From the July 2008 issue of Investment Advisor • Subscribe!

July 1, 2008

Be Positive

Taking a positive approach to SRI has served Reynders, McVeigh--and its clients--quite well

Conventional wisdom says that in order to practice socially responsible investing one must be willing to accept subpar investment returns, as if doing the right thing and making money were somehow mutually exclusive. Chat (n?(C) Charlton III) Reynders and Patrick McVeigh respectfully beg to differ. Moreover, they've each got a track record to back up their opinions.

The two, respectively, serve as chairman/CEO and president/CIO of Boston-based Reynders, McVeigh Capital Management LLC, a firm that always takes social issues into account and claims to have delivered a net return on core investments last year of 24.77%, some 19% ahead of the S&P 500. The firm is less than three years old and already has some $260 million in assets under management in-house. In addition, the two men say they are the subadvisors on some $4 billion at four trust companies around the country. "We also provide consulting advice to other investment advisory firms," explains Reynders. "We do all our own independent research and they seek creative and specific high-quality investment ideas from us, both in the socially responsible sphere and also under the trust mandates."

The high-quality investment advice of which he speaks will no doubt also reflect the firm's commitment to socially responsible investing (SRI). As with many subjects, however, just what "socially responsible" means often depends both on who is doing the defining and the context in which the definition is made. Many investors approach SRI from a negative perspective, in terms of what companies or industries they're not going to invest in.

"We tend to look at SRI in a different way," says Reynders. "We started this firm because we felt that you could invest in industries that were doing positive and interesting things, and that was a good way to make money. Both Patrick and I, for a long time, have been involved in one way or another with what people would call SRI, but we just happen to think it's smart investing. Sustainable growth is what we invest for."

"We offer clients the options of avoiding certain companies or industries if they wish," adds McVeigh, "but we really put our emphasis on finding those positive investments that will appeal to all of our client base, as well as the superior investment companies that we think are doing positive things for the environment, for their employee base, and how they're managing the company."

"We tell our clients: 'We're not going to define for you what social responsibility is, we want you to tell us what those issues are that you're concerned about and what those issues are that you're interested in,'" Reynders continues. "So for some clients we'll look more carefully at alternative energy and global warming issues and for other clients we'll look at employment issues. It really depends on the individual, the definition of social responsibility."

Many Ways to Be Responsible

Although social issues are important in any discussion of SRI, at Reynders, McVeigh social responsibility entails much more than just the avoidance of sin, however you may define it. It has to do with building sustainable growth and takes into consideration how a company is managed, not just what it manufactures.

Companies that take on a great deal of debt are seen as irresponsible because in most cases that debt is not sustainable. "We believe we bring more of the balance sheet into the analysis of what's a sustainable company," says McVeigh of the firm's SRI methodology. "That's critically important. If you're going to maintain good employee relations or look out for the environment, you need to be a healthy company, you need not to be over-leveraged. So that's part of what we bring into the social analysis of a firm."

That balance sheet analysis led Reynders, McVeigh to avoid since the firm's founding a sector that's since become the bane of many contemporary investors--the financial sector. At a time when the financial industry has been the biggest sector within the S&P 500 and a favorite of socially-screened index funds and many other mutual funds, that was seen as a contrarian position, to say the least.

"Some have used the argument that a lot of finance goes into housing and job creation, which are social positives," says McVeigh. "We came to the conclusion that we had an industry that was based on very unhealthy financial positions that have become completely over-leveraged, that were utilizing financial derivatives that no one completely understood--even the participants in derivatives--and we felt that this was a completely unsustainable industry that would lead to serious problems at some point. Rather than using the arguments that this was something positive because it was creating more housing, we felt that it was going to lead to a major decline in the housing market and this was not something we wanted to support either financially or socially. So we had taken the position, since we started this firm, that we would not invest in the financial sector because the earnings were not transparent and their business practices were not understandable. Unless we have that transparency we don't feel we can invest in any company."

Reynders thinks that for many SRI investors the financial sector seemed like a good place to play--there are no environmental issues, negative products, or serious labor problems. "It's the path of least resistance," he says. "But that's one of the things wrong with SRI: that they're looking for the least resistance as opposed to the most progress."

Surprisingly, avoiding the financial sector when everyone else was in it up to their necks was not a problem for their client base. "Our clients expect us and ask us to be thinkers, looking out three to five years for long-term investment opportunities," according to Reynders. "I think when it came down to Fannie Mae and other financial stocks, they expected us to be contrarians. When things are popular and seem to be running so smoothly, it's easy to have this comfortable, social bubble around the idea. That's when we get skeptical. It's in the raw phases when you really need to be thinking in a socially responsible way and looking at those opportunities that are going to make a difference over time, and perhaps create markets. That's where you really earn money for your clients."

McVeigh says the firm's position was probably difficult for some in the industry to understand--avoiding the largest sector in the S&P 500 would appear to be taking on a lot of risk. "Our way of thinking was that we were minimizing risk. If we believe there's an industry or a company that has an undue amount of risk associated with it, then it's our job to avoid that. And we're lucky enough to have clients that understand that our method of investing is to avoid risk and to seek opportunity. It's not just to mimic the market."

Private Equity: Making Movies, Making Loans

For many investors looking to take a socially responsible slant, the obvious choice is from among the hundreds of SRI funds available. At Reynders, McVeigh, client portfolios are primarily built from a combination of individual equities and laddered bonds. There's also another component available to clients with sufficient assets--SRI private equity--and both of the firm's principals have their own areas of involvement.

For Reynders it goes back to how he first got into the industry. Although his family has long been in the brokerage business and he did work summers on Wall Street while an undergraduate, when he graduated from college there was little opportunity for him there.

One of the assignments he had been given during those summers was to analyze IMAX films. So as Reynders puts it, "wisely or unwisely," since he hadn't found a job, he decided to raise the money to make his own IMAX film. It took him four years to get the funding from the National Science Foundation, the National Wildlife Federation, the Audubon Society, individual investors, and "a few firms that saw the value of what we were doing and participated."

In the last 12 years Reynders has been involved as executive in charge of production or executive producer of five major IMAX films on a variety of conservation topics--whales, bears and their habitat, coral reefs, the Grand Canyon. The film "Dolphins" was nominated for an Academy Award as best short subject in 2001. "Each one of these films is seen by 15 or 20 million people around the world in 16 different languages and we reach one to two million students directly in their classrooms with our educational materials," he says with understandable pride.

"We've been very fortunate with these films. They've been nicely successful for clients," he continues. "It's really not about making a whole, whole lot of money. Eighty percent of the ticket sales from these films goes to the cultural institutions that house these theatres, which is very attractive to us and to our clients."

Reynders says that clients that invest in the films aren't expecting equity-like returns and do so as much for the social and educational benefits, but still might make 50% on their money over eight years.

McVeigh's SRI private equity projects, centered on community development loans, sound a little less glamorous, but have had a significant societal impact. "The most recent one I've been in involved with was to help start a loan fund in Haiti," he says. "It was designed to make fairly large-sized loans to peasant groups that would form as a cooperative, mostly in the area of organic agriculture, to help create some infrastructure so people could provide for their own needs."

The pool of funds for such loans came from individuals, including clients of Reynders, McVeigh, and religious groups. So far about $1 million of loans within Haiti have been made.

"We view these things as supplements to the portfolio," McVeigh relates. "The portfolio is designed to meet people's financial and social long-term needs that they spell out for us. You often get that question: 'Does it make a difference, investing in this company or that company in terms of making change?' I think we can certainly make an argument that it does make a difference long term." But he says many clients also want to know what their money can accomplish in the short term. "I think that things like the community loan funds, these movies, are important to show clients that you can create some meaningful change in the short term and your investment dollars through your traditional portfolio can help to create bigger change over a longer period of time."

With home-grown research and a strict balance-sheet approach to SRI, Reynders, McVeigh looks to be well-positioned to help their clients meet their financial needs while making the world a better place.


Managing Editor Robert F. Keane can be reached via e-mail at bkeane@investmentadvisor.com.

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