2014 Lane Reports

Are Your Portfolio Holdings In Conflict With Your Mission?

The Lane Report, August 2014
Friday, August 1, 2014 10:00 am
by J. Brad Strom, CFA

Mission-aligned or values-based investment strategies that yield attractive social as well as financial returns have been gradually gaining ground in the foundation and non-profit communities in recent years. These organizations seek to invest their assets affirmatively, supporting their missions by aligning their investment holdings with their mission statement. In the aftermath of Hobby Lobby’s vilification (rightly or wrongly) by the liberal press following their  supreme court win and the disclosure that their 401(k) plan held and profited from pharmaceutical company holdings (some of whose contraception products Hobby Lobby objects to providing to its employees on religious grounds), privately held companies like Hobby Lobby may want to borrow a page from the non-profit playbook, aligning their company controlled financial assets with either their corporate mission or their owner’s deeply held religious beliefs, as in Hobby Lobby’s case.

This innovative, “mission-driven” form of investment management speaks directly to the issue of organizations unknowingly letting their portfolio holdings fly in the face of their organizational mission. It does, however, necessitate a much more active, hands-on approach to the whole process of security selection. Assessing the degree to which portfolio holdings may undermine or support philanthropic or mission-based objectives, while providing competitive returns, is no easy task. Employing both social as well as financial metrics when analyzing securities requires portfolio managers to evaluate companies across two completely unrelated sets of data, overlaying an additional level of complexity onto an already complex process. The good news is that, in recent years, a number of new software providers have emerged in the socially responsible or ESG space, that have greatly enhanced the efficacy of screening software. The real challenge remaining lies in the myriad of definitions assigned to corporate social responsibility. Very few, if any, can agree on a cohesive, homogenous definition of the term. “Social Responsibility” means very different things to almost anybody you ask. Therein lies the problem: no two portfolios screens are typically alike; every client portfolio is, by its very nature, unique. The answer then is either to generically screen out all objectionable issues for all clients, as is typical at most socially responsible mutual funds, or develop specific values-based or mission-aligned profiles for each client or group of homogenous clients, and then screen individual security selections pursuant to them. 

While most investment management firms are reluctant to take on these labor intensive relationships due to their inability to manage multiple accounts in any one screening venue, Marc J. Lane Investment Management, Inc. has pioneered a process called Advocacy Investing® that efficiently and cost-effectively addresses this timely issue. The Advocacy Investing approach employs a positive “best in class” portfolio screening strategy that, after first identifying companies with sound business fundamentals and solid corporate governance, screens those companies for corporate behavior that reflects and promotes the client’s personal or organizational beliefs and values. Corporate behaviors targeted by our screens include a company’s environmental performance record, its sustainability and environmental management efforts, its diversity and human rights record, board accountability and independence, as well as faith-based issues, to name but a few. The Advocacy Investing approach does accommodate exclusionary screens where the investor's philosophical or religious beliefs require them, but it goes far beyond negative screening alone to positively align the portfolio with the investor's core convictions, searching out companies that lead their respective industries in making progressive changes in targeted corporate behaviors. 

In short, the Advocacy Investing approach meaningfully speaks to one's own values, corporate or individual. It is practical, it drives change, and it turns passive assets into active assets by employing our proprietary process. Find out more about how Marc J. Lane Investment Management, Inc. is helping organizations drive their missions by visiting our website at www.AdvocacyInvesting.com or contact Marc Lane directly and in confidence at (312) 372-5000.

Peterborough's problem was daunting: Sixty percent of prisoners serving short-term sentences historically had gone on to re-offend within a year after their release. But policymakers were confident that a solution was within their reach. They attracted private investment to pay experienced social service agencies to provide intensive, multidisciplinary support to short-term prisoners, preparing them to re-enter society and succeed outside the penal system. - See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpuf

The world's first social impact bond, or SIB, was introduced in 2010 to fund innovative social programs that realistically might reduce recidivism by ex-offenders in Peterborough, England, and, with it, the public costs of housing and feeding repeat offenders. Prudently building on the strengths of that initiative, Illinois Gov. Pat Quinn is rolling out SIBs to help solve some of the state's most vexing social problems.

A SIB isn't a traditional bond where investors are guaranteed a fixed return but a contract among a government agency that agrees to pay for improved social outcomes, a private financing intermediary and private investors. SIBs shift the risk of experimenting with promising but untested intervention strategies from government to private capital markets, with public funds expended only after targeted social benefits have been achieved.

Peterborough's problem was daunting: Sixty percent of prisoners serving short-term sentences historically had gone on to re-offend within a year after their release. But policymakers were confident that a solution was within their reach. They attracted private investment to pay experienced social service agencies to provide intensive, multidisciplinary support to short-term prisoners, preparing them to re-enter society and succeed outside the penal system.

The government decided which goals would be supported, but exactly how those goals would be achieved was left to the private sector. It was the investors, through a bond-issuing organization, who ultimately endorsed the allocation of investment proceeds — how much would be invested in job training, drug rehabilitation and other interventions.

If the Peterborough plan eventually shrinks recidivism rates by 7.5 percent or more, the government will repay the investors' capital and share the taxpayers' savings with them, delivering up to a 13 percent return. If the target isn't hit, the investment will have failed and the government will owe the investors nothing.

Illinois' SIB effort was spearheaded by the state's Task Force on Social Innovation, Entrepreneurship and Enterprise — the governor's think tank on social issues, which I am privileged to chair — with support from Harvard University's John F. Kennedy School of Government, the Rockefeller Foundation and the Aurora-based Dunham Fund. A request for information issued by the Office of Management and Budget on May 13 yielded responses from service providers eager not only to reduce recidivism here but also to create jobs, revitalize communities, improve public health outcomes, curb youth violence, cut high school dropout rates and alleviate poverty.

Now the governor has issued a request for proposals intended to spur better outcomes for Illinois' most at-risk youth — by increasing placement stability and reducing re-arrests for youth in the state's Department of Children and Family Services, and by improving educational achievement and living-wage employment opportunities justice-involved youth most likely to re-offend upon returning to their communities.

Kudos to Mr. Quinn for bringing SIBs to Illinois. May they soon start delivering on their promise.

- See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpuf
The world's first social impact bond, or SIB, was introduced in 2010 to fund innovative social programs that realistically might reduce recidivism by ex-offenders in Peterborough, England, and, with it, the public costs of housing and feeding repeat offenders. Prudently building on the strengths of that initiative, Illinois Gov. Pat Quinn is rolling out SIBs to help solve some of the state's most vexing social problems. - See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpuf

J. Brad Strom is a Senior Vice President and Portfolio Manager of Marc J. Lane Investment Management, Inc. Mr. Strom is a graduate of Illinois State University (B.S.) and DePaul University's Graduate School of Business (M.B.A.). Mr. Strom is a Chartered Financial Analyst (CFA).


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