Tag Archive for investing

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

June 30, 2012 / / No comments

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.

Individuals

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.

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

June 19, 2012 / / No comments

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

Banking

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.

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.

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

June 15, 2012 / / No comments

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.

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Mission-Related Investing for the rest of us (First of a series…)

June 7, 2012 / / 2 comments

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

“Mission Related Investment (MRI)” is where a foundation invests some or all of its endowment in ways that not only provide a financial return, but also advance the organization’s mission.  For example:

  • Providing loans for affordable housing that wouldn’t otherwise be built
  • Providing capital for microfinance loans

By using the whole (or a large chunk) of their endowment on projects related to their mission, they can have a larger impact than just using the interest that is paid out (even if non-MRI investments earn a slightly higher return.)

This made sense to me in the context of a foundation, but I was stopped short recently when I was asked why I don’t do it personally.   Part of my mission is offering the least well off people around the world conditions that enable them to improve their lot.  Economic opportunity through microcredit is one of the key tools to make that happen.  I support some microfinance projects with my donations, but I never really considered making “mission related investments” to use the money I have to greater effect.   This has started me off on a new direction of reading and research, and my thinking is slowly starting to crystallize.

If I waited until I got it all sorted out, I would probably never finish the post, and it would be too long for anyone to read, so I’ll aim to publish shorter pieces (which will probably still be too long), get them out there more quickly (I’ve been sitting on this one in draft form for more than 2 weeks already), and edit as my understanding is refined further.

 

 

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Review of Amy Cortese’s Locavesting

June 4, 2012 / / No comments

Locavesting: The Revolution in Local Investing and How to Profit from ItLocavesting: The Revolution in Local Investing and How to Profit from It by Amy Cortese

My rating: 4 of 5 stars

This is a thought-provoking book. I tended to think about maximizing the financial return from my investments, and using a portion of that to support the causes that I care about. This book challenges you to think more about the investments themselves. “Locavesting” by analogy to “Locavore” is about investing in your own community. Amy Cortese makes the case for why it’s a good thing (supports jobs in your community, and local patronage keeps money in the community more than chain-store purchases) and tells a number of stories about communities (and leading citizens within them) who have stepped up to make these changes. She talks about cooperatives, credit unions, and some of the more esoteric alternatives like direct public offerings and local exchanges.

Although many of the current investing alternatives are restricted to “accredited investors” (net worth excluding home of $1M+) some of that is starting to change. Companies are now permitted to raise up to $1M from “crowdfunding” scenarios of regular investors.

My slight disappointments with the book were what I felt was the over-reliance on a small number of case studies/anecdotes. I guess these are newer topics that are not widely available, but I’d liked to have seen a broader range of examples. It’s also a fast-changing area, so even though it’s a recent book, some of the descriptions are of things that “will happen” in 2011, and I’m curious to see whether they really did. I hope that she revises/updates the material to keep this book current.

View all my reviews

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Budgeting for Piggy Bank Savers

May 8, 2012 / / No comments

When should a commitment to financial giving start?

I think that giving back financially is a good discipline that, done correctly, increases the appreciation for what you have, and helps you feel empowered in your ability to help others.

My friend Peggy Duvette was recently telling me about her daughter Suada, who last year, at 8 years old was choosing to support her school with a donation. Suada had taken some of her money to her school fair to play games and buy things. When she finished the day and had some money left over, she spontaneously told her mom that she wanted to give the rest as a donation to the school. I was impressed by Suada’s generosity and even her awareness that her school might need to be supported. Peggy said that her own role as Executive Director (which also means “head fund raiser”) for a non-profit (Wiser.org., The Social Network for Sustainability) meant that Suada has had more exposure to the notion of giving, but Peggy has also set up a system 3 years ago that helps Suada budget her money between current needs and future ones, for herself and others.

Teaching good financial habits is something that parents can start early with their children: the gift of a piggy bank at age 6 (or so, kids do develop the concept of money at different rates) is also an opportunity to talk about money being divided into that you might spend today and that money that you save for future needs. Peggy had gotten a piggy bank for Suada, where every time she received money, she would automatically split it between spending and saving. A year later, she incorporated the concept of donating.

Basic budgeting is a critical skill for keeping your financial house in order, and starting early makes it seem more natural later.  Dave Ramsey, the popular financial guru, recommends an “envelope system” to budget the monthly expenses for key categories.

While your kindergartner might not have “rent”, “clothing”, and “gas” expense categories, setting aside money to “save” separate from what they may “spend” is a good start.  To get them started thinking about giving early on, how about encouraging them to put a dime into the “giving” envelope every time they put a dollar in one of the other categories?

Of course, what gives the “envelope system” part of its power is its tangibility.  The money for the month for the category is in the envelope, and when you’ve spent it, it’s gone.  That tangibility is great for kids, too.  Only they get to watch their money grow, not disappear.  If you would like to buy one,

http://www.bloggingawaydebt.com/2007/11/six-piggy-banks-that-can-help-teach-kids-money-management-skills/  lists 6 different ones.

But making one can mean there’s more money to put in it.  It can also be a fun family project, and needn’t be complex:
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