This is something I wrote for interest.co.nz on the state of the socially responsible and ethical funds in KiwiSaver.

By Craig Simpson
I don't for one second condone investing in cluster bomb or weapons of mass destruction makers via KiwiSaver funds, but I do think some people are over-reacting to what the media is calling KiwiSaver's dirty little secret.
Let's be perfectly clear, KiwiSaver managers are not deliberately investing in "unethical" investments. Rather they are gaining exposures via their investments in third party manager's funds, or exchange traded index funds.
When investing into another fund manager's fund or into an index fund you can not generally control what investments are held at any point in time, unless of course you have a separate mandate or are following and ethical index.
For many mainstream investors with no particular bias or religious beliefs, there has to be a general level of acceptance, that when you invest into another pooled investment vehicle or index fund, there may be some holdings that you do not agree with, or for personal reasons, would prefer the manager did not hold.
If investors feel so strongly about following an ethical or socially responsible path, there are options available to them within KiwiSaver.
What the current ethical or socially responsible options are
The options for ethical or socially responsible funds within KiwiSaver are small, although the sector is growing slowly. The KiwiSaver funds available at present include:

• Amanah Ethical Growth Fund*
• AMP Responsible Investment Fund - Balanced (started July 28)
• Craigs Investment Partners SRI Balanced Fund (Quay Street manage this fund)
• Grosvenor SRI Balanced and Growth Funds
• Koinonia (Restricted KiwiSaver Scheme)
• OneAnswer Sustainable Growth Fund (owned by ANZ)
• Superlife Ethica Fund (part of the NZX)

Media hype forces reviews
Many of the existing managers who have named and shamed across various publications have announced reviews of their manager selection criteria and investment approaches.
We should also keep in mind that many of the investments in some of the companies such as Honeywell International and Northrop Grumman, for example, are as a result of investments into other fund managers who have exposures to these types of companies.
Although exposure to some of the companies is not ideal, in order to gain global exposure to a wide range of companies that represent the market, there will be some collateral damage. If as an investor you wanted to take a pragmatic approach and looked at the bigger picture, the actual dollar exposure to undesirable companies is actually microscopic. But for some even a few cents or a couple of dollars is too much.
Grosvenor has announced they are switching managers in order to tidy up their portfolios and no doubt to distance themselves from any unwanted attention.

New entrant Simplicity is taking a different approach and is in discussions with Vanguard, who provides their international share exposure, to design a product that is suitable for the NZ market (and presumably beyond), that takes into account the ethical and responsible investment approach adopted by the NZ Super Fund. If enough KiwiSaver managers can join together as a united voice and tackle the issue with managers like Vanguard, change is more likely to occur.
How do I know where my KiwiSaver fund is invested?
Each March, KiwiSaver managers are required to disclose their entire portfolio in an excel file and these will be found on the various websites alongside the quarterly disclosure statements.

Related Topics

KiwiSaverAmanahOneAnswerAMPGrosvenorCraig's IPKoinoniaSuperlifeSocially Responsible Investingcluster bombsethical investingMark ListerClaire Matthews

You can also ring your current manager and ask them directly what holdings they have. For commercial reasons they may not be willing to provide their most up to date information, but should still be able to put your mind at ease that they are not invested into certain types of investments.
Top 10 holdings are disclosed every quarter too as part of the KiwiSaver managers' regular reporting requirements. Some managers also release monthly commentary and fund updates, and these can also be useful resources.
How green is green?
There are many shades of green when it comes to socially responsible and ethical investing. Even if a fund says it's socially responsible or is included in a socially responsible index, it may still have exposure to some companies that you as an investor may find offensive.
Take for example BP. The oil giant is included in the MSCI EAFE ESG etf which invests in securities outside the US and Canada that have positive environmental, social and governance (ESG) characteristics. That's even though BP's Deepwater Horizon oil leak in the Gulf of Mexico remains fresh in the memory. The clean up costs and subsequent settlements were in the tens of billions of US dollars.
In another example, the ishares MSCI KLD 400 Social Index includes sportswear giant Nike, a company that in the past has been linked to child labour and sweatshop allegations. Alongside Nike is cosmetic company Estee Lauder. The cosmetics industry has long been associated with animal testing in the process of manufacturing their products.
These are just some brief examples of companies that could appear in socially responsible or ethical funds.
A recent article by Mark Lister of Craigs Investment Partners further highlights some of the dilemmas investors face when considering ethical or socially responsible investing. His article is here.
Another piece worth reading is this from Massey University's Claire Matthews here.
A final word
Ethical investing is a personal choice first and foremost.
If you are concerned about how your manager is investing your funds, don't be afraid to ask your KiwiSaver manager what they are doing to minimise their exposure to certain types of investments.
Also check out your current managers Responsible Investment Policy on their website.
If you are not satisfied with your manager's response or their investment strategy/investments they hold, then you should seriously consider switching to a fund where the investment strategy is more palatable and in line with your preferences.

*Craig Simpson is a shareholder in the management company that runs the Amanah Ethical KiwiSaver Fund. The opinions expressed in this article are his own.

The Retirement Gamble and KiwiSaver fee disclosure

Its been a while between posts and so much has happened between times. The European crisis deepended with the greater focus on the "Club Med" countries of Italy, Greece and Cyprus. The fiscal cliff turned out to be more of a ramp and closer to home we have just had the Greens and Labour collaborate on trying to derail the Mighty River Float.

And yet with all the turmoil and uncertainty here we are with our heads above water and still breathing.

Here is a link to a recent video I was sent which is worthwhile reading along with my latest piece covering the KiwiSaver fees disclosure legislation posted on interest.co.nz (my full time gig)
http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/
http://www.interest.co.nz/kiwisaver/63806/kiwisaver-managers-adopt-standardised-reporting-quarterly-and-annual-basis-july-2013 

Wealthy hedge fund managers ignore Apple shares

Apple shares have risen 47% year to date (1 Jan to 26 March 2012) and yet the best performing hedge fund managers all of which have done over 30% (the best has done over 40%) do not hold the stock. 

Apple shares are one of the most popular holdings among fund managers and hedge fund managers alike and yet the best three performing hedge fund managers, all of whom are billionaires in their own right do not currently hold the stock. Do they know something us mortals do not?
 
To see where the smart (wealthy) money is invested check out this link
http://www.insidermonkey.com/blog/2012/03/19/billionaire-hedge-fund-index/#more-11470

Why passive funds are not low risk

I have a love - hate relationship with index funds.  On the one hand with Scottish heritage I do not like paying fees and will generally object to the excessive and sometimes offensive fees charged by actively managed funds - passive funds provide a low cost alternative to actively managed funds. 

On the other side of the coin, the capitalist in me likes growing my terminal wealth.  Why would I want to maintain a long only (passive) exposure in a specific market at a time when the world is going to hell in a hand bag?  Some active managers are able to go to cash thereby protecting me as best they can against losing money. 

So how risky are passive (index) funds?  To find out open the attached link why passive funds are not low risk

No surprise behind euro zone credit downgrades

I can not understand what has take the rating agencies so long to down grade France from AAA to AA.  The French have been on a ratings time bomb for some time and have probably the greatest exposure to toxic euro debt.

Comments by Standard and Poors focus on the insufficient initiatives taken by policy makers to address the systemic issues.  S&P also note tightening  credit conditions, increased risk premiums and weakening economic growth as contributing factors.

The oulook forAustria, Belgium, Cyprus, Estonia, Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia and Spain are all negative indicating a one in three chance of a further ratings down grade in the next 12 to 24 months.

The outlook for Germany and Slovakia are stable S&P stated.

The Fed asleep at the wheel

The New York Times published the following article which clearly shows that in 2006 the Fed Governers had no idea what they were doing and were clearly asleep at the wheel.  Could the whole GFC have been avoided if the US was controlled by sensible and rationale Fed Reserve staff - maybe not as the problem was too systemic.   In recent days Obama has asked for a further rise in the US debt ceiling, a further indication that all is not beer and skittles in the US Government, despite corporate America showing signs of growth and profitability.

The NY Times article can be found using the following link
http://www.nytimes.com/2012/01/13/business/transcripts-show-an-unfazed-fed-in-2006.html?_r=1

What really caused the eurozone crisis?

This article was first posted on the bbc website (bbc.co.uk) and is an easy to follow summary of the cause of the eurozone crisis of 2011.

World leaders probably spent more time worrying about the eurozone crisis than anything else in 2011.

And that was in the year that featured the Arab Spring, the Japanese tsunami and the death of Osama Bin Laden. What's more, 2012 looks set to be not much different. But as eurozone governments hammer out new rules to limit their borrowing, are they missing the point of the crisis?

to read the full article click on the link below
http://www.bbc.co.uk/news/business-16290598

The Fed to publish predictions

The Federal Reserve will begin later this month to publish the predictions of its senior officials about their own decisions, hoping to increase its influence over economic activity by guiding investor expectations.

To read the full article from the New York Times use the link below.
http://www.nytimes.com/2012/01/04/business/economy/fed-to-start-publicly-forecasting-its-rate-actions.html?_r=1

How the US avoided a total government shutdown

There is nothing like leaving things until the last minute for action to be taken as can be seen in this article on the Washington Post.

Congressional leaders headed off a weekend shutdown of the federal government with a $1 trillion spending deal. The agreement will fully fund most of the government, including the Defense Department, Education Department and Environmental Protection Agency, for the rest of the 2012 fiscal year.  

Congress had a whole 27 hours to spare when the deal was struck.  Boredom,tiredness and the fact that everyone wanted to leave for their Xmas breaks probably assisted in making the deal happen.  

http://www.washingtonpost.com/politics/congressional-leaders-negotiating-key-bills-to-avoid-government-shutdown/2011/12/15/gIQA6nPwwO_story.html?tid=pm_politics_pop

Regulators Investigating MF Global for Missing Money

An interesting article out of the New York Times on the MF Global debacle

 

By BEN PROTESS, MICHAEL J. DE LA MERCED and SUSANNE CRAIG

Federal regulators have discovered that hundreds of millions of dollars in customer money has gone missing from MF Global in recent days, prompting an investigation into the brokerage firm, which is run by Jon S. Corzine, the former New Jersey governor, several people briefed on the matter said on Monday.

The recognition that money was missing scuttled at the 11th hour an agreement to sell a major part of MF Global to a rival brokerage firm. MF Global had staked its survival on completing the deal. Instead, the New York-based firm filed for bankruptcy on Monday.

Regulators are examining whether MF Global diverted some customer funds to support its own trades as the firm teetered on the brink of collapse.

The discovery that money could not be located might simply reflect sloppy internal controls at MF Global. It is still unclear where the money went. At first, as much as $950 million was believed to be missing, but as the firm sorted through its bankruptcy, that figure fell to less than $700 million by late Monday, the people briefed on the matter said. Additional funds are expected to trickle in over the coming days.

But the investigation, which is in its earliest stages, may uncover something more intentional and troubling.

In any case, what led to the unaccounted-for cash could violate a tenet of Wall Street regulation: Customers’ funds must be kept separate from company money. One of the basic duties of any brokerage firm is to keep track of customer accounts on a daily basis.

Neither MF Global nor Mr. Corzine has been accused of any wrongdoing. Lawyers for MF Global did not respond to requests for comment.

Now, the inquiry threatens to tarnish further the reputation of Mr. Corzine, the former Goldman Sachs executive who had sought to revive his Wall Street career last year just a few months after being defeated for re-election as New Jersey’s governor.

When he arrived at MF Global — after more than a decade in politics, including serving as a Democratic United States senator from New Jersey — Mr. Corzine sought to bolster profits by increasing the number of bets the firm made using its own capital. It was a strategy born of his own experience at Goldman, where he rose through the ranks by building out the investment bank’s formidable United States government bond trading arm.

One of his hallmark traits, according to the 1999 book “Goldman Sachs: The Culture of Success,” by Lisa Endlich, was his willingness to tolerate losses if the theory behind the trades was well thought out.

He made a similar wager at MF Global in buying up big holdings of debt from Spain, Italy, Portugal, Belgium and Ireland at a discount. Once Europe had solved its fiscal problems, those bonds would be very profitable.

But when that bet came to light in a regulatory filing, it set off alarms on Wall Street. While the bonds themselves have lost little value and mature in less than a year, MF Global was seen as having taken on an enormous amount of risk with little room for error given its size. By Friday evening, MF Global was under pressure to put up more money to support its trading positions, threatening to drain the firm’s remaining cash.

The collapse of MF Global underscores the extent of investor anxiety over Europe’s debt crisis. Other financial institutions have been buffeted in recent months because of their holdings of debt issued by weak European countries. The concerns about MF Global’s exposure to Europe prompted two ratings agencies to cut their ratings on the firm to junk last week.

The firm played down the effect of the ratings, saying, “We believe that it bears no implications for our clients or the strategic direction of MF Global.”

Even by Sunday evening, MF Global thought it had averted its demise after a disastrous week. Over five days, the firm lost more than 67 percent of its market value and was downgraded to junk status, which prompted investor desertions and raised borrowing costs.

Mr. Corzine and his advisers frantically called nearly every major Wall Street player, hoping to sell at least some of the firm in a bid for survival.

On Friday, the asset manager BlackRock was hired to help MF Global wind down its balance sheet, which included efforts to sell its holdings of European debt. BlackRock was able to value the portfolio, but did not have time to find a buyer for it given the other obstacles MF Global faced, according to people close to the talks.

By Saturday, Jefferies & Company became the lead bidder to buy large portions of MF Global, before backing out late in the day.

On Sunday, a rival firm, Interactive Brokers, emerged as the new favorite. But the Connecticut-based firm coveted only MF Global’s futures and securities customers.

While MF Global was resigned to putting its parent company into bankruptcy, Interactive Brokers was also willing to help prop up other MF Global units, including a British affiliate.

By late Sunday evening, an embattled MF Global had all but signed a deal with Interactive Brokers. The acquisition would have mirrored what Lehman Brothers did in 2008, when its parent filed for bankruptcy but Barclays of Britain bought some of its assets.

But in the middle of the night, as Interactive Brokers investigated MF Global’s customer accounts, the potential buyer discovered a serious obstacle: Some of the customer money was missing, according to people close to the discussions. The realization alarmed Interactive Brokers, which then abandoned the deal.

Later on Monday, when explaining to regulators why the deal had fallen apart, MF Global disclosed the concerns over the missing money, according to a joint statement issued by the Commodity Futures Trading Commission and the Securities and Exchange Commission. Regulators, however, first suspected a potential shortfall days ago as they gathered at MF Global’s Midtown Manhattan headquarters, the people briefed on the matter said. It is not uncommon for some funds to be unaccounted for when a financial firm fails, but the magnitude in the case of MF Global was unnerving.

For now, there is confusion surrounding the missing MF Global funds. It is likely, one person briefed on the matter said, that some of the money may be “stuck in the system” as banks holding the customer funds hesitated last week to send MF Global the money.

But the firm has yet to produce evidence that all of the $600 million or $700 million outstanding is deposited with the banks, according to the people briefed on the matter. Regulators are looking into whether the customer funds were misallocated.

With the deal with Interactive Brokers dashed, MF Global was hanging in limbo for several hours before it filed for bankruptcy. The Federal Reserve Bank of New York and a number of exchanges said they had suspended MF Global from doing new business with them.

It was not the first time regulators expressed concerns about MF Global.

MF Global confirmed on Monday that the Commodity Futures Trading Commission and the S.E.C. — had “expressed their grave concerns” about the firm’s viability.

By midmorning on Monday, the firm filed for bankruptcy.

Statistics can tell what ever story you want them to

I have always been a fan of statistics.  You can manipulate statistics to tell what ever story you want.  As a director of a funds management business I have spent many hours sitting back and reflecting on the carnage that happened over the last quarter, trying to work out why stocks were so heavily discounted and for no apparent reason as well as trying to rub my crystal ball to predict what will happen this month (October 2011). 

To look into the future you must first look back into history to see what lessons can be learned and distinguish if any trends are emerging and why.  Markets are supposed to be efficient and random, trends are not supposed to occur and history should never repeat - well that is at least what the finance text books tell us. 

From my experience history has a habit of repeating and markets are not entirely efficient or random.  I choose to use statistics to tell a positive story rather than be all doom and gloom.  Looking back at previous October months the statistics are mixed.  We have had major stock market corrections (crashes) occur in October.  Take for example the events of 1929, 1987 and 2008 – co-incidence maybe?.  The month of October has also proven to signal the end of bear market periods as was shown in 1998, 2001 and 2002. 

The following are some key statistics about the month of October as they pertain to equity markets as found on the Pragmatic Capitalism website (pragcap.com)  This website is one of the best I have found and is certainly full of information and different points of view.  If you have not visited this website I suggest you do.  The data was taken from an article first released on 3 October by Cullen Roche.   

• Known as the jinx month because of crashes in 1929, 1987, the 554-point drop on October 27, 1997, back-to-back massacres in 1978 and 1979, Friday the 13th in 1989, and the meltdown in 2008

• October is a “bear killer” and turned the tide in 11 post-WWII bear markets: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, and 2002

• First October Dow top in 2007, 20-year 1987 crash anniversary –2.6%

• Worst six months of the year ends with October

• Best Dow, S&P, and NASDAQ month from 1993 to 2007

• Pre-presidential election year Octobers since 1951, rank last across the board; excluding 1987 still   near the bottom

• Big October gains five years 1999-2003 after atrocious Septembers

Thus far, many of the seasonal trends have held true in 2011. The traditional “sell in May and go away” strategy adopted by some investors will have paid dividends with the markets off heavily from their May closing. Roche notes that if the seasonal trends continue to hold, October could be the beginning of a change in the bear trend.  He also states that ccording to the Stock Traders Almanac (www.stocktradersalmanac.com), October is a great time to buy stocks as it marks the beginning of the stock market’s strong seasonal period.

We have had an atrocious September so the outlook for October is rosy, well that is at least what I believe the statistics tell us.

Invest for equity income: boring strategy but pays dividends in the long run

The following article is intended to be informative and general in nature.  It is not to be interpreted as personalised advice and it is recommended anyone reading this article seek professional advice before making any investment.  The author does not hold shares in the securities mentioned in this article directly, but is a director and shareholder of a fund which may from time to time either hold or trade these companies.

A dividend focussed strategy may not appear to be the most glamorous way of investing but when you are in an environment where there is considerable volatility and little to no capital appreciation, deriving income off your share allocation can assist in insulating a portfolio’s return.

Investing for dividends has in the past, and will continue to be in the future, a viable strategy for investors seeking to supplement their income.  With yields on cash and traditional fixed income providing very little it is important to cast the investment net wider and look towards those companies that have strong cash flows and good annual dividends.

Yes, equities are generally more risky than bonds however one could reasonably argue that buying shares in companies like Johnson and Johnson (JNJ), Microsoft (MSFT) or Coca Cola (KO) is less risky than buying bonds in any of the PIIGS nations (PIIGS = Portugal, Italy, Ireland, Greece & Spain).  The dividend yields on these three companies used in this example are greater than what can be achieved from a US 10 year treasury security.  There are several examples of stocks in New Zealand and Australia where the dividend yield is higher than the long term fixed income or term deposit rate can easily be found.  Many brokers will publish this information and some you can access free of charge off the internet or out of the weekend newspaper.

Before everyone goes rushing off to scan the papers or internet for the highest yielding securities it is important to understand that the stocks paying the highest dividend yield may not be the best ones to invest into long term.  A high dividend yield could be as a result of a falling price.  The dividend yield calculation is the annual dividend in cents per share divided by the current price in cents per share.  A falling price could signal that the dividend is expected to be cut in the near future or worse stopped altogether. 

Factors to consider when adopting a dividend focussed strategy are:

1.  The quality of the company(s) you are looking to buy – our preference is to stick to household names that are considered blue chip companies with solid balance sheets and good management.
2.  The companies track record of paying dividends and increasing dividends over time.
3.  The company’s dividend pay-out ratio, i.e. the portion of the company earnings that are allocated to paying dividends.
4.  The dividend yield of the company compared to its industry peers
5.  The dividend coverage ratio, i.e. the ratio between a company’s earnings and the net dividend paid to investors.

To implement a dividend focussed equity strategy investors have many options available to them including:

• Purchase individual companies on their respective global stock exchanges through a broker;
• Purchase exchange traded funds again through a broker;
• Purchase units in a managed fund or investment trust via an authorised financial adviser. 

It is worth noting that in the managed fund space there are a number of funds available in the U.S. which are listed on U.S. exchanges.  Currently most of the offshore managers who provide dividend strategy funds do not have investment statements which are compliant with New Zealand legislation and therefore are not available to New Zealand resident investors.  Unfortunately from our experience there is very little by the way of globally diversified dividend focussed strategies available to New Zealand domiciled investors.

For New Zealanders, from the perspective of ease of execution, diversification and cost effectiveness, to gain an exposure to a dividend income strategy it may be preferable to use vehicles such as ETF’s or offshore domiciled managed fund or traded securities.  Most investors do not have sufficient investment capital or expertise to put together a globally diversified portfolio of high yielding securities.

 
Next time you are thinking about investing your capital into shares give some consideration to the dividend.

Can we fix it? Yes we can!

Europe central bankers have stolen Bob the Builders catchphrase with their latest and greatest proposal to help the struggling european nations.   For those without children, grandchildren or young nieces and nephews - Bob the Builder is a children’s animated cartoon where the main characters catchphrase is “Can we fix it” to this the other characters shout  “yes we can”.  This is a bit like what is happening at the European Central Bank right about now.  

Defaulting on its debt is nothing new for Greece by the way.

According to academic research, Greece was awarded the dubious honour of recording the first ‘default’ back in around 377BC.  Greece has defaulted on its external sovereign debt obligations at least five previous times in the modern era (1826, 1843, 1860, 1894 and 1932). The first episode occurred in the early days of that country's war of independence, and the last default was during the Great Depression in the early 1930s. The combined length of period under which Greece was in default during the modern era totalled 90 years, or approximately 50% of the total period that the country has been independent.

Although many might consider this level of default to be excessive, Greece is nowhere even close to the top of the list. Venezuela and Ecuador, with 10 defaults each, share the (dis)honour of being the greatest serial defaulters of the modern era.

The latest rescue package announcement to hit the wires is for the use of the European Financial Stability Fund (EFSF) which was created by the euro area member states in May 2010 to assist with the debt crisis that was unfolding at that time. 

There are several moving parts in the proposal but essentially it goes like this -  banks would be allowed to exchange their sovereign debt for debt issued by a special purpose vehicle (SPV) created by the European Investment Bank and capitalised with funds from the EFSF.  The creation of the SPV is seen as important to protect the members and ensure that neither the ECB nor EIB are left carry the can should this all turn to custard.

It is important to also understand that prior to this latest announcement the EFSF has already provided emergency funding to Ireland, Portugal and Greece.  The expectation is that a further 100 billion euros in additional funding is needed just for Greece.

Some commentators are speculating that the proposed plan will effectively make the new vehicle a levered fund, which borrows far more than it has in equity capital provided by European governments. After reading this I am left wondering how leveraging the new fund is going to help and wasn’t this kind of how we got into this mess in the first place?  Maybe we never learn from our past mistakes?