Tag Archive for mission-related investing

Mission-Related Investing for the Rest of Us: Equity-like Assets (Part 5 of 5)

Bottom Line:  Investing for growth is much harder in the impact world.  Crowd-sourced equity investments are coming, but aren’t an adequate substitute for index mutual funds or ETF’s.  Local/social equity investments are best viewed as similar to private equity: a small fraction of a diversified portfolio, willingly taking  a higher risk to chase a higher return.  (Remembering here, that the “return” is a combination of financial and social.)

Mission Related Investing for the Rest of Us series:

  1. Part 1:  Motivation  (Using your investments to earn a “social,” values-based, return as well as a financial one)
  2. Part 2:  Background & Investing Theory (Where I’m coming from, and how I used to think about investing)
  3. Part 3:  Banking and Cash Alternatives
  4. Part 4:  Bond-like Alternatives
  5. Part 5:  Stock-like Alternatives

How I currently invest in equities (mostly)

As I mentioned in Part 2, my belief in the Efficient Market Hypothesis means that I’m not trying to “beat the market” with my stock picks, and instead, I choose the cheapest way I can get the very broadest exposure possible, (the Vanguard Total Market Index ETF, (VTI)).  That’s about as far from favoring my local community as possible.

Socially Responsible Investing

The basic level of making sure that your stock investments line up with your values is ensuring that you aren’t invested in companies whose business or business practices you find objectionable.  Advisors tend to talk about “screens” for alcohol and tobacco, but other industries like military/defense, mining, or companies that have engaged in questionable financial practices or exploitation of their customers (pay day loans, e.g. or the “too big to fail” banks that steered minorities into mortgages that were not the best fit/rate for which they were eligible.)

There are mutual funds that perform this research and ensure that their holdings meet the criteria described in the prospectus.  See, for example, the list maintained at www.socialfunds.com.

Going beyond the “negative screens”, you can proactively choose to invest in sectors that you feel will pay off for society if they succeed.  Alternative energy investments are an example here, and the socialfunds list includes them as well.  The returns over the recent history have not been pretty–make sure you are comfortable that the money you are investing can be subject to the risk that is inherent in these investments.

“HIP” Investing

R. Paul Herman has coined the term “HIP” investing to talk about “Human Impact + Profit” investments.  While his writings cover the whole spectrum of this 5-part series, (he’s excerpted his book in a 25(!) part series on Triple Pundit), the focus is on equity investing, and finding companies that will excel based on their commitment to key values:

  • Health
  • Wealth (generating it for the customers)
  • Earth
  • Equality
  • Trust

Within each of these values, he lists demonstrable metrics, and provides a scorecard for rating companies and benchmarking industries.  (A lighter-weight “HIP Check” is available for free on their site.)  Herman’s thesis is that abiding by these values offers a competitive advantage, and therefore, companies that score well on the HIP metrics will also outperform financially.  He connects the dots for some of the examples, showing how the savings in reduction of waste accrue to the bottom line, and compares the return of the HIP fund against two others (a “vice” fund and a socially responsible fund) for a 5-year period ending June 2009, and shows that it has the highest return of the 3.  This was an especially volatile period, so is perhaps not the best to extrapolate from, but worth noting his results.


Since equity  investments tend to be riskier and harder to evaluate, the government tries to protect prospective investors.  The laws requiring security registration and prohibiting the advertising of unregistered securities do provide protection, but they also greatly limit the opportunity for smaller companies to raise equity capital.  Generally, a company can sell unregistered securities only to “accredited” investors (those with a net worth of $1M+, not counting their primary home, or annual income of $200K+ individual, $300K+ married), or a small number of “friends and family.”  But here again, the combination of risk and low-deal flow makes investing in these types of deals (often called “angel investing”) are appropriate only for a small portion of your portfolio, more akin to lottery tickets than the average growth upward over time of an investment in the broad market indices (and re-investment of dividends, which makes a big difference when compounded over the years.)


One aspect of the investing landscape that is changing with the passage of President Obama’s JOBS acts is the permission of companies to raise a moderate amount of capital (up to $1 million) without registering the security.  There will be limits on the amount that individuals can invest per year, and it remains to be seen how it will be implemented (the SEC is supposed to propose rules by January 2013), but there is some chance that it will transform equity raising for small companies in the way that Kiva has transformed fund raising for microcredit.  There are certainly plenty of companies that would like to be the platform upon which such investments are made.  Realistically, though, with the limits and uncertainty, crowdfunding isn’t a feasible investment vehicle today, and won’t be for some time to come.

Update:  Here’s a nice blog status report on the SEC process by Crowd Check:

Mission-Related Investing for the Rest of Us: Bond-like Assets (Part 4 of 5)

Bottom Line:  With a little extra effort, you can lend your money to organizations or people for housing, creating new businesses or education.  You can pick your cause, your geography, and in some cases, even the borrower him/herself.  You may get additional information about the social impact that your loan has, and you can still earn interest.  Some of these loans have a higher risk of default, so understand what the issuers are doing to protect you from a loss.  It won’t be the same as an FDIC-guaranteed investment.

Mission Related Investing for the Rest of Us series:

  1. Part 1:  Motivation  (Using your investments to earn a “social,” values-based, return as well as a financial one)
  2. Part 2:  Background & Investing Theory (Where I’m coming from, and how I used to think about investing)
  3. Part 3:  Banking and Cash Alternatives
  4. Part 4:  Bond-like Alternatives
  5. Part 5:  Stock-like Alternatives
[See bottom of post for a brief intro to bonds.]
Also, Paul Herman of HIP Investor has a related post (“Loaning your Money For Impact Can Also Generate Income”) well worth reading.

Bond Mutual Funds

For most people, probably the easiest way to invest in bonds is through a bond mutual fund.  I’d followed the path of least resistance, and ended up choosing the tax-free bond fund for California residents, offered by Fidelity (FCTFX).  Not that much thought had gone into the choice, but I was steadily earning and reinvesting the dividends, growing at a tax-equivalent rate of 4.3%.  The money was ultimately funding California municipal projects.  Not bad, but perhaps opportunities to do better.

Andy Loving of Just Money Advisors prepared a list of socially responsible investments which included Community Capital Management’s Reinvestment Act Qualified Investment Fund (CRATX).  In an article in Financial Advisor Magazine, he said “If you want something that’s earning a good return with safety and going good here in the U.S., you’d be hard-pressed to find something better…” It was something I could easily purchase in my existing Fidelity brokerage account, and I did.  Here most of the money goes into GNMA and FNMA mortgages, although only ones that are Community Redevelopment Act (CRA) eligible.  Interestingly, because of this higher level of due diligence, the fund actually had fewer of the “toxic assets” when the mortgage market melted down.

But even here, I question the impact that my investment has:  if I’m just buying bonds of already existing mortgages, does that really get more people into houses?  Perhaps, if that then means that GNMA has more money to lend.  But there is a level of indirection, and there’s the question of whether home ownership is really the right step for moving people out of poverty.  The F.B. Heron Foundation recently made some waves when it issued a new strategic plan including the statement: “We have also concluded that owning fixed assets is important to an individual’s longer-term prosperity only insofar as jobs and income are steady and reliable.” (Italics added)  In other words, a house might be a good investment and avenue to long term wealth generation, but only if you have a job that lets you pay the mortgage.

Community Notes

Where else can you put money to get a favorable return while doing good?  The Calvert Foundation offers Community Investment Notes, in $1,000 increments for periods of 1-5 years.  The longer the time, the higher the rate, up to a  maximum of 2% (current, 6/30/2012).  The money is loaned (100% of it) to approved community groups that have different geographic and cause focuses (microcredit, jobs creation, home ownership, etc.).  Calvert has reserves set aside to cover (some of) the risk, and their site states that no investor has lost money in the community notes.  The notes can be purchased either directly from Calvert or through a broker (or Microplace, see below).

Oikocredit has Global Community Notes, similar in concept, which may be purchased directly through Oikocredit in increments of $250 (or Microplace for smaller amounts, see below).  The bulk (79% at the time the prospectus was written) of these notes are invested in global microcredit funds.  The notes pay 0-2% depending on the term.

For members of the United Church of Christ, the Cornerstone Fund is an investment that loans money out to church construction projects (which can have a hard time finding traditional funding, since banks generally don’t loan to places they wouldn’t be willing to foreclose on…) Interest rates are fairly attractive, starting off higher than the other community notes, though not rising as quickly into the longer maturities.  These funds are not federally insured, and while they do have reserves against losses similar to those of Oikocredit or Calvert, the concentration risk is greater (e.g., a scandal in the UCC that caused a “run” on funds, or steep drop in church membership that impacted the borrowing churches’ ability to re-pay.)

Social Impact Bonds

After philanthropic organizations have invested the risk-capital to prove that an idea works, and even saves money in the long run, where does the capital come from to invest in that idea today?  In general, foundations need to preserve their “risk” capital to try other fresh ideas, and don’t have enough to reach scale with these programs anyway.  The government is already over-committed to existing programs.  Social investors  can step in to the gap with a Social Impact Bond, with the returns being based on achieved savings.  This Forbes interview with Laura Callahan summarizes her longer report from McKinsey.  Although Bridgespan partner Daniel Stid remains a skeptic, based on the challenges.

Local Co-ops

Did you know that .coop is a top-level domain (like .com or .edu)?  There are some 29,000 co-ops in the US with $654 Billion in revenue, and 2 million jobs (stats from Amy Cortese’s book  which  features a chapter on Cooperatives).  Some business cooperatives raise capital from members, offering a return in the form of dividends.  In this limited case (only from members, typically within one state) securities do not need to be registered as they would more broadly.  The examples she gives of the largest co-ops are from Europe, while the ones that you might invest in are generally much smaller, local affairs such as groceries, farms, or pubs.

Searching out investment opportunities can be a challenge, but if you want to support co-ops, there is a Community Development Financial Institution (see Part 3) that invests in co-ops.  The Cooperative Fund of New England offers you the chance to name your own return between 0-2%, provided you’re investing at least $1,000 for at least 1 year.  Although the securities are not federally insured, the Fund says that several of the co-op investors have agreed to take the first losses as a way to protect other (retail) investors.


Most of finance has been about aggregating individuals to diversify risk.  If one fails to repay, it’s a small loss that, shared among many investors, isn’t too painful.  One interesting trend in social investing, is to bring back the individual.  Websites like Microplace, Kiva,  and Prosper feature the profiles of individuals, and an investor chooses one (or more) to invest in.  Of course, the investor can choose to diversify herself by investing a small amount in several individuals.  Choosing at the individual level lets the investor make a strong personal connection (especially rewarding in an “impact”-focused rather than financially-focused investment).   Although similar in concept, with each site listing borrowers along with their intended usage of loan proceeds, the three sites fill distinct niches:

  • Kiva does not pay interest.  This removes the need to be treated as a security.  You loan money to one of the borrowers profiled (through one of Kiva’s partner microfinance institutions–Kiva does not manage the loans themselves.)  When (if) the loan is paid back, you have the option of getting your money back or loaning it to someone else in the system.  You are not donating the money to the borrowers (many of whom are inspiring micro-entrepreneurs in very needy parts of the world), but you are loaning it to them.  They are obligated to pay you back, and a very high majority do.  (98.97% of dollars are repaid, as of 6/30/2012)
  • Microplace does pay interest (typically in the 2-3% range).  With each borrower profile is the amount of interest he or she is offering (really, the MFI is offering on his or her behalf).  Here again, you have the opportunity to either pull your money out or roll it over with another borrower when the first loan is repaid.  Also, both Calvert and Oikocredit offer versions of their Community Investment Notes for sale through Microplace.  With PayPal handling all of the transactions digitally, they are able to offer lower minimum buy-ins of just $20, instead of the $1,000 and $250 minimums required for direct purchase through Calvert or Oikocredit.
  • Prosper is less concerned with the social impact aspect, and is just a marketplace for peer-to-peer lending.  The borrowers put up their own descriptions, along with some credit history information that Prosper turns into a risk rating.  Interest rates can be very high (30%+) for risky borrowers.  You can find listings to help start or grow businesses here, but there are also loan consolidation, wedding loans, home improvement loans, etc.  Substantial risks of default, but high potential return compensating for the risks.

Bonds, A primer

A bond is an investment where you have loaned money (to a company or government) and you are entitled to a stream of interest payments for a certain duration, after which  your loan is returned.  This right to receive income and return of principal may be sold, so there is also the notion that the bond has a price, which may be fluctuating over time as demand for the secure payment goes up (typically in an environment where the other investment alternatives look too risky) or down (when investments in stocks look to bring good returns).  There is some risk that the company or government that took the loan can’t make the contractual payments, and defaults instead.  If investors believe that there is default risk, they will demand a higher interest payment when the bond is issued, or trade it at a discount to face value after it is issued. Certain government bonds are tax free at national or state level or both.

Overall, bonds tend to be more stable than stocks, with a predictable income stream, so are recommended for investors with a lower risk tolerance.  Bonds blended with stocks provide added stability for a portfolio, at a slight reduction in expected return.

Mission-Related Investing for the Rest of Us: Banking (Part 3 of 5)

Bottom Line:  The money you have sitting at your bank (savings, checking, CD’s) is being loaned out as mortgages, business loans, etc., and is generating interest from those loans, some of which is paid to you, some of which is profit to the shareholders.  When you consider where you want to bank, in addition to security, convenience, and service, also think about where you would like to see your bank lend out your money, and who you would like to profit from it.

  • If you’d rather have the money available as loans to your own community, consider a local community bank or credit union.   Try looking here, though this list really stretches the definition of “community” (under $65 billion, Amy Cortese defines it as < $1B in Locavesting)
  •  If you’d like to benefit a historically disadvantaged community, consider a Community Development Fund Institution in those communities.  Find one here.
  • If you would like to have the profits of your financial institution’s operations shared with you and other members by way of better rates, consider a credit union.  Find one here.
  • If convenience is your top value, then maybe one of the national “Too Big To Fail” banks is your best bet.

Mission Related Investing for the Rest of Us series:

  1. Part 1:  Motivation  (Using your investments to earn a “social,” values-based, return as well as a financial one)
  2. Part 2:  Background & Investing Theory (Where I’m coming from, and how I used to think about investing)
  3. Part 3:  Banking and Cash Alternatives
  4. Part 4:  Bond-like Alternatives
  5. Part 5:  Stock-like Alternatives


I have been a customer of long-standing with Wells Fargo.  Nearly 20 years ago, when I moved to Stanford, I opened an account with them, mainly for the convenience.  They had a branch on campus, a wide ATM network, provided free checking and credit card with decent perks.  Over the years, I’ve stuck with them, based mostly on inertia.  Sure, they pay almost nothing in interest today, but changing to a different bank for a slightly higher rate would be a hassle.  I haven’t required much in the way of additional services, and the few things I have needed (safe deposit box, wiring money internationally) they’ve been able to provide.  Their customer service has been all right, and I think has gotten better in the last couple years as they’ve implemented a new CRM system so that each person you deal with sees the full picture of your Wells Fargo relationship.

Not long after signing on with Wells Fargo, I opted to open a brokerage account with Fidelity.  Again, convenience, breadth of offerings, and reputation entered into my consideration, and they have continued to earn my business over the years, with nice online tools, a great Donor Advised Fund account, and ATM fee rebates.

Current Banking Selection Criteria:

  • Convenience / Access (distance to closest branches, online presence, number of branches/ATMs)
  • Breadth of offerings
  • Service
  • Reputation

The Challenge

Recent discussions and readings have led me to ask myself whether my investments match my values.  Paul Herman’s article “Where does your cash sleep at night?” was one that not only raised the questions, but offered some specific alternatives.  “Your money can be your voice,” he writes.  Do I want my deposits going to a bank that is practicing investment banking and buying investments rather than making loans?

Chapter 5 of Amy Cortese’s Locavesting also talks about the advantages of credit unions and local banks.   Institute for Local Self-Reliance’s “Top 5 reasons to choose a local bank or credit union” added fuel to the fire.  While some of the other financial moves potential expose you to greater risk, this one doesn’t:  you have the same or equivalent insurance, and you can actually expect higher interest.  These credit unions and local banks are not top of mind, because they aren’t spending millions on marketing, but with a bit of research, you can find some very attractive alternatives.


Community Banks:

A community bank is just a smaller, local version of your “Too Big To Fail” national bank.  Deposits are FDIC insured, and they are likely to offer the same basic services:  checking and savings accounts, credit cards, safe deposit boxes, mortgages, personal or auto loans, and CD’s.  They will probably have a smaller number of branches, and few of their own ATM’s, though you will likely be part of a network that gives you access to ATMs across the country for a modest fee.

The main advantage of a community bank is that your money stays within the community (your deposits are more likely to be loaned out to someone locally, and the bank’s profit is more likely to accrue to local investors).  Community banks are more likely to emphasize friendly customer service.  Compared to a national bank, the rates are likely to be comparable or slightly better.  They are less likely to have more arcane services, but you may be surprised:  my hometown bank offers health savings accounts.

Credit Unions:

A credit union is a not-for-profit financial institution which is owned by its members (you become a member when you open your first account).  Credit unions typically have some criterion for membership:  they might be open to employees of a certain company, students/alumni of a certain school, professionals in a certain occupation, or people living in a certain county.   Credit union accounts are not FDIC-insured.  Instead, there’s a different government agency, the National Credit Union Administration (www.ncua.gov) that provides a comparable level of deposit insurance.

Since credit unions are not out to make a profit, their rates are typically more favorable to the customer.  They offer higher interest rates paid for deposits that the customer makes, and charge lower rates when the customer borrows money.  A comparison provided by SNL Datatrac for December 2011 (the most recent readily available at NCUA.gov) shows that Credit Unions pay about 25% more interest:  a regular savings account at a bank paid 0.16%, compared to a credit union where it paid 0.21%.  A 60-month loan for a new car would cost 4.98% at the average national bank, but only 3.55% at a credit union.  The exception was home mortgages, where national banks’ interest rates came in slightly cheaper than credit unions (though it would be interesting to see if that comparison holds when points/fees are added to the picture.)

Community Development Fund Institutions (CDFI’s):

Not to be confused with a community bank, a CDFI explicitly trades off profit motivation for the social return of improving the community.  A CDFI could be a bank or a credit union (subject to the regulations of either type).  They are typically chartered for communities that have been “historically denied access to capital by traditional financial institutions” (definition from Forum for Sustainable and Responsible Investing) and offer basic financial services to the community.  The advent of online banking means that you don’t need to be physically in the community in order to conduct your banking business with the institution.

CDFI banks are FDIC-insured, which was relevant recently, when the poster-child of CDFI banks, ShoreBank, became insolvent due to over-extension in questionable real estate loans.  A group of investors re-capitalized the bank as Urban Partnership Bank, and covered 20% of the losses, with the FDIC covering the rest, so depositors didn’t lose money (up to the limits of FDIC insurance).   This bankruptcy does highlight the risk of banking with a CDFI, but on the other hand, plenty of regular banks ran into equivalent trouble.

Making the Move

If you do decide to switch your primary banking affiliation (or even create a secondary one that holds a portion of your assets for a social return), the “Move Your Money Project” (an outgrowth of the Occupy Movement) offers a checklist to help you plan your move.  I’ll have to admit that I’m still in the planning stages, but will likely switch to the Stanford Credit Union.

Mission-Related Investing for the Rest of Us (part 2 of 5)

In my first post of this series, Mission-Related Investing for the Rest of Us, I contemplated the challenge of how my personal investments could better reflect my values.  Some recent classes and books have encouraged me to think about the “social returns” my investments could be earning instead of focusing exclusively on financial returns.

To show how my thinking is changing, I need to start with what it was before.

My Background

I’m a “rational” and somewhat informed investor.  I was part of the Investment Club learning about the stock market in middle school, have subscribed to BusinessWeek nearly continuously and Forbes occasionally.  I took a course on investment strategies as part of my Masters in Industrial Engineering / Engineering Management.  I have friends who work in finance and occasionally recommend books or share ideas (I’d heard of CDO’s well before they became mainstream media news.)  I spent a year learning about microfinance and talking with bankers and non-profits about their operations.

I’m more of a do-it-yourself investor.  Although I’m not prepared to spend much of my time managing investments, I’m also leery of paying the high rates for someone else to manage my money for me, knowing that most advisors  fail to match the averages, especially when fees are included.  This combination translates into making me a “Buy and Hold” investor.  One of the dangers of this investing style is that you have to be committed about holding, and not bail out because “everything is dropping!”  That’s a sure-fire way to “Sell Low.”  Friends cited the Warren Buffett advice:   “Be fearful when others are greedy, and be greedy when others are fearful.” (from his 2007 Annual Shareholders Letter)  If you don’t have the temperament to follow your disciplined strategy, then having a manager do it for you can be a solution.  But that’s a very different style manager than an active trader or one who calls you up with a “hot tip.”

My career as a high-tech entrepreneur and consultant tends to have more earnings volatility than average, so I compensate by being more conservative in my investments.  (Or maybe I’m just more risk-averse than I like to admit.)

Efficient Markets

To a first approximation, I believe in the Efficient Market Hypothesis:  that is, people (especially investing professionals) have access to the same (or more) information, and have done the analysis, so if there were a serious mis-pricing (stock being under- or over-valued) they would buy and sell it to make the profit, and drive the stock to its “correct” price.  So, although there is random variation in prices (e.g., due to unexpected events in the market place), as new information becomes available, it gets absorbed quickly, with the prices adjusting accordingly.  A small, part-time, retail investor like myself is not going to get rich off seeing something that the full-time experts missed.

Blending Stocks with Bonds

Just as individual stocks are subject to random variation, the stock market also has a random component to it, and there are some years where the value will be down, say, 20%.  People with a strong stomach, investing over a long time horizon, can ride that out and wait until things come back, but people with a shorter time horizon can’t, and keeping a portion of your investment portfolio in a more stable investment, like bonds, yields greater stability at a (small) cost in total return.

Secure “Emergency Fund”

There’s also the need to have an emergency fund (6 months of expenses, at least) in a secure, liquid source should one have an unexpected change in job situation, health, etc.

Putting it all together

So, recapping, at a high level we have:

  • Stable, secure, liquid source for necessary living expenses:   savings / checking account, money market account, CD’s
  • Invested broadly in the stock market:  stocks, equity mutual funds or ETFs
  • Fixed income/bonds:  individual bonds, bond mutual funds or ETFs

[Note:  I’m not a home-owner, but for many people, their house is their most significant investment.   It shares characteristics of an equity investment:  expected appreciation over the long term, subject to dips and potentially long stretches to recover value if purchased at the top of a bubble.]

The mix that you have of these 3 asset classes (stocks, bonds, cash) determine the amount of risk you are taking (the higher the percentage of stocks, the more risk), and also the rate of return you are hoping to achieve.  The next 3 posts will deal with each of these asset classes, and how you can find alternatives that provide a mission-related return as well as the financial one.