging Sovereign Debt:

The second pitfall looks at emerging sovereign debt and examines how government policies affect humanitarian issues within their state.  It is important to realize that taking on the debt of emerging counties indirectly supports their human rights policies and foreign policies.  As responsible investors, we need to be aware of a nation’s humanitarian track record before picking up foreign treasuries or similar types of debt.  Listed below are some useful resources to assist in the social due diligence process:

 

        ·       Universal Human Rights Index of the United Nations

·        Freedom of the press Scale

·        Political Terror Scale 

 

I’m currently aggregating a list of my 10 favorite socially responsible funds and portfolio managers.  I’m hoping to get these posted soon.  These two top-ten lists will be a great way to augment the social and political indexes listed in this post. 

 

Copyright © 2008 David van der Roest

 

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