"Socially Responsible" Investing

[Elle]

My business is in Mutual Fund investment consulting and SRI (socially responsible investing) has become en vogue following the recent, so-called, corporate scandals. The fundamentals of this investment strategy irk me at the highest possible level, and I've been working on developing of definite standpoint as to why.

I was wondering if anyone here was familiar with this area of business or had an insight into this new fad which I believe to be in-line with collectivism and "the good of society as a whole" to a sickening extent. There were quite a few articles I would like to attach, but instead I reccomned visiting Social Funds .com to read some of the articles and Annual Reports and responses there.

This is just one example I would like to share. All emphasis on text is post-editorial (mine).

04/07/2004: Press Release from Starbucks Corporation

Starbucks Validates Commitment to Transparency in New Corporate Social Responsibility Annual Report

Third Annual Report Demonstrates How Starbucks Continues to Successfully Live its Values

CSRwire Note: The Starbucks report is available in the CSRwire report database.

(CSRwire) SEATTLE — In an ongoing promise to promote transparency in its business practices and its dedication to corporate social responsibility, Starbucks Coffee Company (Nasdaq: SBUX) has released its third Corporate Social Responsibility (CSR) Annual Report. Titled "Living Our Values," the report details company initiatives, programs and activities in fiscal year 2003 (Sept. 30, 2002 - Sept. 28, 2003) that demonstrate how Starbucks provides social, environmental and economic benefits to the communities in which it operates globally.

“Since Starbucks opened its first store in 1971, our goal has been to act with integrity and in a responsible manner throughout our business,” said Sandra Taylor, senior vice president, Corporate Social Responsibility for Starbucks Coffee Company. “We hope our report helps to instill trust in our stakeholders by illustrating that we continue to operate our business according to our values and guiding principles.”

For the second consecutive year, Starbucks CSR Annual Report was independently verified by Moss Adams, a certified public accounting firm. By taking this step, Starbucks is providing additional assurance to its stakeholders that the information is accurate and that its policies and practices are consistent with the information in the report.

Some highlights from the 2003 CSR Annual Report include:

Starbucks paid an average of $1.20 per pound for all its green (unroasted) coffee – approximately double the commodity market price. The premium prices Starbucks pays for high-quality coffee help farmers cover their cost of production and provide for their families.

Starbucks purchased 6.7 million pounds of coffee that was Fair Trade Certified™, certified organic and/or conservation (shade-grown) – an increase of 97 percent over the previous year.

To address standards for social responsibility throughout its supply chain, Starbucks introduced a Supplier Code of Conduct.

Starbucks adopted corporate governance initiatives that make its Board of Directors stronger, more independent and better informed.

Starbucks partners (employees) and customers volunteered nearly 200,000 hours in local communities. In addition, Starbucks gave $11.3 million in cash and product donations to nonprofit organizations in North America through The Starbucks Foundation and Starbucks corporate giving program.

Starbucks reduced its water usage by 30 percent in a sample of more than 1,400 Company-operated stores.

82 percent of Starbucks partners indicated that they are satisfied or very satisfied with their employment at Starbucks. Moreover, partners are highly engaged in their work, meaning they are emotionally and intellectually committed to Starbucks success.

Going Forward

For the first time, in this year’s report Starbucks has included future performance targets for its CSR activities, further underscoring the company’s commitment to communicate openly and transparently with its stakeholders.

“While we are proud of what we’ve accomplished, we know there is always room for improvement,” added Taylor. “We believe that by publicly stating our future intentions we will continue to see positive changes throughout the company. Next year we will report back on our progress made on the performance targets and intend to continue to raise the bar even higher for ourselves in the coming years.”

Starbucks CSR Annual Report was officially released at the Company’s Annual Shareholders’ Meeting last week and is available online at www.starbucks.com/csrannualreport. To request a printed copy, call 1-800-23-LATTE. Starbucks values ongoing feedback from its stakeholders. Readers are encouraged to complete an online survey at www.starbucks.com/csrsurvey.

Starbucks Coffee Company is the leading retailer, roaster and brand of specialty coffee in the world, with more than 7,500 retail locations in North America, Latin America, Europe, the Middle East and the Pacific Rim. The Company is committed to offering the highest quality coffee and the Starbucks Experience while conducting its business in ways that produce social, environmental and economic benefits for communities in which it does business.

At this point I'm just getting my ammunition together, my company doesn't advocate socially responsible funds and the people I've spoken to lead me to believe that SRI funds are regarded warily by investment advisors. However, this is another of the many mounting concerns for those who value individuals rights in the face of collectivist shareholder advocacy, which would attempt to rule corporations by a majority vote of stockholders.

And opinion from the standpoint of Objectivism is what I'm working on developing, but I feel I don't know enough about it yet to fully refute this issue. Any advice would be appreciated.

at Social Funds .com there are even Mutual Funds named after Aquinas.

Ad-Note: I'm assumed a press release in a non-copyrighted article and that I'm not violating the Terms of Service to this forum, but if I am I hope someone will kindly inform me so I can change it.

[Richard_Halley]

Sounds to me like "socially responsible" companies are those whose primary goals are not profit, but rather charity... I, personally, wouldn't invest in any such companies.

Also, owning stock in such a company is like giving to charity, but not getting to pick what charity to give to. This makes it a moral wild-card. I wouldn't take part in such a charity, and I wouldn't take part in such a company.

On the other hand, I would be willing to bet that most of these reports are released as publicity alone, and that most of the companies releasing them place no importance on their meaning. Certainly Starbucks fits into this category?

I would still be reluctant about such a company, and would run from such a mutual fund as quick as I could.

[Bearster]

I am familiar with "socially responsible" investing. I will define the term below, but I believe that this is a catchword for environmentalist investing (which is a contradiction in terms). It values political correctness above financial returns.

I think environmentalism is the next major religion. It is a faith-based philosophy which is more consistently anti-man than any religion thus far. Its faith is dedicated to Earth, as such, rather than "god" or "society". Its goal is the destruction of man.

The first observation is that people who support welfare programs, and people who support favoritism to women and blacks over white males, and people who support restricting man in favor of animals or even plants are one in the same group.

Why is this?

Each of those is the concrete product of a secular, vicious desire to harm those who do not deserve it. It is a desire to sacrifice a greater value to a lesser.

Environmentalism is the broad philosophy which integrates this. It is not merely the view that man shouldn't poison his own well, but rather, the proper standard of value is "the earth", and the earth wants man off her surface (i.e. dead).

Environmentalism is a death cult even more consistent than Islam.

Obviously, any attempt to "invest" in anything that merely pays lip service to this is bad, much less something that actually attempts to practice it.

[Richard_Halley]

Environmentalism is the broad philosophy which integrates this. It is not merely the view that man shouldn't poison his own well, but rather, the proper standard of value is "the earth", and the earth wants man off her surface (i.e. dead).

One should note, when making a statment such as the above, that many Environmentalists disagree about what methods and justifications should be used in order to accomplish the above stated goal. In fact, I would say that there has never been an idealogy more apt at hiding its true purpose than the so called "antropocentric environmenatism."

Bearster is essentially correct in his assesment of environmentalism, but an elaboration is in order...

Bearster says that environmentalism believes that "the proper standard of value is 'the earth',"

While this is true about many environmentalist idealogies, many disagree with this idea. What all environmentalists agree upon is that, because man is superior to all other things in nature, he is: 1) evil or 2) morally obliged to subordinate himself to the inferior.

Bearster is correct in identifying that environmenatlism is, necessarily, anti-man.

[Walker]

At my school, the Chief Investment Officer of Equities at Calvert Group talked at a business summit on SRI. Since Calvert is heavily into SRI, he wanted to present his case for SRI and explain it.

Basically, his company looks for "environmentally friendly" companies and companies who are "socially responsible," i.e. - they give away their money to charities. However, they don't invest in these companies unless of course they are highly profitable - otherwise, Calvert wouldn't be around for very long.

The point of his lecture was that SRI funds do better than non-SRI funds (my response: big deal, I could beat both funds by sticking my money into spiders or an S&P index funds). Obviously, being "socially responsible" has nothing to do with being a profitable business - in fact, it holds those companies back from realizing their true potential.

SRI is probably considered "moral investing," which I'm sure everyone here realizes is completely wrong. However, I think approaching investing from a moral point of view is perfectly correct - as long as that moral point of view is based on proper values.

[AisA]

Bearster, I agree that environmentalism is a religion. Michael Crichton gave an excellent speech on this subject. I don't agree with everything he says -- such as religion being an inexorable social institution -- but he does make some good points about the nature of the movement.

Environmentalism

Edited April 18, 2004 by AshRyan

[y_feldblum]

My definition of "moral investing": a lot of it in highly profitable companies.

Strangely enough, that's also my definition of "socially responsible investing".

Altruism is constantly looking for an ever lesser value to sacrifice good to; first it was other people, now it is mud & mosquitos, and tomorrow it might be empty space. It's a movement progressing to ever more consistency. The ultimate end of it is: sacrifice everything to nothing; destroy for destruction's sake; kill and then kill yourself. At its end it must say, be born and die.

[Old Geezer]

My definition of "moral investing": a lot of it in highly profitable companies.

Strangely enough, that's also my definition of "socially responsible investing

Y feldblum. Would you have invested in the East India Tea Company??? What about Companies in Hitler's Germany profiting off of Human flesh?

[Tom]

Why do we invest?

We invest for the sake of improving the quality of human life. This doesn't just include the material standard of living. That would imply a mind-body disparity where none exists.

Whose quality of life?

Your own, but this means you should serve human values--not negate them through investing in companies that sacrifice higher values to lower ones (e.g. slave labor) or misallocates capital (i.e. spend money outside of profit-motive--which means less investment in the business, slower technological advancement, lower product/service quality, higher prices, laid-off employees, etc.)

Why would a manger worry so much about PR?

The target market will spend more money on them if their PR is good.

Why do they need to spend money on PR to gain revenue?

Maybe they have something to hide. Maybe they're trying to offset poor customer-service. Maybe they're vain "second-handers". Maybe they're trying to differentiate themselves from the competition.

Any number of reasons, few of which are good.

So what IS moral investing?

Giving money to somebody who will produce high returns without sacrificing any higher value in the process.

And "socially responsible" investing?

Giving money to somebody who will produce high returns without sacrificing anyone in the process.

In other words, the difference between the rational egoist's answer and the altruist's answer depends on what the rational egoist regards as sacrifice.

This is something that should be explored further.

[DavidV]

Y feldblum.  Would you have invested in the East India Tea Company??? What about Companies in Hitler's Germany profiting off of Human flesh?

If you accept that A is A, you should understand why investing in unethical companies is not a very profitable strategy. You will either lose your money or support a government that will take it from you.

[oaktree]

East India Tea Company

India owes Britain for railway, post, roads, rights, rule of law.

English too. Else how to outsource our jobs.

[dark_stranger]

However, this is another of the many mounting concerns for those who value individuals rights in the face of collectivist shareholder advocacy, which would attempt to rule corporations by a majority vote of stockholders.

Perhaps I've missed something? Do you mean a majority of people with less than a majority of the company ownership? If you mean a collection of people who together form a majority of ownership, how else would one distribute the decision-making power within the company? Do not those who have invested money into the company deserve to have it run however they care to (even to their own detriment)? Furthermore, shouldn't the rational among the shareholders just jump ship and sell their shares when they see this behavior?

[oaktree]

how else would one distribute the decision-making power within the company?

maybe what I say is slightly off topic but related

Google founders shares have more vote power comparing to public shares

Furthermore, shouldn't the rational among the shareholders just jump ship and sell their shares when they see this behavior?

most investors do this

no point trying to change management

just sell

[A.West]

Elle wrote:

"My business is in Mutual Fund investment consulting and SRI (socially responsible investing) has become en vogue following the recent, so-called, corporate scandals. The fundamentals of this investment strategy irk me at the highest possible level, and I've been working on developing of definite standpoint as to why.

I was wondering if anyone here was familiar with this area of business or had an insight into this new fad which I believe to be in-line with collectivism and "the good of society as a whole" to a sickening extent. "

Hi Elle and others,

I've worked in investment analysis and portfolio management fpr over a decade. I think SRI is vicious, because "socially responsible" is a massive package deal. Ethical investing would be a valid concept I believe, though. The key point is that the moral is the practical, at least in the long term, in investing. Ethical investing means directing capital towards its highest long term uses, and correcting allocation mistakes others may have made.

I believe that in the mutual fund industry, "SRI" is mainly a marketing and advertising tool, enabling a fund manager to attract the attention of a niche audience and build investor loyalty, by conforming to a certain code of values in investing. Were it not for the faulty values underlying all existing SRI funds, that in itself would not be wrong. I once considered starting a "SRI" hedge fund based upon rewarding economic freedom globally, creating strategies that punished or rewarded and profited from country's moves toward and away from economic and political liberty. But I never found the sort of partners and capital required for such an effort. My business plan for such a fund was one of my entrance essays for the NYU Stern MBA program.

Here's the text of an article I wrote on a related topic at NYU's Stern School of Business MBA newspaper, a couple years ago:

A Stern Opinion: Like Leaves In Fall

By Andrew H. West

As the air turns cool, leaves begin to turn color and fall from their trees. Similarly, as the economy turns to recession, weaker companies begin to fall apart. This is the means by which trees and the economy change to strengthen themselves and prepare for new growth when conditions become more favorable.

There are some companies I do not mind seeing fall by the wayside. I have a strong dislike for companies that I think squander investors' capital, or that waste economic resources better utilized by other companies. They are what I call value-destroyers, and to them I say good riddance.

One kind of inefficient business bothers me the most - a company that squanders shareholders' money while going on a world crusade to promote "socially responsible" or "stakeholder-oriented" business. Let me give full disclosure. I reject the whole concept of "socially responsible" business, because the very phrase implies that business is "irresponsible" without some special intervention by government or "do-gooders." I think that as long as a company doesn't violate individual rights through force or fraud, it should pursue its maximum business and economic advantage -because that is a company's primary responsibility to its owners.

When a company's activities enrage me, I engage in and encourage boycotts against their products. I boycott Ben & Jerry's Ice cream, for example, because I don't want my purchases to help fund anti-capitalist environmental organizations, or possibly provide money for some old hippies to smoke weed.

Perhaps the highest-profile example of a loud, crusading, "socially responsible" company that seems irresponsible to its shareholders is Body Shop International. Earlier this year, a Stern club I won't name invited Anita Roddick, founder of Body Shop International, to give a speech about how she combines business "success" with promoting social and environmental issues, animal-rights, and "fair" trade. Mrs. Roddick is much more famous for lecturing the world on her outspoken left-wing views than for making money for shareholders. For example, Roddick has said "Sometimes, you just have to say "up your bum" to those institutions that say to maximize profits." Since 12/91, her company's stock has declined 81%, a negative 13% annual return. I hope Roddick sells environmentally friendly, non-animal-tested, lubricating jelly to ease the pain in her shareholders' "upped bums." I'd short her stock with pleasure, but it's become too shriveled, small, and illiquid for that anymore. (For an interesting bar bet, challenge a friend to quickly yell "Anita Roddick" three times - she has more fans than you might think.)

Over the last few years, there's been one "socially responsible" company that I really grew to despise the most, and have shorted on occasion. AES Corp. It's a global power company headquartered near Washington D.C. It was founded in 1981 by two ex-bureaucrats with a specific philosophy: businesses don't exist to make money, they exist to serve. AES lives by the creed that "social responsibility" should come ahead of profits, a mission the Securities & Exchange Commission required the company to state clearly in its risk statement when it went public in 1991.

When I first read AES' annual report in 1997, I concluded that AES was philosophically unfit for business.

AES Chairman and CEO refused to write a "letter to shareholders," insisting that their letter instead be addressed to "Customers, AES People, Governments/Communities, Suppliers, Partners and Shareholders." In the letter they explained that "We try not to give a higher priority or a "most important" label to any one or set of these groups." I noticed that shareholders were at the bottom of their list of "stakeholders." Later the founders wrote in Marxist terms "The people in AES are not principally economic resources. We are not tools of the corporation." Then they stated their bizarre new theory of leadership and employment: "Probably the biggest single problem in both new and existing AES enterprises is overcoming the natural desire of our leaders to make decisions and control others. For some of us this is a day-to-day struggle between what most organizational leaders think is central to their role - making decisions - and what we believe is crucial to having the most fun adult workplace possible - voluntarily giving up the power to decide." Later the CEO said, "I tend to limit myself to one decision a year. It's hard." So then I wondered what management does all day, eat Ben&Jerry's, make tie-died shirts and hemp baskets, while listening to the Grateful Dead?

AES later wrote: "Some of us were surprised to learn this year that about the same amount of AES money goes to governments and communities (through taxes, social responsibility projects, and charitable donations) as to shareholders (through profits). We think this is fair. Governments give us the license to exist in the first place." I guess AES' founders disapprove of the Boston Tea Party, perhaps believing that people do not live, work, pursue happiness, and create profits by Right, but rather by the whim or permission of government.

In ensuing years I've watched AES sacrifice shareholders' interests on the bonfire of its corporate philosophy. The company has tended to see itself as a global missionary, bringing electricity to the world's poor. It has grown by acquiring or building electricity companies in places like Kazakhstan, Pakistan, China, Brazil, Bangladesh, and Venezuela, and claims to be motivated not by a desire for profits but a spirit of service to those in need. To quote Jesse Jackson, "need not greed" motivates their expansion. Unfortunately for AES, electric plants are not free. To fund acquisitions the company has required multiple cash calls from shareholders totaling about $2.8 billion since 1997. AES has also gone on a debt-issuance binge, with about $6 billion of bonds outstanding, (dragging the company's debt rating well down into junk bond territory). The company is an investment bankers dream however, constantly doing deals in need of financing. So it's no surprise that for years it's been a top recommendation among most sell-side analysts.

When I analyzed AES, I reached conclusions contrary to most analysts views. They saw reported EPS growing. I saw quality of earnings declining, and a "comprehensive earnings" footnote showing weakness. Analysts saw emerging markets acquisitions as "earnings enhancing." I saw a company purchasing minority stakes in declining emerging market stocks, financed with leverage by issuing junk bonds. Other analysts focused on reported EPS growing 250% from 1996 to 2000, while I focused on interest expense rising 800%. I noticed that heavy currency devaluations in emerging market investments were not reflected in reported earnings but were being swept into an ever-growing "comprehensive loss" account under owners' equity - an account larger than the cumulative profits of the past five years.

My conclusion was that AES consumed capital - it's inputs from shareholders and bondholders were larger than its profit outputs would ever justify. It's a negative EVA company- its cost of capital is higher than its return on capital - making it an economic value destroyer running amok. Investment bankers attracted investors' capital to it like sirens calling sailors to a rocky shore. As an investment analyst, that's the kind of company I like to short - especially when Wall Street loves it and touts it. The fact that the company's philosophy is diametrically opposed to mine made shorting it that much more satisfying.

The climax of the AES story came on 9/26/01, when its stock fell to a five year low (over 80% off its peak) after management released an earnings warning caused by problems related to foreign acquisitions. It was apparently difficult to integrate and manage hundreds of operations around the world while telling managers not to make decisions, and placing a higher priority on "fun" than profit. Who would have guessed it? AES shareholders shouldn't complain - they implicitly accepted this company's self-destructive philosophy, and this is their reward.

These companies who care so little about profit remind me of a scene in Ayn Rand's "Atlas Shrugged" "I'm perfectly innocent…since I lost all of my own money for a good cause. My motives were pure. I wanted nothing for myself… I can proudly say that in all of my life I have never made a profit!" "I think I should let you know that of all the statements a man can make, that is the one I consider most despicable."

P.S. This essay should not be construed as investment advice.

[Godless Capitalist]

Here's a description of such a fund available through my wife's retirement plan:

"The CREF Social Choice Account is a balanced fund, holding stocks, bonds and money market instruments issued by companies included in the Russell 3000® Index that pass two sets of social screens.

First, the account excludes companies that derive any revenues from the manufacture of alcohol or tobacco products, or from gambling; companies that derive significant revenues from producing military weapons; and electric utilities with interests in nuclear power plants.

Second, the remaining companies are evaluated and selected based on the following: respect for the natural environment; strong charitable giving and employee benefits programs; the presence of women and minorities in leadership positions; quality products and leadership in research and development; and the payment of fair wages and protection of the environment where they operate. Concerns identified in one area will not automatically eliminate the company from the portfolio."

Note the bizarre grab-bag of reasons to reject companies, coming from all over the spectrum of irrationality: antinuclear activism, affirmative action, environmentalism, religious conservatism, you name it.

Now I actually think that many companies, like Starbucks, merely pay lip service to this kind of stuff for PR purposes and really are focused on making profits. And social funds generally do OK, so they also are looking at profits not just "social concerns." But why bother looking at them at all? Even many mainstream investment advisors suggest buying funds purely on profit potential and donating some money to the charity of your choice if you want to support some cause.

[softwareNerd]

... SRI is vicious, because "socially responsible" is a massive package deal. Ethical investing would be a valid concept I believe, though. ...

I believe that in the mutual fund industry, "SRI" is mainly a marketing and advertising tool,

... I once considered starting a "SRI" hedge fund based upon rewarding economic freedom globally, creating strategies that punished or rewarded and profited from country's moves toward and away from economic and political liberty.

The guy who runs "JunkScience.com" has started a fund along these lines. I'm sure it isn't exactly what you were thinking of, Andrew; this is probably more an "anti-environmentalist" fund. Reading the details, the main thrust seems to be shareholder-activism rather than ethical investing. Thought you might be interested if you hadn't seen it already.

[khaight]

The guy who runs "JunkScience.com" has started a fund along these lines.

And then, of course, there's the Vice Fund, which I guess could be described as "socially irresponsible" investing. They invest in companies with very un-PC products like alcohol, gambling, tobacco, junk food and weapons.

[Groovenstein]

Regarding such "social responsibility" investments, if you are concerned about what rights you may have as a shareholder for companies making investments you don't consider to be in the best interests of the corporation, talk to a lawyer. I don't recall the specifics, but my vague recollection from Corporations is that managers have a good deal of discretion under the business judgment rule when it comes to burning up profits for the "public good." I may examine some cases in more detail another time. Talk to a lawyer.

[softwareNerd]

The firms in which these funds invest and the firms in which they don't are both doing things that are legal. That is to say, the selection is not being done based on a criteria of legality vs. illegality.

These funds fall into two types. The bulk of them have this message: "There are many things that are illegal but are immoral. Do you want to avoid investing in a company that contributes to global warming? In those that tempt people to the satan of alcoholism? In those that start our children on the road to lung-cancer? In those that produce genocide-causing 'morning-after pills'? Blah, blah , blah... Well, you do not have to compromise your values to make money. The moral is the practical. You can do just as well, financially, if you limit your investments to the thousands of companies that are both moral and legal."

That's their message. I agree with Andrew West's post (above) that the general thrust of ethical investing is fine. The real problem is two-fold: firstly, choosing the wrong ethics; secondly, using the whole ethical thing as a marketing tool because one is good at talking about that and are not so good at choosing investments that make money.

There is a second type of fund, of which the junkScience one seems to be a type. (I don't think this is popular, but I don't know.) They're really not interested primarily in investment, but primarily in shareholder activism. They want to be the "squeaky wheel". Holding a few shares in (say) IBM, they want to be able to demand to speak at the company's annual meeting and ask why IBM is outsourcing jobs to India. Noisy activism does work. So, if these funds are pursuing the right ethical activism, they make some sense too, but not as a way to make money.

[Groovenstein]

Holding a few shares in (say) IBM, they want to be able to demand to speak at the company's annual meeting and ask why IBM is outsourcing jobs to India.

As far as I know, you can't just hold a few shares and demand to speak at the annual meeting. SEC Rule 14a-8(b )(1) says:

"In order to be eligible to submit a proposal, you must have continuously held at least $2,000 in market value, or 1%, of the company's securities entitled to be voted on the proposal at the meeting for at least one year by the date you submit the proposal. You must continue to hold those securities through the date of the meeting."

Then there's (c ): "Each shareholder may submit no more than one proposal to a company for a particular shareholders' meeting."

So that probably helps keep it under control. Then under (i) are all the grounds the company can use to exclude the proposal.

[softwareNerd]

... at least $2,000 in market value, or 1%, ...

I assume this means the lesser of the two? On reading your post, I checked the recent report from "The Free Enterprise Action Fund". Their shareholding pattern is: a few thousand dollars in any one company, but about 400 companies owned with a total of over $4 million.

Looking at their site a little more has intrigued me about the value-for-money proposition. The fund does not pretend to be trying to invest and make money while avoiding evil firms. Instead, they're clear that their purpose is activism. Even so, by investing in decent-sized companies, and avoiding only the most obviously risky one, the chances are that they will not lose all theirs principal in one fell swoop.

Since this fund has just started, one cannot predict how they are going to perform. However, let's take a hypothetical example. Suppose one puts $1000 in such a fund. With such a broad holding, they are not to perform very differently from the S&P500. That means that one can expect "close-to-market" returns pre-expenses. They will likely have special activism-related expenses, but on the other hand, they probably don't need any genius analysts on their payroll either. Activist-aides probably come cheaper that financial analysts.

Even if they miss the market by (say 5%) that would be lost earnings of $50 on a $1000 investment (when compared to the market benchmark like the S&P500). I figure that $50 a year may be a worthwhile charity, in addition to what ARI does.

Andrew, What do you think of the idea of having a fund that is explicitly an S&P500 Index fund but also does a whole lot of activism within those 500 companies? Would that be something that would be interesting for an activist, but not to a financial analyst?

Edited December 22, 2005 by softwareNerd

[Groovenstein]

I assume this means the lesser of the two? On reading your post, I checked the recent report from "The Free Enterprise Action Fund". Their shareholding pattern is: a few thousand dollars in any one company, but about 400 companies owned with a total of over $4 million.

Yes, I guess I would read that as the lesser of the two. So maybe that's not much of an impediment. But again, there are those exclusion grounds in (i), though the company does have the burden of proof on those.

[softwareNerd]

My guess is most companies would allow some minimal moral comment rather than be seen as stifling it. In the best case, the "good activist" would be helping the directors.

The activist fund above has focused on two areas: "anti global-warming" and "anti predatory-lending practices".

So, for instance, CitiGroup paid a few hundred million dollars in various fines because they were supposedly engaging in predatory lending. Leaving aside the merits of the case, the activist fund, as a CitiGroup shareholder is asking them to push back in some way. Supposedly, they have prompted some preliminary action.

Similarly, another firm was about to do something to appease the global-warming camp. It could have been under pressure from some other activist group or just directors thinking the company should be a "good citizen". This activist fund claims to have got the directors to hold back on that support for global warming environmentalists.

In summary, I think it's possible -- indeed even likely -- that an activist fund with a predominantly correct philosophy might find a willing ear in some companies, rather than being treated as an antagonist.

[softwareNerd]

This news-story reminded me of this thread. It's not just an example of bad activist-investing, but of completely futile "activism". Here's the key snippet:

[ Rev. Ken Hutcherson]... urged supporters Tuesday to buy up [Microsoft's] stock and dump it to drive prices down.

If dumping would drive prices down, what would the pre-dumping buying do? This guy must also invest in perpetual-motion machines.

There's money to be made in being the broker handling these activists' trades; nobody else is going to make any.

[A.West]

...

Andrew, What do you think of the idea of having a fund that is explicitly an S&P500 Index fund but also does a whole lot of activism within those 500 companies? Would that be something that would be interesting for an activist, but not to a financial analyst?

The above is essentially what Calpers does, but of course using an incorrect philosophy. There are a number of hedge funds that are activist investors, and pursue the posotive moral agenda of trying to push companies to stop wasting money, right-size, optimize capital structure, etc., to serve shareholder interests.

From a practical perspective, I think it would be better to hold a concentrated portfolio of companies likely to economically benefit from your activism. A small fund paying salaries is a recipe for massive underperformance.

I once proposed as a concept a hedge fund that would invest on the basis of economic freedom, agitating countries on that basis. But I'd say that's just one layer of the investment management process - one would need to overlay that level of analysis upon a sound investment analysis at the investment unit level. One could even short companies likely to suffer from increasing econ freedom (e.g. companies subsidized/ propped up by the govt.) or go long cos benefitting from removal of restrictions, etc. The challenge is that one needs size because activism is expensive - you need lawyers, influencers. I wouldn't be surprised if the largest hedge funds may well influence US and foreign govt decisions.