Steven's Thoughts

Consumers want to be educated

I am a new fan of the magazine called "Good"(see previous blog). I've been reading some great articles.

• Metal is making a comeback in Egypt after a crackdown on "Satanic music."


• The Ashland Media Exchange and the Espresso Book Machine seek to put books back in people's hands


• Michael A. M. Lerner talks with the man who is putting the “science” back in political science.                           

While I was reading I came across what looked like an article which listed several facts about the dangers of pesticides.

• "six times greater the incidence of children born with autism to mothers living within 500 meters of California fields sprayed with pesticides than the rate of autism births nationwide"

• "10,400 Number of people who die in the U.S. each year from cancer related to pesticide exposure."

• "250 Number of people in the U.S. killed each year by assault rifles"

• "245,000 Number of fish killed in 1995 when a heavy rainstorm caused runoff from Alabama cotton fields into a nearby creek"

• "4,000,000 Number of people in the U.S. who routinely drink water contaminated with carcinogenic herbicides"

• "90 Percentage of municipal water treatment facilities lacking equipment to remove these chemicals from the drinking water"

• "5 Number of the nine most common pesticides used on cotton that are classified as “known carcinogens” by the EPA"

• "75 Estimated percentage of pesticides sprayed from crop dusters that blow away rather than reach the ground"
  

The article was sponsored by what I thought was a not-for-profit organization called Loomstate. I was intrigued and went right to my mac to enter www.loomstate.org. Lo and behold Loomstate is actually a organic jeans company, not an environmental not-for-profit.

What a great marketing campaign! If they would have created a typical jeans ad featuring a sexy model showing off a nice butt,  I probably would have flipped right to the next page. Well, maybe I would have looked for a little bit, but I would have quickly forgotten the brand and I definitely wouldn't have gone to their website. Rather than using sex to sell their jeans, Loomstate chooses to educate their consumers about the environment and in turn piques some interest in their product that goes beyond the surface.

Asset managers tend to show the equivalent of what are sexy models in their ads, by touting 1, 3, 5 year results. Why doesn't the industry educate advisers who are interested in investments and provide insights to portfolio mangers? Asset Mangers could present statistics or analysis, that reveals something new to advisers, which would ultimately drive traffic to their site.

I hope the financial industry catches on and the next time I open Financial Planning Magazine I will get inspired by the information presented to me. And who knows perhaps I'll  gain a new perspective that will compel me to hop on the computer and find out more.

DC plans still don't offer SRI options

Increasingly investors are putting their money towards socially responsible investment (SRI) funds. A survey by Mercer Investing Consulting, prepared for the Social Investment Forum (SIF), show that less than a 20% of defined contribution (DC) plans, such as 401(k)s and 403(b)s, at work, are currently offering one or more SRI funds. DC plans are starting to listen to investors and an additional 41% are planning to offer SRI options within three years.

Why would a DC plan not offer a SRI option when increasingly investors are demanding this as an investment option?

Institutional Investors against Global Warming

Anu (our new hire) recently made me aware of an NPR podcast that talks about the The Investor Network on Climate Risk. This organization is a network of institutional investors and financial institutions dedicated to promoting a better understanding of the financial risks and investment opportunities posed by climate change. They manage $4 trillion in assets.

Increasingly investors and institutions realize the importance of this issue and are taking action by putting their money where their mouths are. It will be interesting to see what the effect these kind of initiatives will be over the next years.

Divestment of Sudan

Celebrities have started to divest their investments from companies who are involved with Sudan. Now asset mangers are starting to get on board as well. Calvert has forged a partnership with the Sudan Divestment Task Force, an advocacy group for divestment in Sudan. Calvert wants to increase awareness about and the impact of a targeted divestment strategy that aims to influence the Sudanese government and halt the genocide.

These actions are designed to put pressure on the government to stop the killings. The United Nations estimates that at least 400,000 people have been killed and more than 2 million have been displaced in the region.

The investment community can help stop the genocide. This is an opportunity for the industry to do more than make money.

Celeberties put their money where their mouths are

Mia Farrow worte in an op-ed article published in the Los Angeles Times that she was shocked to learn that some of her pension money held in Fidelity funds was invested in PetroChina and Sinopec, two oil companies that do business in Sudan. Human Rights Watch estimates 70% to 80% of the billions of dollars in oil revenue that go to the country’s government is used for weapons and training.

Farrow says she withdrew her money from Fidelity, sending the firm a letter explaining her decision. She says the firm has since significantly increased its holdings in PetroChina, saying it is not the appropriate entity to address such "complex social and political issues."

Growing Popularity of Asset Allocation Funds

Over the last six months a number of our clients have added new asset allocation funds.

This trend is largely due to the rising popularity of these funds by investors who seem to like the simplicity of these products. The number of asset allocation funds has doubled since 2001; Morningstar reports that there are 247 asset allocation funds and 81 international hybrid funds, offered by 60 different money managers. According to Strategic Insight these types of funds attracted about $51 billion in new money in 2005, a 15.8 percent increase from 2004.

Asset-allocation funds are available through financial advisors, but are largely in 401(k) plans. This is primarily due to growing concerns that too many people are mismanaging their retirement money. These products enable the unsophisticated investor to leave their 401(k) plans on autopilot. Employers are often using lifestyle funds as the default investment option for automatic enrollment.

In 2005, 63% of 401(k) plans offered at least one asset-allocation fund, up from 35% in 2001 and 19% in 1997, according to Hewitt Associates. Balanced funds, meanwhile, have decreased in popularity, with 67% of plans offering this investment option in 2005, down from 72% in 2001 and 76% in 1997.

Yet, few 401(k) investors seem to be using these funds as the stand-alone investments they were intended to be. The average 401(k) plan participant with a lifestyle fund holds an average of 4.8 funds, according to 2003 data from Hewitt. Meanwhile, 32% of them hold more than one lifestyle fund and just 15% invest in a single lifestyle fund and nothing else, according to Hewitt.

There are two main types of asset-allocation funds:

• Lifestyle fund

• Target-date or life-cycle fund

Lifestyle fund invests partially in equities and partially in bonds, attempting to provide instant diversification for the life of the investment period. Balanced funds do the same thing, but lifestyle funds take it a step further, by allowing people to choose from a variety of asset-allocation strategies based on risk tolerance.

Target-date lifestyle funds are another evolution of this concept. Rather than choose your fund based on risk, which can change over time, you would choose it based on when you expect to retire. The fund would automatically grow more conservative over time, thus reducing need for the investor to monitor the portfolio.