‘Seeding the markets’

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There has been a move toward micro-finance over the last few years in a number of areas within the impact investment arena. As more consumers adhere to the organic and sustainably farmed initiative themes, there will be a higher demand for this type of enterprise globally.

Although this market is not new, it is being continually “seeded” by Root Capital, an entrepreneurial non-profit founded by Willy Foote back in 1999 with a loan to a cardamom and coffee cooperative in northwestern Guatemala. We tend to believe that these types of loans can often be overlooked by the major lenders and at most would constitute a small portion of their loan book.

According to a March 14, 2015 article in the Economist, “Root’s business is lending to the owners of small farms in poor countries. An estimated 450m of these smallholdings exist worldwide, typically providing a subsistence-at-best income for more than 2 billion of the poorest people on the planet. Mainstream finance has largely ignored them. They face multiple hardships, including land of poor quality, a lack of infrastructure to get their output to market and the constant threat of being wiped out by extreme weather. The lack of access to credit for working capital and investment makes a bad situation worse.”

With any loan from the highest quality to AAA companies to high yield bonds, there are a variety of risks. Think about the recent high yield volatility largely due to one sector in energy. While we cannot vouch for Roots loan portfolio, we feel this specific asset class is a risk worthy of exploration.

“The company says that less than 3% of its loans go bad, a failure rate that would be impressive even among much richer clients. The loans, which come with free advice and training in how best to use the money, are helping farmers increase their productivity and so boost their incomes. The money also protects farmers from having to sell their wares cheaply to the first available buyer. More than half of Root’s borrowers see their income increase by at least 20% a year after receiving a loan; it rises by over 50% for nearly a third of them.”

It is an interesting time in the markets as a robust group of non-profits and for-profit organizations work toward a larger opportunity set for investors. These investments require a lot of due-diligence in order for it to make it as a complement to an existing portfolio.

Keep this in mind as you explore the many possibilities outside the traditional asset allocation.


Tom Koehler-CIO

“Socially Responsible Investments represent a complex asset class and while we covered a small amount, there is a lot more information needed prior to making an investment decision. Let us know if we can provide more information to help in that process.”


Fossil Fuel Divestment

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The world runs on them and we as a society still depend on them in direct and indirect ways. Unless someone goes completely off the grid, they are a fact of economic and social life. However, many people feel conflicted as they believe that the use of fossil fuel is too some extent harming the environment and potentially our health.

An individual or organization can reduce their dependence on these fuels directly and indirectly. Directly they are able to gauge and measure their own usage and construct a plan to reduce through various alternative ways of conducting business.

The indirect route is interesting as investors can reduce fossil fuels from their investment portfolio. It would be very difficult to eliminate them altogether as most areas of the modern economy are touched by the use of fossil fuels.

The most apparent way to begin the process is to reduce oil and gas companies from ones portfolio. If someone is invested in mutual funds or ETFs, they can begin by selling those with the highest concentration of these type of companies and replacing the allocation with a “green” alternative.

Green Century is a small fund company with a balanced and an equity fund. If your intent is to ween off of the fossil fuel theme inherent in most diversified portfolios, philosophically it may make sense to examine this company. Below is their stated goal within the funds and something to seriously contemplate as more firms and foundations divest fossil fuels.

“The Fund seeks to invest in well managed companies that are leaders and innovators, strive to maximize their environmental advantages and minimize their environmental risks. To select the stocks for investment, the portfolio managers at the sub-advisor Trillium Asset Management use rigorous financial analysis that employs a “growth at a reasonable price” discipline. The portfolio managers use similar financial and environmental criteria in selecting bonds in an effort to modulate the Fund’s overall level of investment risk and exposure to business, economic, and interest rate trends. The portfolio managers also seek to invest in green bonds that support energy efficiency and emissions reductions programs through domestic and international corporations and agencies. ”

“Green Century believes that companies that are environmentally responsible could enjoy competitive advantages including cost and liability reductions, quality improvements, profitability enhancements, and access to new and expanding growth markets. Such companies may also gain from strong relationships with their stakeholders.”

The second paragraph is very powerful if all their assertions come to fruition. As the trend continues toward growth markets in green products and as stakeholders are taken into higher consideration, Zenith believes this is an area very worth exploring as the capital markets evolve over the next twenty years and beyond.


Tom Koehler-CIO

“Socially Responsible Investments represent a complex asset class and while we covered a small amount, there is a lot more information needed prior to making an investment decision. Let us know if we can provide more information to help in that process.”

Even bonds are turning green.

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These type of debt instruments raise capital in order to finance those projects that are definitively environmentally friendly. Overall they are a small portion of the bond market but are growing and have representation in investment and non-investment grade sectors. There are a number of indexes as Bank of America and S&P both have created them and no doubt this will increase investor participation as fund managers are able to manage around a defined set of criteria.

To illustrate, we have selected a fund from Calvert Investments who specializes in SRI investment themes.

Calvert Green Bond Fund (CGAFX)

“The Fund seeks to invest primarily in “green” investments. The Fund defines “green” investments to include securities of companies that develop or provide products or services that address environmental solutions and/or support efforts to reduce their own environmental footprint; bonds that support environmental projects; structured securities that are collateralized by assets supporting environmental themes; and securities that, in the opinion of the Fund’s Advisor, have no more than a negligible direct environmental impact, which may include securities issued by the U.S. government or its agencies, and U.S. government-sponsored entities.”

They may invest up to 35% in below investment grade debt and currently it is much lower than that although BBB’s make up 23%. Right on the cusp of investment grade. The yield of 1.38% is decent for a short term government/credit fund although this is categorized as an intermediate fund by Morningstar and rightly so as the duration is 4.79.

We would pass on this fund for now and in the meantime, continue exploration within this interesting segment of the debt markets.


Tom Koehler-CIO

“Socially Responsible Investments represent a complex asset class and while we covered a small amount, there is a lot more information needed prior to making an investment decision. Let us know if we can provide more information to help in that process.”

Triple Bottom Line?

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There simply used to be the bottom line but in the case of SRI/ESG investing there are potentially three main bottom lines.




“The phrase “the triple bottom line” was first coined in 1994 by John Elkington, the founder of a British consultancy called SustainAbility. His argument was that companies should be preparing three different (and quite separate) bottom lines. One is the traditional measure of corporate profit—the “bottom line” of the profit and loss account. The second is the bottom line of a company’s “people account”—a measure in some shape or form of how socially responsible an organization has been throughout its operations. The third is the bottom line of the company’s “planet” account—a measure of how environmentally responsible it has been. The triple bottom line (TBL) thus consists of three Ps: profit, people and planet. It aims to measure the financial, social and environmental performance of the corporation over a period of time. Only a company that produces a Triple Bottom Line is taking account of the full cost involved in doing business.” *Taken from the Indiana Business Review

The problem is measurement especially within the people and planet areas. How are they measured and what is the common unit of measurement across all three aspects? It could be helpful to measure across a common index and at the end determine a score that is monetized so that the profitability portion can be increased or decreased depending on the people and planet portion.

“Echoing the growth in corporate social responsibility reporting, a growing number of mostly small- and medium-sized companies are taking environmental and social stewardship further and becoming benefit corporations — companies that are legally bound to have a positive effect on society —according to a report by Worldwatch Institute.

There are currently about 200 benefit corporations  — none of which are publicly traded companies at this point — in the US, according to More Businesses Pursue Triple Bottom Line for a Sustainable Economy. The total gross revenues for all certified benefit corporations are about $6 billion annually, and together these businesses employ about 30,000 people, the report says.

Signs indicate that interest in becoming a benefit corporation is growing. The number of companies annually using benefit corporation nonprofit advocate B Lab’s online assessment tool, which is a marker for broader interest in eventual certification, grew from 280 in 2007 to 2,406 in 2012. By the end of the first quarter of 2013, some 8,000 individual companies had used the tool, according to the report.

Most benefit corporations to date are either small or medium-sized businesses. But they include a few larger companies that are privately held, such as the outdoor apparel and accessory firm Patagonia, which became a benefit corporation in early 2012 and posted annual sales of about $540 million for the fiscal year ending April 2012.

King Arthur Flour is another large benefit corporation. The employee-owned, 223-year-old company reported sales of about $84 million in 2010, the report says.

Proponents of this new corporate form say it “bakes a triple bottom line into a company’s DNA” that frees companies from the fear of shareholder lawsuits if their decisions fail to maximize shareholder value because of some competing interest of other stakeholders, such as workers.

Benefit corporation status is intended to establish the directors’ fiduciary responsibility to consider the interests of all stakeholders.”  *Taken from the Environmental Leader-May 2013

This summation is only intended to introduce the reader to a different analytical framework so that they are able to potentially judge companies on their merit beyond the traditional financial metrics.

In a way, this opens up many possibilities for holding companies accountable truer to ones ethos and to their view on how a corporate society can evolve.


Tom Koehler-CIO

“Socially Responsible Investments represent a complex asset class and while we covered a small amount, there is a lot more information needed prior to making an investment decision. Let us know if we can provide more information to help in that process.”

Clean, alternative or renewable?

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The energy complex beyond the traditional fossil fuel infrastructure has expanded over the last few years to include clean , alternative and renewable energy.

Solid investment decisions in these areas can become difficult as the very definitions are not easily deciphered among the various energy classifications.

Clean technology has been described by Clean Edge, a clean technology research firm, as “a diverse range of products, services, and processes that harness renewable materials and energy sources, dramatically reduce the use of natural resources, and cut or eliminate emissions and wastes.” It notes that “Clean technologies are competitive with, if not superior to, their conventional counterparts. Many also offer significant additional benefits, notably their ability to improve the lives of those in both developed and developing countries”.

Alternative energy can be loosely described as that which is not fossil fuel and includes; wind, sun, biomass and other non-traditional energy sources. This definition is also similar to renewable energy and many times they are used interchangeably.

While the assets continue to grow in what can arguably described as an energy revolution, it is helpful to examine the overall landscape to help shape your firm’s asset allocation decisions in this area.  In this piece we will only touch upon a few general themes as there are many avenues in which to pursue to this portion of “ethos” investing.

It may be helpful to describe two or three Exchange Traded Funds in this space to illustrate the difficulty inherent in constructing a dedicated alternative energy strategy.

Powershares Clean Tech ETF-PZD

This ETF invests according to the Clean Tech LLC Index that focuses on clean tech which “considers a company to be a clean-tech company when it derives at least 50% of its revenues or operating profits from clean-tech businesses”.   Some of the industries that are represented include: application software, auto parts and equipment as well as industrial companies.

The inherent appeal with this approach is the industry diversification that may suit your firm’s risk profile compared to the Guggenheim Solar ETF (TAN) for instance. PZD holds 57% industrial companies and 21% IT while TAN holds over 70% in IT and most of that is within the semi-conductor industry. While it may be a worthy investment, it is very specific and not potentially in line with your overall volatility goal.

Market Vectors Global Alternative Energy ETF-GEX

The Fund normally invests at least 80% of its total assets in stocks of companies primarily engaged in the business of alternative energy. Such companies may include small- and medium-capitalization companies and foreign issuers. Alternative energy refers to the generation of power through environmentally friendly, non traditional sources. It includes power derived principally from bio-fuels (such as ethanol), bio mass, wind, solar, hydro and geothermal sources and also includes the various technologies that support the production, use and storage of these sources.

Semiconductors continue to dominate the IT sector within this fund but we begin to see “pure plays” within the alternative energy complex as renewable electric and independent electric producers are represented.

Market Vectors Environmental Services-EVX

The Fund normally invests at least 80% of its total assets in common stocks and American depositary receipts (“ADRs”) of companies involved in the environmental services industry. The Environmental Services Index is comprised of companies that engage in business activities that may benefit from the global increase in demand for consumer waste disposal, removal and storage of industrial by-products, and the management of associated resources and includes securities of companies that are involved in management, removal and storage of consumer waste and industrial by-products and related environmental services, including waste collection, transfer and disposal services, recycling services, soil remediation, waste-water management and environmental consulting services.

Industrial names are most prevalent here and Waste Management makes up a little over 10% of the portfolio. While we like the concept, a lot of this portfolio is dedicated to trash and basic waste pick-up and disposal.

After taking a brief look at a few of the offerings within the clean tech, alternative energy and environmental services space, it becomes clear that a well defined strategy is necessary to invest in the non-fossil fuel arena as the choices are somewhat diverse in their composition and intent.

It may be the case that ETFs simply do not have the flexibility to invest across these themes where there is value on a consistent basis. There may be great value among these that speak to your client’s beliefs but may need to be managed in a separately managed account to take advantage of the opportunities in all the energy revolution areas.

This short list is just the tip of the iceberg as we will continue to help outline and streamline the significant amount of choices as they relate to your environmental and alternative energy investment efforts.


Tom Koehler-CIO


“Socially Responsible Investments represent a complex asset class and while we covered a small amount, there is a lot more information needed prior to making an investment decision. Let us know if we can provide more information to help in that process.”

The SRI/ESG quandary

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Quandary= “a state of perplexity or doubt”

That is the state we find the SRI/ESG theme currently embedded. In part, given the wide range of topics within this broad universe, it should not come as a surprise that many investors are wondering what exactly is this socially responsible investment type?

Even if it is able to be explained, there of course is a natural instinct toward doubt as some of the concepts may seem or actually be suspect. Despite this apprehension and lack of representation in the market, we feel that over time, the planning and investment discussion will include a determination of an investors ethos that will aid in shaping asset allocation decisions.

In our post about one year ago, we mentioned that there are already indexes based on SRI/ESG criteria such as the Dow Jones Sustainability Indexes and that there is also massive support from the non-profit sector such as CDP, an organization with one of the largest and most influential SRI screen data bases in the world.

The data and screens are utilized by hundreds of institutional investors globally and also by many open-ended mutual funds and to a lessor degree some Exchange Traded Funds. What screen is appropriate for your firm and for your client’s beliefs?

Some funds in this area of the markets do under-perform their benchmark but this does not need to be the case as we pointed out in our June 2014 piece that shows that investors do not have to sacrifice profit for ethos. We still believe that will hold true in the future and that it will be imperative to have a well vetted stable of funds for investors with nuanced beliefs.

As listed in that same piece, we displayed how nuanced these beliefs can be and even if admirable, they are not necessarily themes that necessarily overlap in their intent.

  • Environment and climate change
  • Governance and ethics
  • Diversity
  • Human right, labor and indigenous people’s rights

In addition to these screens that drive the open end space, there are additional channels for unique investments under the umbrella of “impact investing”. These include but are not limited to;

  • Micro Finance
  • Sustainable farming
  • Clean tech
  • Environmental damage mitigation

It is easy to see the magnitude that SRI/ESG encompasses and how this aspect within the investment world can truly present a quandary at the firm and individual investor level.

In order to help firms understand the potential and pitfalls inherent with this broad asset class, we will continue to vet this complex area within the capital markets and deliver concise opinions on funds utilizing our Zenith Score and to uncover interesting, potentially profitable but obscure opportunities for your portfolio.


Tom Koehler-CIO

“Socially Responsible Investments represent a complex asset class and while we covered a small amount, there is a lot more information needed prior to making an investment decision. Let us know if we can provide more information to help in that process.”

A time for thanks and for introspection


Good evening to all,

Zenith is in WI taking time to spend with family as we value that time. Coincidentally and sadly during this time that should be ideally for family, there is a battle brewing between those that believe that retail stores should be open and those that believe that they should be closed for the holiday.

We believe in most cases that it is healthy to maintain a level of corporate balance that respects the time for employees to enjoy the holidays to the degree that each type of business warrants.

The whole issue is a microcosm of the larger issue with regard to corporate priorities. Obviously, the shareholders and debt holders are a top priority but where does the employee come into the picture?

Everyone has their own ethos in life and attitudes toward corporations are an important extension of ones beliefs. It is when those ethos and the behavior of those corporation are incompatible that problems arise.

The incompatible aspect is amplified as people who are incensed over certain corporate actions continue to hold the company’s securities. If they held the stocks or bonds in an individual account they could sell them and truly express their angst and their beliefs.

However, it becomes a problem if those same investors hold the stock in a 401-k within a larger asset allocation and likely may not even know that they hold the companies that are not aligned with their ethos.

We feel at Zenith that this misalignment can be corrected over time and that the capital markets and the real economy will benefit immensely as beliefs and investments can and should go together. The mechanism is still not there but determined ethos investors will win the day in the future.


Tom Koehler-CIO

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