Author: lamsridominic

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Interface: Rolling the red carpet for Ray

To all of our Readers:
If there’s any one company that exudes all that this website stands for, then it’s Interface (IFSIA).  Interface is to the corporate soul like the late Ray Charles was, and still is, to music.
Despite its risks (and there are always risks) I like this company, I like what it stands for, its vivacity and inventiveness.
Interface is not the kind of company one imagines as being Socially Responsible.  It’s kind of small, scrappy and its products (modular carpet tiles) were made with chemicals – many of which were toxic.   However…something happened one day when founder (and author) Ray Anderson received an inspirational “ah-ha” moment from a customer.
As Ray describes, it was a dramatic wake up call, analogous to “a spear in his chest.”  He then challenged his employees…
“to head the first company that, by its deeds, shows the entire industrialized world what sustainability is in all dimensions: people, process, product, place and profits – and in doing so, become restorative through the power of influence.”
But rather than letting me explain, I’ll hand over the microphone to Mr. Anderson.  Later, our website will follow-up with an in-depth analysis.  You know, a wise man once said that, “we think with our heads when we should be thinking with our souls.”  Well, my friends, this is one of those times!
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Update on Socially Responsible Investing TRENDS

Gee, right after we finished writing our 5-part series on SRI Trends, SocialInvest.org released its latest survey on the subject.  I read the report to determine if there were any changes worth talking (actually more like writing) about.
The biggest change, or more like surprise, was the continued growth in SRI assets, despite the troubling waters of capital markets.  In fact, SRI has not only become increasingly popular, but Hip!  From the start of 2007 to the beginning of 2010, SRI assets increased more than 13%.  Total AUM was $3.1 trillion excluding the effects of overlapping strategies.  (See table).  This compares with anemic growth of 1% for overall professionally managed assets.  Demand for Socially Responsible Investments has come from the “grass-roots” efforts of investors, and not from the institutions (or their portfolio managers) themselves.
The fastest growth of what’s categorized as ESG investing vehicles was what is called Alternative Investment Funds.  The Social Investment Forum Foundation identified 177 of these vehicles with AUM of $37.8Bn.  Alternative investments vehicles include ones I’ve focused on in my 5-part Series such as Hedge Funds (mostly quant funds) as well as private equity.  Can private equity really do good, or is this an oxymoron?
The number of alternative investment vehicles incorporating ESG criteria increased 285% since 2007, while AUM grew an even faster 6x.  Surprisingly, leading investment criteria were clean technology versus what I had expected would be quantitative funds that screen.
On the U.S. Registered side of SRI, there were 281 mutual funds with $320.3Bn under management.  Most of this was to the ever familiar mutual funds.  The smallest share was to Closed-end funds (just a bit over $200MM).  However, the fastest growth was in Exchange-Traded-Funds (“ETFs”) growing 225% since 2007, to $4Bn.  While still a relatively small AUM, we expect ETFs to continue leading the way in SRI.  As mentioned previously, we like the growth being witnessed here, but are disturbed by the disassociation of the individual investor from the ETF’s investments, and the tendency of ETFs to become like casinos.  (Please review Part V of our SRI Trend series for additional information.)
Going forward, I continue to expect ETFs to grow quickly as well as Social Venture Capital and Private Equity.  As you know, I’m no fan of ETFs or of Private Equity.   However, Social Venture Capital (and Social Enterprise) are areas I believe SRI can really make a difference in society.
The question is:  Would you rather help society, or make a quick-buck investing in an ETF ?
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SRI Trends, Part V: Growth of ETFs and Community Investing.

The below article is the last in our 5 part series on SRI Trends:
4.  Growth of Exchange Traded Funds (ETFs).  This is an area that may well need little, if any introduction.  Though a recent addition to investment portfolios during the last decade, ETFs have become an overnight sensation. 
Definition:  ETFs offer public investors an undivided interest in a pool of securities and other assets and thus are similar in many ways to traditional mutual funds, except that shares in an ETF can be bought and sold throughout the day like stocks on an exchange through a broker- dealer.  ETFs therefore possess characteristics of traditional mutual funds, which issue redeemable shares, and of closed-end investment companies, which generally issue shares that trade at negotiated market prices on a national securities exchange and are not redeemable (Source: Securities and Exchange Commission).
History: In the beginning, ETFs were more simplified investment vehicles utilized to mimic the S&P 500 index.  The first major product, SPDRs (introduced in 1993) was nicknamed “Spiders.”  As you can see, the ETF industry had creative marketing popularizing them since Day 1.  However, ETFs took off in the early 2000s, when Barclays Global Investors launched the ishares line.  Within 5 years, iShares surpassed all of its competitors.  Since then, new competitors have entered the market slicing and dicing industries and sectors into a thousand pieces.  According to the Investment Company Institute (ICI) the number of ETFs grew from just 29 in 1998 to 797 by 2009, representing $777Bn in assets.
It was only a matter of time that ETFs would move out of its humble beginnings as a broadly based index fund, to a mimicker of certain Socially Responsible Indices, such as those following the popular, and longest-running Domini Social Index (now called FTSE KLD 400).  According to Morningstar, there were over $3.2Bn in about two dozen SRI related ETFs as of mid-2010.
This website will not advocate investing in ETFs for a variety of reasons.  For starters, they attract a speculative nature (e.g., animal spirits) in people.  I just can’t reconcile the “making of a quick buck” with ethically-based SRI.  Other negatives include:  Tracking error, Index Composition, sometimes-high management expenses, opaque operating structure, and hidden fees.  Hmm, maybe the ETF holding company itself should be analyzed for ESG criteria!
SRI ETFs, given their niche nature only exacerbate these potential disadvantages.  For example, by default, an ETF tracking the S&P500 will likely have much lower fees and little tracking error, compared to a small, new, exotic ETF tracking solar energy.  Besides, nearly all of the SRI ETFs are invested in “Green-Energy” indices, rather than indices of socially responsible corporations (regardless of whether they’re in green industries or not).  Also, much has been written about surprise investments within ETFs including shares of Halliburton, and BP/Transocean.  As I’ve stated previously, but bears repeating, the individual investor’s desires and moral suasions become disconnected from the ETF’s investment process, and hence, positions.
If you must invest in pooled assets, I recommend screening MorningStar for SRI-based mutual funds.  Morningstar actually uses another name for SRI, calling it Socially Conscious funds.  It defines them as,

“Any fund that invests according to non-economic guidelines. Such funds may make investments based on such issues as environmental responsibility, human rights, or religious views. A socially conscious fund may take a pro-active stance by selectively investing in, for example, environmentally friendly companies, or firms with good employee relations. This group also includes funds that avoid investing in companies involved in promoting alcohol, tobacco, or gambling, or in the defense industry.”   

The most popular include some of the better-known fund families in this area:  Parnassus, Ariel, Pax World, Amana, Calvert, Domini and Sentinel.  Similar to ETFs, SRI mutual funds have grown at a rapid clip.  As of 2007, there were 260 socially screened mutual fund products in the US, with assets of $201.8 billion. By contrast, there were just 55 SRI funds in 1995 with $12 billion in assets (Socialinvest.org).

5.  Community investing is directing capital from investors and lenders to communities that are underserved by traditional lenders.  According to the Social Investment Forum “Community investing provides access to credit, equity, and basic banking products that these communities would otherwise lack.”  Assets in community investing institutions rose about 32% from $19.6Bn in 2005 to $25.8Bn in 2007.  I am a great believer of this type of investing; however, it is out of the scope of this website, hence the quick description.  Interested readers are urged to link to Communityinvest.org.
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Green Mountain Coffee Roasters restates earnings. Can we trust its Social Responsibility Report ?

Green Mountain Coffee Roasters announced that it restated its previous financials after the close on Friday, 11/19/2010. 

On first glance, I was like everyone is, very excited by the resolution of this accounting problem.  The shares are soaring 10% in after-hours trading;  just $5 below their all-time high of $38.  Not too shabby for a high P/E company.

However, on closer inspection, the accounting issues may actually be a bigger can of worms.  Press Release is troubling because:

  1. There were several restatements (albeit just a few pennies per share)
  2. These restatements were made over several quarters (and years)
  3. Worse of all,  they don’t even cover GMCR’s fullfillment vendor, M.Block & Sons

                                      
Like Yogi Berra said, “it ain’t over ’till its over.”  The SEC investigation remains ongoing, though the company indicates its own internal investigation is “nearly complete” implying the SEC doesn’t have an issue w/ GMCR’s accounting w/  M Block & Sons.  What is readily apparent though, – – this company’s got some major internal-control issues.  This is surprising for a company that is so Socially Responsible and into “ESG“.  Can we trust its Social Responsibility report ? link to GMCR’s CSR page

However, a Moody’s analyst I spoke w/ a few weeks ago, mentioned that the key issue was likely with M. Block & Sons.  So something’s not making sense here.

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