RAIN Journal of the Center for Urban Education SPECIAL ISSUE Socially Responsible Investing AN INTRODUCTION Rob Baird EDITOR Special Issue 1987 Volume Xin Number 1
A Message from the RAIN Editor Well, RAIN has, so to speak, weathered its most recent change. We've received both applause and criticism. One reviewer went so far as to say "RAIN dries up." Another person thought that RAIN no longer looked like a comic book, and "felt like a real magazine." The "Northwest Information Economy" article generated several responses, including one person who felt it didn't go far enough in defining the next economic period, and another, representing a post-industrial company, who ironically, couldn't earn a living. Steve McCurle}^s article was welcomed as good, solid, and timely, advice. A national church organization may reprint it for distribution to its membership. Because the last issue was delayed, and because we were frank about RAIN's economic situation, the rumor mill generated some exaggerated stories. A woman arrived from Boston studying the state of the environmental movment, and immediately voiced her sympathy for our "plight"—^making me feel as though I had not noticed the death of a close friend. A book distributor had heard from someone in Eugene that RAIN was no longer published. I suppose we spread some of this ourselves by an editorial that said the old RAIN had not enough supporters to continue, but it always amazes me how quickly people spread a rumor, and what the rumor becomes from fairly humble origins. What is normal? RAIN has never been a rich enterprise. Nobody, considering the number of hours logged, has received above minimum wage for doing it—ever! The circulation has always been small. Probably most people would be shocked by the working conditions and the circulation of well known and supposedly well supported periodicals. There are two secrets behind the successful ones: (1) one or more fanatic true believers who live and breathe the magazine, and (2) inherited wealth or other form of outside subsidy. Maybe I'm just jaded but I can't remember an easy time for RAIN (or for most anything I've chosen to work on). There have been dull and exciting times, but never easy. Some things are not meant to be easy—if art were easy it would probably be worthless. Our own attitute toward the new RAIN is that the first issue was a dress rehearsal. If we had had more time we would have worked out more small details of design and sought a better balance of material that would reflect our perspective. But the show must go on. We hope you will give us a couple of issues to find ourselves and our niche. This issue grew out of a series of activities of the last couple of years. Rob Baird, formerly a RAIN employee, became interested in ethical investment issues and has developed the interest into a career. RAIN has always tried to provide its readers with ways to act on their values. Socially responsible investing fits the bill perfectly, helping you to put your money where your mouth is. For librarians: this is Volume XIII, Number 1. Volume XII, Number 4 was a combined Fall/Winter issue. This issue has no seasonal indication, and the next issue Volume XIII, Number 2 will be the spring issue. It will be a late spring, just as spring usually arrives late in the maritime northwest—after a false spring such as this issue. Steve Johnson RAIN Volume XIII, Number 1 Special Issue, 1987 Editor Steve Johnson Designer Susan Applegate Circulation Manager Alan Lockler Intern Andris Wollam Printing Argus Printing RAIN is published quarterly by the Center for Urban Education. RAIN subscription and editorial offices are at 1135 S.E. Salmon, Portland, OR 97214, 503-231-1285. Subscriptions are $18 per year. Writers' guidelines are available for a SASE. RAIN is listed in the Alternative Press Index. Copyright © 1987 by the Center for Urban Education. No part may be reprinted without written permission. ISSN 0739-621X.
Socially Responsible Investing AN INTRODUCTION Rob Baird EDITOR
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Socially Responsible Investing AN INTRODUCTION Rob Baird EDITOR CONTENTS Introduction hy Rob Baird 3 Socially Responsible Investing: What It Is, Where Is It Going? 4 An Interview with Joan Bavaria, Chuck Matthei, and Amy Domini Socially Responsible Investment Funds Guide 8 A Financial and Social Summary of Eight Money Market & Mutual Funds How a (SRI) Mutual Fund Works 10 An Interview with Jerome Dodson Finding a Financial Planner 12 An Interview with Kathleen Kendziorski Investing in Community hy Chuck Matthei 14 Socially Responsible Banking: Chicago's South Shore Bank by Rob Baird 18 Socially Responsible Investing and the Church 22 An Interview with Darrell Reeck Access 24 Directories, Publications, and Research Organizations Center for Urban Education Portland, Oregon
Rob Baird has worked for a variety of nonprofit community organizations, including RAIN magazine and the Center for Urban Education. He is a graduate of Oberlin College and Duke University (M.Div.). Rob is now an account executive, specializing in socially responsible investing, with the Anderson Financial Group, in Portland, Oregon. He is a member of the Social Investment Forum. Acknowledgments Special thanks to Steve Schneider for his support in making this book possible. Thanks also to F. Lansing Scott, former RAIN editor, and Julia May, former RAIN intern, for their hard work on the articles reprinted from the Summer 1986 issue of RAIN. The article, "Socially Responsible Investing and the Church" was originally printed in the January/February 1987 issue of the Ecumenical Ministries of Oregon Newsletter. The assistance of a number of editors and proofreaders is appreciated, including: Carlotta Collette, Alan Locklear, Jeannette Goostree, and Andris Wollam. © 1987 Center for Urban Education. All rights reserved. Center for Urban Education 1135 S.E. Salmon Portland, Oregon 97214 503-231-1285 Production Editor: Steve Johnson Designer: Susan Applegate To order additional copies of this booklet, please write or call. Bulk purchase prices are available. Page 2
Introduction Awareness of socially responsible investing (SRI), applying social as well as financial criteria to investments, is on the rise. Major financial publications and TV news programs have carried stories on the subject, stockbrokers and financial planners now recognize the concept, and press coverage of divestment in South Africa has brought the issue to the public's attention. The Social Investment Forum, the field's national trade association, found that by April, 1985, $40 billion of investments had been screened using social criteria. Now over $300 billion has been socially screened and the number is growing fast. The purpose of this publication is to help novice investors (or investors new to SRI) manage their financial resources according to their values. Interviews and articles by experts cover the full range of socially responsible investment opportunities. The first article is an interview with three of the best known experts in the area of socially responsible investing: Joan Bavaria, Amy Domini, and Chuck Matthei. They answer some of the basic questions about SRI and examine its direction. Jerome Dodson, president of the Parnassus Fund, explains how a mutual fund works and what is involved in using social criteria to make investment decisions. The "Socially Responsible Investment Funds Guide" provides an overview of the social and financial performances of socially-screened money market and mutual funds. Many people do not have the time or interest to manage their investments and prefer to work with a financial advisor. Kathleen Kendziorski, a registered investment advisor in Seattle, Washington, discusses the basics of financial planning and how to choose a financial planner. Community investing has the potential for a more direct impact on society than traditional investments. Chuck Matthei, a leading advocate of community investing, explains the value of directing investments into underfunded programs such as low-income housing and worker-owned businesses. The South Shore Bank of Chicago has become profitable by making loans in the low-income area in which it is located. In "Socially Responsible Banking" we look at the national model of a community development bank. Churches, primarily at the national level, have been active in SRI. Darrell Reeck looks at that activity and explains how churches can get involved. Finally, there is a list of resources—directories, newsletters, and research organizations—for those seeking more specific information. The underlying theme of the socially responsible investment movement is the demand for ways to invest money consistent with one's values. Baby boomers, whose values were crystalized in the 1960s and early 1970s, are now advancing in their professions and have money to invest. As this generation, as well as those in other age groups, looks at how its money is invested, including pension funds, and college and church endowment funds, there will be the potential for a dramatic change in the way capital is used in the U.S. economy. 4 Glossary Bond: Debt in which a government agency or corporation agrees to pay a specified interest and repay the principal over a designated period of time. Capital Gain: Profit from the sale of a stock (or other asset) at a higher price than for which it was purchased. Commission: A broker's fee for buying or selling securities. A mutual fund commission is often called a load. Dividend: Payment from the profits of a corporation to its shareholders. Mutual Fund: An investment company that offers shares of its portfolio of stocks and bonds with gains or losses distributed to shareholders. The individual investor gets the advantages of diversified investments and professional management. Prospectus: A legal document that must be given to every investor who purchases registered securities. Revolving Loan Fund: A nonprofit organization that takes loans from investors and makes loans to community programs, such as low-income housing or worker-owned businesses. Securities and Exchange Commission (SEC): Organization created by Congress to enforce securities laws and protect investors. Stock: Ownership (equity) shares of a corporation. Page 3
Socially Responsible Investing What It Is, Where Is It Going? The follomng interview provides a look at socially responsible investing (SRI) from the perspective of three of its best known practitioners. The McKenzie River Gathering Foundation, based in Eugene, Oregon, sponsored the 1986 Socially Responsible Investors Conference. Rob Baird had the opportunity to interview: Joan Bavaria, founding president of the Social Investment Forum, the field's trade association, and president of Franklin Research and Development Corporation (Franklin), an investment management firm in Boston; Amy Domini, author of Ethical Investing and an investment counselor and vice president of Franklin; and Chuck Matthei, director of the Institute for Community Economics (ICE), which operates the largest community-based revolving loan fund in the country. CUE: What is socially responsible investing (SRI)? MATTHEI: The most basic definition is the application of social as well as financial criteria in making an investment decision. In practice it means different things to different investors. Social values and priorities differ from case to case. The one issue that has clearly drawn the greatest attention and investor response is divestment in South Africa. At latest count, $80 billion has been ordered divested from companies doing business in South Africa. The volume of capital managed with more extensive social screens is much smaller, but still significant—in the hundreds of millions—and growing quite rapidly. Social investing ranges from the application of social screens to conventional stocks and bonds to, at the other end of the spectrum, loans for investments in community development. CUE: Why is there a growing interest in SRI? DOMINI: What usually gets people interested is this kind of realization: I work three afternoons a week for Physicians for Social Responsibility and Tm getting dividends from General Electric. This doesn't make sense. If I looked at your checkbook, Td know you pay $110 for a pair of shoes and give $10 to the Girl Scouts. I'd have an idea of your priorities. If I looked at your stock portfolio, you would be a rare person if I could get any idea of what you cared about. Money is very personal. The last thing you will tell anyone is how much money you make or how much is in your stock portfolio. It's that intimate, yet you haven't integrated it into your life. CUE: Rather than SRI, why not make as much money as possible and then decide where to give charitable donations? BAVARIA: We are a total system. In the end there is no way to divorce the ethical decisions from your investment portfolio. At some level people are making decisions on a social basis anyway. It becomes a question of whether you can have the same results in an ethically integrated portfolio. We think that question will be resolved irrefutably with a resounding yes. You can definitely have the same performance, so why not integrate your social values? MATTHEI: Many people are skeptical of the results. What is happening now is that all the funds of all different types are building a track record that will overcome that skepticism. The fact is that the Franklins, the Calverts, and the Working Assets are posting returns comparable to unscreened portfolios. CUE: In your experience, are you seeing that companies that have a more progressive approach outperform others? You can definitely have the same performance, so why not integrate your social values? BAVARIA: It would be presumptuous to draw that correlation. What you can say is that they are smart companies. They aren't ignoring the bottom line, but they are sensitive to what's going on around them and sometimes they are survivors because of that. CUE: It is often difficult to cite relationships of cause and effect. Can you cite instances where a company has been motivated by the SRI movement to change some of its policies? BAVARIA: One of the more recent and most outstanding is that AT&T has divested from South Africa and is offering its employees a South-AfricaPage 4
free pension alternative. They have a very broad employee base and the employees and shareholders gave them a lot of trouble. There are a lot of other small anecdotes. One of the funnier ones is that we at Insight [Franklin's newsletter] write up companies and recommend buying or selling a stock. We wrote up Pitney-Bowes [maker of office equipment] at one point as a buy. Then it became very expensive and faded away. Pitney-Bowes called us up and said, "What did we do?" We have a lot of interchanges like that. CUE: What would you suggest for the small individual investor? BAVARIA: When you are just starting to save money you naturally start at a bank, and it gradually becomes big enough until you think of more creative investments. You might think about credit unions rather than the international bank. Credit unions are by definition neighborhood organizations that keep capital in the same neighborhood. There are some banks that are neighborhood-oriented. When you have several thousand dollars, the next step is a mutual fund. Unless you have $100,000 or closer to a quarter of a million it's very difficult to be an investor in the stock market. CUE: How can people dealing with a board of trustees convince them to shift investments for which they are responsible? BAVARIA: If they are trying to convince a board or individual trustee, one of the first parameters is to remember that the money doesn't belong to the trustees—it belongs to you or to a church or to a pension. The ownership is really not with the board, the board is to serve the owner. If you're convinced of that, you will go a long way. They are usually concerned that they will be sued for negligence by someAmy Domini one down the line or that they aren't going to meet their income requirements. You need to show them the records of existing social investment funds, and say this isn't true. We can prove that you can do just as well with social screens applied to a portfolio. You need to provide them with the data that they need to feel that they are not taking undue risk, and let them know that you are the owner and you have rights, too. We are beginning to see mainstream interest. It's not just on the fringes. CUE: Another option for socially responsible investors are community loan funds. How do they work? MATTHEI: Over the last six years almost 200 investors, individual and institutional, have committed a total of almost $4 million to our loan fund on a variety of terms. We have taken that money and made about 150 loans to community development projects in 20 states, and wonder of wonders, we haven't had a single loan loss yet and we've never been a day late in payment to a lender. The social performance has been just as exciting. We did a brief survey of our housing loans. We found that in $500,000 of housing loans, we've leveraged at a rate of five to one. That means that for every dollar that we put directly into those projects more than $5 comes from conventional sources that would not have flowed unless we came up with the missing piece of the financing package. Who benefits from that housing? Look at the complexion of deep poverty in the United States; we are Joan Bavaria Page 5
building houses for those people and successfully financing them. CUE: What can be done to keep capital in the local area? MATTHEI: What's needed is both public and private activity. We've spent most of the day talking about what investors can do in the private sector. The social investment movement is also in some sense a grassroots political movement. This movement can help build a constituency that can build more effective public policy. We ought to be looking at how public agencies dispose of publicly held property. We should insist that every public agency give first consideration to economic institutions that have the greatest benefit for the community over the long term. We should be willing to take even more aggressive action if that's what required. In New Bedford, Massachusetts, the mayor threatened to use eminent domain power to seize a factory to protect it from becoming a runaway shop to Taiwan, leaving the community in shambles. We need to recognize where the community has created value and assert our legitimate interests as a public body. What would a just economy look like and how will we get there? Finally, I think we need to hold the private institutions more accountable. In Massachusetts we have an organization called the Massachusetts Urban Reinvestment Advisory Group. It monitors bank compliance with the Community Reinvestment Act [CRA]. CRA doesn't go far enough, but it at least says that banks have some responsibility to the communities in which they are taking all that money. A CRA challenge in Chicago resulted in a $135 million settlement from the major banks and a commitment to mortgage money to neighborhood housing development. It's a movement on several levels. It's a movement on the grassroots level wherever it's conducted. It's a movement of accountability to private institutions. It's a movement to change the focus and priorities of public policy. DOMINI: If you want a prediction, community investment is going to be the area you are going to hear most about in the next few years. This is what people are looking at at the national level. The Episcopal Church nationally divested from South Africa. The next area of study is community development, not divesting weapons. CUE: Are institutions willing to accept a lower return that may result from community investments? DOMINI: Institutions are created for some social purpose. South Africa made them aware that they have money and that it was working in conflict with their social values. Now they are interested in a positive step. They are studying community investing as one positive step. CUE: What directions are emerging in the SRI movement? BAVARIA: We are beginning to see a mainstream interest in what we are doing. I don't think anything gets done in this country unless it reaches the mainstream. We are a middle class society. Any invention is started by "mad artists" and then others pick up the idea. I think that's what's happening now. Union and public pension funds are beginning to get interested. It's hitting people it never hit before. It's not just on the fringes. CUE: What efforts are being made to expand interest in SRI? BAVARIA: The Social Investment Forum has engaged in a public relations effort where we are appearing on television programs. The media have been very kind to us and written good things about us. Some less than good things, too, but that's just part of public debate. There are various kinds of educational seminars. Amy wrote a book; there are some of us who are publishing. There is a lot of outreach, networking, and public relations involved. Last, but not least, we are striving to achieve excellent performance and be wonderful professionals. Money is power. The investment of money can become the exercise of power. MATTHEI: I think this movement is moving out of its infancy, but is still a very small child. We've achieved the goal of putting the concept before the public—at least there is initial recognition in quite a number of quarters. Clearly the next step is a lot of promotional activity—spread the word and debunk the myths. Over time, there are going to be some legislative issues, particularly regarding pension fund investments. Pension funds, in the foreseeable future, will account for about half the value of the American economy. There is the potential to redirect the economy in fundamental ways. It's important for us to grow as a movement, not simply to look outward but to look Page 6
inward. There are a lot of difficult and challenging questions about the nature of wealth, where it comes from, and how it is used. What would a just economy look like and how will we get there? We need to look outward and publicize the very credible record we've assembled, but we also need to look inward and be willing to challenge ourselves and one another. CUE: Has the Social Investment Forum considered setting up guidelines, so that as the SRI movement grows it has a credible reference? BAVARIA: Yes, the Social Investment Forum does have a code of ethics that is reasonably broad, and asks members to subscribe to certain disclosure and honesty requirements. What the forum does not do is evaluate members. The only mechanism we have now is the reports of other members. Certainly over time we hope to refine those processes. I think it is very important. CUE: Will SRI have an impact beyond an individual's investments being "clean"? Will it have a social impact? BAVARIA: The South Africa situation has been impacted by the divestiture movement. There is not much question that it surprised us. These things have a natural energy, and at some point they take off. I think that what has happened because of South Africa is that people are much more aware of the way Socially Responsible Credit Card Would you like to help stop the arms race and feed the hungry every time you say, "Charge it"? It's now possible. The managers of Working Assets Money Fund have established the Working Assets VISA card. When someone signs up for a card, $2 of the $22 annual fee goes to nonprofit organi2»tions such as Sierra Club, Oxfam, and Amnesty International. Each time you use your card, 5^ goes to the same groups. The interest rate is 17.5 percent. The Working Assets Money Fund is a money market account that avoids investing in firms that manufacture weapons or pollute the environment. Shareholders were surveyed to find out what other financial services were desired. The number one response was a credit card. Although some of the Working Assets board members felt that they should be creating ways to save money rather than spend it, the shareholders got what they wanted. For more information, contact: Working Assets, 230 California St., San Francisco, CA 94111; 415/ 989-3200 (collect). corporate America acts in other countries. You can see the research beginning to broaden to the Third World. Are corporations abusing or taking advantage or are they supporting the local economy? DOMINI: Money is power. The investment of money can become the exercise of power. The first woman who chained herself to the courthouse door didn't get the vote. She didn't get the respect of her family. She didn't get anything. It takes a lot of people to make a major social change. It takes people doing it from all directions. It takes people who are willing to chain themselves to the courthouse door, build shanty towns on campuses, work through the court system, a shareholder action group, a divestiture group, direct investment—whatever it takes—a multi-pronged approach is needed to create social change. # SRI Around the World SRI is not confined to the United States. Canada has two SRI mutual funds. The Solidarity Fund of the Quebec Federation of Lahore invests in Quebec companies with good labor records. Vancouver City Savings Credit Union, Canada's largest credit union, opened its Ethical Growth Fund in January, 1986, using five social criteria. The Canadian Social Study Group (246 Queen St., Ottawa, Canada, KIP 5E4) has a directory of Canadian organizations involved in social investing. Great Britain has an array of mutual funds, community lending banks, and a venture capital fund for social investors. The Stewardship Unit Trust was the first mutual fund and excludes companies in South Africa or those involved in arms, tobacco, alcohol and gambling. It was started in 1984 by the Friends' Provident Society Insurance Company in Dorking, Surry. The Financial Initiative in Salisbury, Wiltshire, is for investors wanting to support the start up of "humanely and ecologically worthwhile" ventures. The Ethical Investment Research and Information Center (9 Poland St., London, WIV 3D6) publishes a quarterly newsletter on ethical investing in Great Britain. Australian investors can participate in August Investments in Sydney, the first company there to use ethical criteria. The Southern Cross Capital Exchange was modeled after coimnunity banks in Germany and Great Britain and lends to a variety of "ethical projects." Page 7
Socially Responsible Investment Funds Guide This brief guide includes a chart of financial information and a description of investment guidelines for funds that screen their investments based on social as well as financial criteria. Note that the term "socially responsible" is relative. Each fund applies a very different set of criteria. The New Alternatives Fund, South Shore Bank, and the Parnassus Fund seek out a particular type of positive investment (such as solar energy), which tends to exclude negative investments (such as weapons or nuclear power production, operations in South Africa). Other funds also seek positive investments, but are more specific on what they exclude. An example of how different these funds can be is that Minimum Investment Date Started Ave. Annual Total Return 1983-86* 12 Month Total Annual Return** Sales Fee Total Assets (millions) Mutual Funds: Calvert Social Investment Fund $1,000 1982 15.8% 21.16% 45% 104.3 Dreyfus Third Century Fund $2,500 (IRA-750) 1972 14.0% 12.61% 0.0% 152.7 New Alternatives $2,650 (No IRA) 1982 149% 30.26% 6.0% 2.0 Parnassus Fund $5,000 (IRA-2000) 1985 10.6% 23.82% 3.0% 3.3 Pax World Fund $250 1970 16.5% 15.14% 0.0% 53.8 Lipper General Equity Fund Average (Lipper Analytical Services) — — — 22.22% — — Money Market Funds: Current Yield Calvert Social Investment Fund $1,000 1982 5.24% 6.16% 0.0% 61.1 Working Assets Money Fimd $1,000 1983 5.14% 6.06% 0.0% 1055 South Shore Bank "Development Deposits" $2,500 1973 5.40% 6.34% 0.0% 48.0*** Donoghue's Money Fund Average {Donoghue's Money Fund Report) — — 5.30% 6.19% — — This information has been obtained from sources we believe reliable, but cannot be guaranteed. In addition to the above information, an investor should examine a fund's social screen and a fund prospectus. *Ave. Annual Total Return: calculated for four years (two for Parnassus Fund) ending 12-31.86. **Mutual fund 12 month total returns, through 2-26-87, from Lipper Analytical Services. Money market 12 month yield and current 30 day (except South Shore Bank) yield from Donoghue’s Money Fund Report. •**Development Deposits program includes $14 million in money market and $34 million in certificates of deposit. Page 8
Pax World Fund is the most thorough of all in excluding military and weapons-related products, while Dreyfus Third Century Fund does not specifically screen this area. Calvert Social Investment Fund and Working Assets have the most comprehensive social screens. There are also some mutual funds that have a partial screen or do not have a specific social screen, but are often used by socially responsible investors. The Pioneer Group (60 State Street, Boston, MA 02109) has five funds and an unwritten policy not to invest in alcohol, tobacco, gambling, or South African companies. A number of mutual funds invest primarily in certificates of the Government National Mortgage Association. Known as "Ginnie Maes," this investment represents partial ownership in a pool of mortgage loans. This type of fund is used since, at present, there are no socially screened bond funds. Municipal bond funds are also used. Municipal bonds are issued by local governments (e.g., state, county, city) and the interest earned is not subject to federal income taxes. Money from the bond sales is used by government agencies to support schools, housing—or nuclear power plants. When using a partially screened or unscreened fund, it is advisable to review a list of the fund's holdings to be sure you know in what enterprises you are investing. A summary of the financial information for the socially responsible funds is on the previous page. The minimum investment varies quite a bit among funds. Two of the funds have lower minimums for Individual Retirement Accounts (IRAs). The "Average Annual Total Return" column compares the return of the funds from 1983 through 1986. The next column, "12 Month Total Annual Return," indicates the return for 12 months ending February 26, 1987. The Lipper General Equity Fund Average and Donoghue Money Fund Average are averages of money market and mutual funds in general and are included for comparison purposes. The mutual funds should not be compared directly because they have varying investment objectives as indicated at the end of each social criteria summary. SRI Funds Social Criteria Calvert Social Investment Fund, 1700 Pennsylvania Avenue, NW, Washington, D.C. 20006; 800/368-2748 The fund invests in companies that; deliver safe products and services in ways that sustain our environment; are managed with participation throughout the organization; negotiate fairly with workers, provide a good work environment and opportimities for women and minorities; and foster human goals such as creativity and responsibility. It excludes companies primarily engaged in nuclear energy. business activities in South Africa, and the manufacture of weapons systems. Investment objective: growth and income. Dreyfus Third Century Fund, 666 Old Country Road, Garden City, NY 11530; 800/645-6561 This fund invests in companies that show evidence in the conduct of their business, relative to other companies in the same industry, of contributing to the enhancement of the quality of life in America. A company's record is considered in the areas of protection of the environment, occupational health and safety, consumer protection, and equal employment opportunity. In 1986, Dreyfus decided to exclude companies operating in South Africa. There is no screen for the military industry. Investment objective; growth. New Alternatives Fund, 295 Northern Boulevard, Great Neck, NY 11021; 516/466-0808 The fund invests in companies that have an interest in solar and alternative energy development. The fund states that alternative energy by its nature is an affirmative investment that tends to exclude atomic weapons. South African investments, and environmental polluters. Investment objective: long-term growth. Parnassus Fund, 244 California St., San Francisco, CA 94111; 415/362-3505 The fund takes a "contrarian" approach by buying stocks that are out of favor with the investment community. This is done when a company is financially sound and also has a good record in these five qualitative "renaissance" factors: 1) the quality of products and services; 2) market orientation, staying close to the consumer; 3) sensitivity to the community where it operates; 4) treatment of its employees; and 5) ability to innovate and respond well to change. Investment objective: long-term growth. Pax World Fund, 224 State Street, Portsmouth, NH 03801; 603/431-8022 The fund invests in companies that are not engaged in manufacturing military or weapons-related products, or in liquor, tobacco, or gambling industries. Seeks out companies with fair employment and pollution control policies. Excludes companies operating in South Africa with the exception of those providing food and medicines. Investment objective: income and, secondarily, growth. South Shore Bank, 71st & Jeffery Blvd., Chicago, IL 60649; 312/288-7017 South Shore Bank has a "Development Deposits" program that seeks deposits from all over the country to support its innovative lending program in low-income Chicago neighborhoods (see "Socially Responsible Banking," page 18). Accounts available include savings, checking, money markets, and certificates of deposit at competitive rates. Every depositor is insured up to $100,000 by FDIC. Investment objective: income. Working Assets Money Fund, 230 California Street, San Francisco, CA 94111; 415/989-3200 (collect). The fund seeks investments that create jobs and develop the American economy, such as housing and small business, promote the advancement of women and minorities, and bargain fairly with employees. It avoids firms that pollute the environment, manufacture weapons as a principal business activity, generate electricity from nuclear power, or have a substantial presence in a foreign nation controlled by a repressive regime such as South Africa. Investment objective: income. Page 9
How a (SRI) Mutual Fund Works An Interview with Jerome Dodson Jerome Dodson is president of the Parnassus Fund. He was formerly president and co-founder of Working Assets Money Fund. He was interviewed for CUE by Rob Baird. CUE: What is a mutual fund? DODSON: A mutual fund is a registered investment company. The term "mutual fund" is just a nickname. It is registered with the Securities Exchange Commission (SEC). It is a way for investors to pool their resources to get professional management. If you buy shares in the investment company, that entitles you to a percentage of its profits or income. The mutual fund invests the proceeds from the sale of its shares in shares of other securities, whether it's stocks or bonds. CUE: Mutual funds are very popular. What advantages do they have over other investments? DODSON: The advantage is for smaller investors. By that I mean under $100,000. The reason people like them is that first of all you get diversification. Say you had $10,000 to invest and you wanted to spread it out over 20 different stocks. If you divide 20 into $10,000 you have $500. You generally can't get a round lot, it's just too small. A round lot is 100 shares, and it is difficult to buy fewer than 100 shares, and you would be charged a higher commission. You have more safety in a mutual fund because it is diversified. Professional management is the second advantage. Most people don't enjoy making investment decisions about specific companies. They would like to turn it over to a third party who has enough information. CUE: What actually happens to my money when I send it to a mutual fund? DODSON: You make out your check to the fund, and it goes to the transfer agent. In the case of the Parnassus Fund, we are small so we are our own transfer agent. In a lot of cases they will have a bank or computer company as the servicing agent. They open the envelope and deposit your check at a custodian bank. Every mutual fund has to have a custodian bank to hold its securities and cash. The fund never actually has your money, it really goes to the custodian bank, which handles everything. The fund provides the management. The fund manager gives instructions to the bank to put the money in stocks, bonds, money market instruments, or keep it in cash. CUE: How do you receive earnings from the fund? DODSON: Usually they are paid out once or twice a year. You get capital gains and income dividends. They are usually automatically reinvested to buy more shares in the fund or you can take it out in cash. CUE: There are many different types of funds. What are the different funds trying to accomplish? DODSON: The three major types are a stock mutual fund, a bond mutual fimd, and a money market mutual fund. Originally they were all stock funds or equity; you were a part owner in the companies you invested in. If you invested in a mutual fund and it invested in 20 companies, then the mutual fund shareholder was part owner of all 20 companies. They are the most aggressive investors. They take a reasonable amount of risk to get a much higher return. Another type is the bond fund. This is for people who just want income. They don't want capital gains or to take many risks. This fund will invest in corporate bonds, U.S. government bonds, or Ginnie Maes, the Government National Mortgage Association, which supports housing. In essence you are lending money to the corporation or the govermnent. The third type is the money market fund. It is similar to putting money in the bank—^you can take it out any time. The interest varies. A couple of years ago it was 15 to 16 percent and now it is down to 5 or 6 percent. They just buy short-term money market instruments like certificates of deposits in banks or commercial paper [short-term loans] from corporations. CUE: There are a lot of mutual funds now; what would convince me to choose one over another? DODSON: The three reasons are past performance, the investment philosophy, and the manager. For past performance you look at how the fund has done in the past few years, up to five years.
The investment philosophy is another way. You might want to look at a fund that specializes in small companies or one that invests in larger, more stable companies, or ones that are contrarian, that look for companies that are out of favor. It depends on what philosophy you are most comfortable with. The third reason is that you like the fund manager. CUE: What is the minimum investment? DODSON: Minimums vary. In some you can start with as little as $100 or $200. Most require $1,000 to several thousand, some as high as $25,000. Typically they are below $5,000. CUE: Do mutual funds charge fees? DODSON: It depends on the type. There used to be pretty clearly two types: a load fund and a no-load fund. A load fund was sold by a broker. The load was compensation for the broker's time looking for a fund, explaining it to you, or giving you service. Typically the load was 8-1 /2 percent. The no-load fund didn't have any sales charge. The fund was sold through ads in the paper and things like that. More recently, this has been breaking down and they have what they call low-load funds, which is 3 percent or less. They also have what is called a 12b-l charge in which the fund takes a percentage of the assets each year. You may say that's not so bad, but one-half of a percent per year begins to add up for the long-term investor. There is also what they call a redemption charge or back end load. To redeem your shares you have to pay a fee. It's hard to say which is the best, but you should be aware of all the different kinds. CUE: What's involved in adding the use of social criteria to a mutual fund? DODSON: It does create a lot of work. You have to investigate things like a company's environmental protection policy, if they are defense department contractors, if they discriminate against minorities. You get some of that from government reports. Investor newsletters like Insight have good information. Most of the funds do the research themselves. CUE: At Working Assets you said you excluded certain things such as weapons manufacturers. At Parnassus, you take the other approach and look for positive attributes. DODSON: Right. At Working Assets they don't go out and visit companies. They use government reports. I am more interested in the intangible qualities, like how a company treats its employees, than the negative one of whether they violated the National Labor Relations Act. Just tecause a company hasn't violated that act, doesn't mean it's a good company as far as labor relations go. CUE: How do you feel about the view that using social criteria automatically reduces your return? DODSON: In theory it does, because if you exclude certain investments, you don't have as many investment opportunities. There are still enough investments around to be able to get a return as good as any other fund. CUE: Are socially responsible investment funds doing just as well financially as other funds? DODSON: Over the past couple of years they have been doing just as well. CUE: Do you think that over time they may do better because they use a social criteria? DODSON: That's quite controversial. I think it is true myself, but I wouldn't want to push it too far. If you take an example, say Delta Airlines versus United. Both are successful and quite large. United treats people like automatons. They are not a very enlightened employer, they are very hierarchical. Delta treats their employees very well. At the Christmas rush you will see executives moving baggage. You would never see that at United. I would invest in Delta. In the long run I think Delta will do better because of the support of its employees. They are going to work harder and there will be good labor relations. It's going to be a much better operation. Now you look at United; it's large and they have done very well, but over time Delta has been more profitable. When the executives and management are more enlightened, they are going to do better. I don't have a study to back it up, that's my opinion. I want to see if in the long run—three or four years—I will be able to get a return better than the market averages by using this social investment philosophy. 4 Jerome Dodson. Photo by Janet Fries. Page 11
Finding a Financial Planner An Interview with Kathleen Kendziorski Kathleen Kendziorski is a registered investment advisor with Financial Network Investment Corporation in Seattle, Washington. She was interviewed for CUE by Rob Baird. CUE: What is financial planning? KENDZIORSKI: Financial planning is looking at all aspects of a financial picture: where is your money, where is it going, taxes, cash flow, insurance, and emergency situations that may arise. Then trying to identify goals. 1 always ask, "What do you want to accomplish?" And finally, working toward those goals in a way that is comfortable; be it levels of risk or a concern for socially responsible investing (SRI). Financial planning is an ongoing process. Some of it may be very specific issues such as where to put my Individual Retirement Account (IRA). Nothing is cast in concrete; things change, you change. A financial plan is flexible. CUE: Why do people need a financial planner? KENDZIORSKI: We put more time into planning our vacation than we do into our financial plan. We also don't have information about investment op tions. Particularly for women, we have been left out of discussions about money. The goal of a financial planner is to give you more information so you can make a better decision. CUE: How do you find a financial planner? KENDZIORSKI: You're looking for a professional just like any other. So what do you do first? You talk to people that have financial planners. You ask your friends or family, "Are you working with someone you like?" Second, if you have access to other advisors: an attorney, a certified public accountant (CPA), ask them. If you know people who have money and are investing, and they may not necessarily be friends or family, ask them. Shop around. Don't just talk to one, talk to five. Usually financial planners give a first interview free. CUE: Are there specific questions you should ask financial planners? KENDZIORSKI: Definitely. You want to know if they have other clients in your situation; whether you are just starting out or have a $5 million portfolio. You want to know about the planner's experience and background and how they approach financial planning. In that conversation you should get to: What are my goals? What am 1 trying to accomplish? The idea is that they are working toward my goals, not their goals. They are not trying to get me into a certain kind of approach because all their clients use that approach. Another question to ask is, "How do you make your money?" I explain the three ways that financial planners make money. The final thing is to ask for a referral. Talk to one of their clients. Ask the client what their goals are, do they feel they have been serviced well, is their planner accessible? CUE: What is the most important thing to find in a financial planner? KENDZIORSKI: You are looking for a couple of things. A sense of communication; what you are saying as a client is being heard by the advisor. You want someone who can communicate back to you in a way that you can understand. Not, "I'll take care of it for you, dearie, don't worry about it." Nor the other side, where they give you so much detail that you walk out of the place spinning from too much information. Ultimately, you are looking for someone that you can trust. Do they show genuine concern about you? You know what happens? After talking with two or three planners you come out of it thinking: I'm most comfortable with this person or that person. Ultimately^ you are looking for someone that you can trust. CUE: What are the three ways that financial planners make money? KENDZIORSKI: One is that they charge a fee and they do a comprehensive financial plan. That fee ranges anywhere from $500 to thousands depending on how complex it is. Some will give you a plan for Page 12
you to carry out on your own. Others will facilitate your carrying it out, but will not take a commission. They use products with no load. Some of them will monitor these plans on an ongoing basis for a retainer or on an hourly basis. There are some planners who make their living by receiving a commission. Therefore all the up front time and energy and the plan they prepare for you have not been paid for. But they expect that once you begin investing that will generate a commission. The third type of planner is one that combines the two, which is what I do. I can charge a fee from $500 to $2,000 and I can carry out that plan. In the process there may be investments that pay a commission, but I am no longer biased or forced to recommend an investment with a load. CUE; Investing is more fun than insurance, but financial planning does address insurance. KENDZIORSKI: You have to manage your risk. There is a risk that you may die and your family depends on your income. The chances are low, but possible. For an inexpensive price you can manage that risk, i.e., term insurance [the cost increases as the insured ages]. Now if you cannot save and yet you are committed to papng your bills, then maybe a universal life or variable life [combines life insurance and savings] is a better investment because it is a forced savings program. Disability income is the same thing. Who would be hurt if you were disabled and to what degree would they be hurt? What happens to you, your mortgage, emergency fund or other investments? I approach it on every level. What would happen if your health turned bad? I want people to think about if they are adequately covered, make a conscious decision, and then tell me, "Tm not going to do that but I thought about it." If that's the case, fine, it's your decision and your life. I'm not going to force the issue, but I don't want people to make a decision by default. CUE: Consumer Reports did a cover story on financial planning with the subtitle: "What are they really selling?" Brokers sell stocks, insurance companies sell insurance, but they all call it financial planning. KENDZIORSKI: What is the approach you take to financial planning? If someone has an insurance background and says these are the investments I use and they are all insurance products, then you know your planner is quite parochial and would have a limited outlook. You want someone who deals with all types of investment options. Ask the person: "What is your bias?" or "What is the typical portfolio for someone in my situation?" The title of financial planner is abused. The International Association of Financial Planners and others are trying to address that problem. I always say to people, "It's your money. You're responsible. You're going to have to make decisions. You are just asking for someone to help you make those decisions." CUE: In talking with a planner is there a way to find out how much they know about SRI? KENDZIORSKI: That's a good question. A lot of people say they are interested in SRI, but what do they do in regard to it? My first question is what types of investments do they tell their clients about? Are we talking about just the Calvert Money Market or Managed Growth Fund or about the whole array of options? Second question: Do they deal with individual stocks and have information about their social responsibility? Question three is more global: What types of tools and approaches do you take to help me define what is important to me in terms of ethical investing? The answers will give you a sense of their approach. I have seen a major problem with people who say they are interested in SM but don't have access to resources. I've been flabbergasted by some people who say they are doing SRI. It is very much a speciality. On top of reading everything else, they have to read the material on SRI. You may be better off getting a referral and talking to some of their clients for a recommendation, ll Kathleen Kendziorski Page 13
Investing in Community By Chuck Matthei Chuck Matthei is director of the Institute for Community Economics, which provides training, technical assistance, and financing to community development organizations throughout the United States. In the spectrum of social investment initiatives, community investment programs stand out for their unique ability to strike at the roots of economic injustice and express an affirmative social vision. Community investment funds encourage investors to think not only about what they are opposed to, but what they would like the world—and their neighborhood—to look like in the future. Community investment addresses social needs and opportunities that cannot be addressed through conventional stock and bond investments. Community investment provides housing, employment, and basic human services to those who have been excluded from the real estate and job markets, and it supports the development of innovative, democratic, community-based economic institutions. The line of demarcation between the haves and have-nots in this society is shifting, particularly in the housing markets, on the farms, and in the industrial heartland where factories and communities are neglected and abandoned and thousands of jobs are lost. Factories owned by distant conglomerates are literally "running away," leaving working-class and middle-class Americans unemployed and disenfranchised, and the plight of the poor steadily worsens—yet much of the critical financing for worker cooperatives, and micro-businesses in low-income communities is not available from conventional capital markets. Investors who are concerned by these realities, who want to help realize these opportunities, turn to community investment. Community investment involves three basic social conrunitments. First, it is a commitment to places—to specific communities—and to strengthening the economic and social relationships on which they depend. Second, it is a commitment to the people in those communities who have been systematically disadvantaged or excluded by prevailing economic forces—a commitment to social and economic justice. And third, it is a commitment to the kinds of projects—community development projects—that build an economic base in and for those communities, that effect a just distribution of equity and earnings. What kinds of investments reflect these three basic commitments? Community investment typically finances businesses owned by workers, consumers, or nonprofit organizations—rather than those owned by distant shareholders; it supports community land trusts, housing cooperatives, and nonprofit housing corporations, which provide affordable housing and homeownership opportunities to residents while ensuring that the properties will remain affordable for future residents and will not return to the speculative market. For the investor, community investment offers a wide range of terms and may take a variety of forms. Investments may be negotiated directly between Community investment addresses social needs that cannot he addressed through conventional stock and bond investments. investors and particular conamunity development organizations, but usually they are placed through community development credit unions, development banks, or community development loan funds. Community development credit unions are established to serve low-income communities. They have the ability to effectively meet the consumer banking and credit needs of neighborhood residents—people who are usually served very poorly, if at all, by conventional banks. Occasionally, as in the case of the Page 14
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