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News
Socially Responsible Investing for the Pooled Investment Fund
Joe Bjordal
Socially Responsible Investing for the
Pooled Investment Fund
Trustee-Managed Fund Produces Healthy Return for 2006
by Gailen Krug and the Rev. Leonard Freeman
What is “Socially Responsible Investing?"
Socially Responsible Investing (SRI) is an investor’s choice to incorporate his or her ethical, social, or religious principles into the decision-making process in the management of an investment portfolio. SRI emerged in the late 1960’s as “ethical investing” and has, over the years, supported interesting and varied global issues.
SRI has three primary goals:
• To place priority on environmental and economic issues in the investment process
• To identify standards for “good” corporate behavior
• To improve corporate behavior regarding social and environmental issues
These goals are achieved by applying portfolio screening, the use of engagement, and through community investing.
Portfolio Screening uses a variety of standards to identify and eliminate companies that don’t measure up. The standards include the typical offenders of tobacco, alcohol and firearms, but can also include: community relations, corporate governance, diversity, human rights, regulatory actions, hazardous waste, abortion, gambling, adult entertainment, military, nuclear power, contraceptives, animal welfare, genetic engineering, fetal stem cell research, and Catholic or Islamic values. In fact, many socially responsible mutual funds screen for one hundred or more characteristics.
Engagement is the use of voting rights via stock ownership (proxy votes) to influence corporate behavior and the public’s opinion of the corporation. Engagement is sometimes called Shareholder Activism.
Community Investing, as might be expected, is simply choosing to direct an investment to low-income or other underserved areas. For example, an investor might choose to invest only in projects that support migrant workers, single mothers or in a geographic area suffering from natural disaster.
Who are Socially Responsible Investors?
Many large public pension funds, endowments, foundations, and wealthy private investors embrace SRI. Portfolio size and scale are critical factors in successfully applying socially responsible investment concepts. In order to filter and eliminate companies because of their failure to meet SRI guidelines, a portfolio must ideally be separately managed, meaning that the investor actually owns individual, or separate, securities in the investment portfolio. A money manager must then apply the investor’s screens, and select an approved company’s stock over an unapproved stock, such as choosing General Motors rather than Daimler Chrysler or Pepsi Cola rather than Coca Cola. While fulfilling the SRI philosophy, it can often lead to sacrificing an opportunity for higher returns.
The screening or filtering process has led to conundrums, however. As recently as 2004, Starbucks was the ‘darling’ of SRI in almost all screening categories. Its relationships with workers, terms of international trade, fairness to coffee growers, etc. were all held up as shining examples of good corporate behavior around the world. However, in 2004, Starbucks entered into a joint venture with a major alcoholic beverage company for the distribution of a coffee-flavored liqueur featuring the eminently saleable Starbucks name and logo. Several index funds and portfolio managers were forced to sell the stock because of anti-alcohol screens, despite the stock’s strong performance and role as a global employer and corporate citizen.
Developing an agreed upon set of filters is challenging and difficult, particularly for a diverse group of investors with a smaller-scale pooled portfolio invested in mutual funds rather than having a separately managed portfolio. The Pooled Investment Fund falls into this category.
How does the Pooled Investment Fund (PIF) Accommodate Socially Responsible Investing?
A less perplexing means of achieving Socially Responsible Investing is through Engagement, the policy adopted by the National Episcopal Church and the Diocese of Minnesota. Engagement, or Shareholder Activism, asks that all money managers vote proxies in the best interest of all concerned, without specific attention to individual characteristics.
This policy, adopted by the National Church in 2001, suggests that prudent judgment based upon circumstance is the appropriate path to follow:
Abstract: The 73rd General Convention commends and encourages
the Church Pension Fund to continue stockholder actions and urges
other Church entities to exercise similar responsibility in their investments.
Careful selection of mutual fund investments and monitoring of those funds’ proxy voting allows the Pooled Investment Fund to be mindful of social issues while achieving its goal of long-term growth for its underlying investors.
What Are The PIF’s Investments?
The Pooled Investment Fund invests in a variety of carefully selected mutual funds recommended by the PIF’s investment manager and reviewed and researched by the Investment Committee before investing. The PIF’s manager provides regular updates to the Committee, and communicates with the Committee’s Chair as needed. Committee Guidelines dictate that the Committee must approve a new investment, but the Committee Chair has the authority to approve terminating an investment if necessary.
Mutual Fund investments are chosen for their quality, long-term performance and risk management practices. A description of the PIF Funds is available from the Diocese office.
Diversification is a key element to strong performance and prudent risk management. This chart illustrates the PIF’s broad diversification across the global capital markets. While the allocations vary slightly from quarter to quarter based on market conditions, the PIF’s Investment Objectives emphasize diversification.
How Has the PIF Performed? The PIF Posted Positive Performance in 2006!
Diversification, disciplined long-term strategic asset allocation, and shorter term tactical allocation adjustments have provided competitive returns with modest risk, important qualities for congregations who invest through the Pooled Investment Fund.
Despite political change, erratic energy prices, continued war in the Middle East, and capital market uncertainties around the world, 2006 proved a rewarding year for PIF investors.
The fund ended the year with a substantial return of 13.2%. The PIF's broad diversification and thoughtful asset allocation provided this return with modest risk to investors.
Overview: Historical Performance
The Pooled Investment Fund
The Trustees of the Diocese of Minnesota, Inc.
2000 3.5%
2001 -4.1%
2002 -11.8%
2003 23.9%
2004 9.5%
2005 5.9%
2006 13.2%
Through the Pooled Investment Fund, the Trustees manage over $23 million in funds belonging to the Diocese of Minnesota and many of its congregations. A brochure about the Pooled Investment Fund is here.
The Investment Committee welcomes comments and questions. Please contact James Pavlik, Principal Financial Officer at james.p@episcopalmn.org
Gailen Krug, a member of St. Stephen's Church, Edina,
was recently re-elected to a second term as a Trustee
and serves on the Investment Committee.
The Rev. Leonard Freeman, rector of St. Martin's by-the-Lake,
Minnetonka Beach, recently completed two three-year terms
as a Trustee and served on the Investment Committee.
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