Don’t Go At It Alone

A lack of affordable SRI investing solutions may incentivize some savvy investors to do their own research and purchase their own portfolio of individual stocks, but this is almost always a mistake.

If you’re joining the SRI movement, it’s likely because you have a vision for our world and the economy that’s bigger than your own portfolio. To leverage the full scope of impact, you should identify ways that you can coordinate your efforts with others whose values overlap with your own. The easiest way to do this is by purchasing a SRI fund, but there are other ways to maximize your impact.

Going it alone makes it extremely difficult to keep pace with the changing landscape of SRI investing. Volkswagen, for example, was once a darling of sustainable investors—then we found out they were rigging the emissions tests. Other companies are making radical improvements and are becoming worthy of SRI attention. The field is quite dynamic and you or your investment manager will need support to stay on top of latest developments.

You also need to consider how you plan to manage shareholder responsibilities. When I was a younger and more naive investment advisor, I argued that investors should begin attending shareholder meetings and voting proxies. Both tools were given to owners to exercise their stewardship oversight and I now realize that both are a big waste of time for most investors (the Berkshire Hathaway meeting excluded).

Every year, investors are asked to vote on a whole host of issues. Perhaps a company seeks to repurchase shares of its own stock. Or it plans a merger. Companies hire and fire new directors. These actions typically require a shareholder vote.

The problem is that most shareholders own a tiny fraction of total shares and this makes the uncoordinated actions of any one shareholder meaningless. The unspoken message at most shareholder meetings is essentially, “We’re only doing this because we’re required to.”

Naturally, most mainstream investors who own stocks ignore requests to vote or attend annual shareholder meetings. I no longer blame them! Exercising ownership powers are only fruitful when made in coordination with an ownership block large enough to be recognized.

To overcome these hurdles, you may want to identify a fee-only (no commissions) investment advisor who specializes in SRI investing—even better, find one who avoids the plethora of expensive SRI funds. An investment manager can identify investments that match your values and help manage all of your voting responsibilities.

Coordinated action can also take place by purchasing a mutual fund or ETF but the challenge here is that most funds have a poor track record of shareholder advocacy on governance issues as cited here and here. Investments that do have a strong track record for shareholder advocacy often have management fees that exceed a reasonable threshold.

To overcome these challenges, some decide to self-manage a stock portfolio. If you go this route, I recommend that you start by reading James McRitchie’s Shareowner Action Handbook, where he walks investors through the ins and outs of exercising shareholder powers. James is a personal hero and is one of a small group of individuals who regularly file their own shareholder resolutions to encourage corporate best practices.

You will also want to check out the work being done at Proxy Democracy, where you can see how leading investors including public pensions (e.g., CalPERS) and SRI fund company leaders (e.g., Calvert and TIAA CREF) voted their shares.

A natural corollary to this collaboration principle is a willingness to compromise. The two go hand in hand. The quality and quantity of research in the developing field of SRI investing has many gaps that offer plenty of room for disagreement on how best to rank or classify a given company. The deeper you decide to dive into the world of SRI, the more willingness you’ll need to live in “the gray”—that is, between simple black and white solutions.

However you decide to engage, let me be the first to warn you that the SRI community is unlike any other investment community that I’ve ever been a part of. There’s a more even distribution of men and women in leadership roles in this community and this gender balance brings with it a greater sense of collaboration. One leader in the field argued that it’s going to take billions and even trillions of dollars committed to sustainable investing before the capital markets will begin to take this new approach seriously. To get there, we all need to find more avenues to work together.

Note: Featured Image on this post was used under Flickr Creative Commons.

The Case For Responsible Investment (In Light of Central Bank Interventions)

While many are increasingly feeling distrust over markets that are losing touch with reality, SRI (Sustainable, Responsible, Impact) investors have good reasons to stay engaged with the ways their portfolio impacts the real economy.

As I talk with investors, I hear many express a level of concern that teeters on disillusionment over central bank interventions that are undermining the fundamentals of the markets. Equity valuations using both backward reported earnings and forward estimates all sit at unsustainable levels. While this suggests that performance may be lower for longer, investors should also consider another power even stronger than the Fed, the ECB, and all of their cousins. This unparalleled force is known as the human race.


Population estimates by Angus Maddison

Our species isn’t just growing larger; we are also consuming more resources as we grow. We’re demanding more food, more buildings, more computers, more bicycles (especially in the Illian family), and we’re consuming more energy.


Data compiled by Gail Tverberg and available at Our Finite World

It’s clear from world energy consumption that human appetites show no signs of slowing down. This means businesses will continue to have demand for their products and investors will continue to lay claim to a share of the earnings pie.

Increasing demand for goods and services also means that the job of the SRI investor is never over. It’s human nature to occasionally lose sight of the common good in search for greater personal financial gain. And these impulses are especially dangerous when the human beings are at the helm of the world’s largest corporate citizens. We witnessed this in the case of Enron, the BP oil spill, Lehman Brothers, etc. The list will only grow longer with each passing year.

I don’t suggest that we’ll ever see the end of acts of unabated self-interest, but I do believe investors can foster a more civil marketplace. Financial transactions that benefit some while exploiting others have no place in a sustainable economy. Here’s another principle: we won’t invest in any business that ignores its environmental footprint.

There’s no time for thoughtful citizens to linger in despair as a rapidly changing world develops.  All hands on deck!

Investing Lessons from America’s First Stock Company

Investing in America began with bankruptcy. In the early 17th century, the hottest stock in England was the Virginia Company of London. Instead of adding to their fame and fortune, wealthy investors gained several hard insights from this first company to go bust on American soil.

Fame Is Not To Be Confused With Fortune

Sir Thomas Smythe.jpg

Sir Thomas Smythe (1558 – 1625) was Treasurer for the Virginia Company and a prominent citizen of London

By 1609, the Company was two years into the Jamestown settlement and despite many setbacks from rugged conditions and native attacks, Virginia Company trustees captured enough public interest to issue a second stock offering. This wasn’t quite tulip bulb euphoria but it is safe to assume that any new information on this overseas enterprise was a hot topic in every pub from London to Liverpool.

To publicize the glory of joining ranks with the Virginia Company, investors were given the moniker “adventurers” which sounds better than “people who are willing to take huge risks with their life savings while sitting on their 17th century couches.” Name tags are no substitute for a return on investment. Any time an investment is motivated by having a good story to tell at a social event, there’s a strong chance your financial returns will suffer.

Exclusivity Is A Poor Predictor of Performance

A single share of Virginia Company stock cost 12 pounds 10 shillings, the equivalent of over six month’s wages for an ordinary working man. As you can imagine, the high cost of ownership culled shareholders into a who’s who of English society.

Today’s investors continue to be wooed by the allure of elite hedge funds only available to those with enough wealth or income to meet the “accredited investor” standards of the Securities and Exchange Commission. Despite our efforts to expose the unjustifiable costs and underperformance of hedge funds, their greatest attraction seems to be the fact that average investors are barred from accessing them.

Doing Good Is Not A Business Plan

The marketing campaign for the Virginia Company relied heavily on a stream of ministers in support of their effort. Printing sermons may sound like a strange marketing strategy in modern times, but if there was one idea that bound England’s established Anglicans and upstart Puritans together, it was the idea that the Native Americans must be ushered from savage paganism and shielded from the Catholics. Royal Chaplin, Daniel Price, called the Virginia Company’s colonization effort “the most worthy Voyage that ever was effected by any Christian, in descrying any country of the world.”

The modern divorce between moral responsibility and wealth management swings to the other end of the spectrum. Faith-based zeal is good complement but poor substitute for a prudent business plan.

The pursuit of survival in the New World left little space for pursing the religiously inspired motivations of investors. After failing to identify a plentiful source of valuable natural resources, colonists found a profit source that many considered a detestable vice in the home country: tobacco.

In fact, King James so despised tobacco he wrote a treatise enumerating its many health dangers and described the odor as “hateful to the nose.” Tobacco would grow to become Virginia’s most valuable export, but not quickly enough to offer much benefit to investors.

As the financial stability of the Virginia Company crumbled, the top officers resorted what should have been a final warning to savvy investors. From 1612 onward, the Virginia Company offered a series of lotteries to provide most of its revenue. As morally dubious then as it is today, lottery revenue helped keep the colony afloat for a dozen more years.

Instead of saving native souls, the Virginia Company brought tobacco products and lottery tickets to their fellow Englishmen. Dark irony should be expected when doing good is a substitute for a solid business plan.

Frontier Investing Is High Risk

The trustees of the Virginia Company should be commended for retaining their investors’ patience for approximately fifteen years, but the King of England was not so easily soothed.

After grave reports of mismanagement at the Virginia Company and staggering loss of life filtered back to England, the Crown’s patience was finally exhausted and the company’s charter was revoked on May 24th, 1624. Other than a few hundred acres of generally worthless land that was awarded to shareholders in absence of any monetary returns, shareholders lost their entire investment.

Despite the financial failure of the Virginia Company, surviving colonists persevered and planted the first seeds in what would become the wealthiest nation the world had ever seen. Americans celebrate their birth, but wealthy English investors learned the hard way that speculative investments can fail spectacularly.

What Gets Measured Gets Managed

CDP (formally the Carbon Disclosure Project) is a not-for-profit organization with headquarters in London that is one of the more important advocates for the SRI investors concerned about climate change. For over ten years, CDP has been leveraging market forces to encourage companies to disclose data related to their environmental stewardship.

Despite offering guided support, companies like Pioneer Natural Resources Co (PXD) still do not disclose their carbon footprint along with other pollutants (NOx emmissions, SOx emissions, hazardous spills). Failing to disclose these environmental impacts suggests that either Pioneer Natural Resources Co has something to hide or they don’t care.

Some have come to believe that the only companies that fare well in these ranking systems are companies like Tesla Motors but this isn’t the case at all. Spectra Energy Corp (SE), a natural gas distributor, receives CDP’s highest ratings for disclosure and for their environmental stewardship.

A failure to communicate on material issues leaves investors with unknown environmental risks which all too often have economic consequences. I would like to see the day when the majority of investors refuse to buy stock in companies that fail to disclose material non-financial data.

Principle Numero Uno: Remain Vigilant on Fees

The biggest challenge for the Sustainable, Responsible, Impact (SRI) investor is avoiding excessive fees. High fees have plagued the entire SRI industry and have, unfortunately, left many to forgo the pursuit of any values alignment in one’s portfolio.

Most investors don’t know that they pay excessive fees because they don’t even know what to look for. If you’re buying a fund, start by making sure that it’s a no-load fund. The markets are too volatile to have a commissioned sales person get 5% before you’ve even put your money to work in the markets.

The next thing you need to understand is the expense ratio. The expense ratio is the ongoing fees charged by the fund and, while it comes out daily, it’s measured as an annual percentage fee (e.g., 0.5%).

If you plan to invest in a US Stock fund, there’s no reason to pay more than 0.65% in fees. If you’re investing the assets in a large family foundation or a university endowment, you won’t have any problem finding funds that charge less than this benchmark. But if you don’t have access to institutional pricing, fees can take a big bite out of your returns.

If you go to the US Sustainable Investment Forum (USSIF) mutual fund member list, you’ll only find a small number for funds that achieve this reasonable cost threshold. One example is the TIAA-CREF Social Choice Equity fund which has a 0.44% fee for the retail share class and only requires a $2,500.00 minimum investment. By keeping its fees competitive, this TIAA-CREF fund has only slightly underperformed the cost-less benchmark over its ten-year history.

All of the other funds on this list that meet the 0.65% criteria are institutional funds and require a much larger starting investment, often as high as $1 million. The remainder of the US Stock funds available on this list to retail investors have an average expense of 1.06% and even go as high as the 1.68% for the Praxis Small Company A fund. As I alluded to earlier, there’s a lot of expensive garbage in SRI investing and the stink has contaminated the general perception of the industry as financially irresponsible.

Another US stock fund with reasonable fees is the Vanguard FTSE Social Index fund (VFTSX), which charges 0.25% for its entry level “investor shares.” Two Exchange Traded Funds (ETFs) that meet the fee benchmark are the iShares MSCI USA ESG Select ETF (KLD) and the iShares MSCI KLD Social 400 (DSI), both of which charge 0.5%. New lost cost ETFs that seek sustainable profits will be added every year.

Until recently, investors needed very large nest eggs to access low cost ESG options in the foreign markets. Now, BlackRock offers the iShares MSCI EAFE ESG Select ETF (ESGD) which covers developed markets and offers a very reasonable 0.4% expense ratio. The iShares MSCI EM ESG Select ETF (ESGE) which covers emerging markets is priced at 0.45%.

Some in the industry will argue that high fees are necessary to offer a high level of shareholder advocacy. By this, they believe that their efforts petitioning the board and executive team to make improvements mean needing to spend your retirement dollars. Most of these organizations don’t have the scale to be anything but an annoying fly. (In Part 2 of this series, I’ll share some ways to csider joining the efforts of others that don’t require excessive fees.)

Jack Bogle, founder of Vanguard Funds, illustrates the importance of watching fees with his Relentless Rules of Humble Arithmetic. Here’s the equation he offers:

Total Stock Market Returns − Total Fees from Finance Industry = Average Investor Return

If the total market of stocks for and bonds are expected to yield 7% on average (from a balanced portfolio) and total fees from the finance industry equals 2%, this leaves 5% as the average net return. This humble arithmetic concludes that the more extracted in fees, the less remains as a reward for the risk undertaken by investors.

Simply reducing your fees by 1% over a 35-year career can add an additional 20% to your total retirement savings. This means that if your goal is to accumulate $1 million, an extra 1% in fees can cause you to fall $200,000 short.

In conclusion, keep your US stock fees at or below 0.65% and you’ll have a found a solution that passes the first principle of SRI investing. International fund fees may be a bit higher and fixed income fees should be a bit lower. Your portfolio seeking a more sustainable future should also have fees that are sustainable to your own nest egg.