BP and socially responsible investing

By Edwin Palsma; The Afro News Langley : The oil spill in the Gulf of Mexico has a lot of people thinking about their investments.

First, they are wondering if they own any shares of BP through the mutual funds or indices in their investment portfolios. The oil spill has lopped more than $30 billion off BP’s market cap as investors worry about the total bill for cleanup.

Second, people are wondering if there is any way to influence companies that have the potential to make such a negative impact on our world, whether environmentally or socially.

At first blush, SRI — socially responsible investing to encourage progressive social change — seems to have very little sway or influence in how companies such as BP make decisions. In a world seemingly fixated on making money, is it possible that having a social conscience can make a difference? Looking back, the answer is yes; there have been times during which socially conscious investors have successfully initiated change.

Back in 2001 and 2002, a few shareholder resolutions filed by SRI companies, such as Ethical Funds, helped encourage BP and other oil companies to pull out of a new oil field in the pristine wilderness of Alaska’s Arctic National Wildlife Refuge. This was a small victory at the time. Subsequently, many SRI investment companies divested themselves of their shares in BP in favour of other oil and gas companies they believed were better investments, and which were being more proactive in addressing their environmental impact. Better out than in, given today’s sad situation.

But did SRI investors really win in all this? While not owning shares in BP at a time when their market cap is falling doesn’t hurt one’s investment returns, we are still staring at an enormous environmental problem that will impact the Gulf of Mexico for years to come. There are very few winners in situations like this.

So you may be asking yourself: I’m all for SRI, but how much is it going to cost me in returns? The prevailing myth is that SRI doesn’t pay off like regular investing…that investing with a conscience exacts a price.

Evidence indicates otherwise. Socially responsible investing has been around for quite a number of years, and people think of it mainly as along the lines of not investing in cigarette companies and munitions. Due to the oil sands, investing in oil companies is generally considered off-limits. All these industries are highly profitable, and crossing them off the list can negatively affect returns in an SRI portfolio. Right…? Wrong.

One of the longest, consistent records of SRI is the FTSE KLD 400 Social Index. Begun in April 1990, it has an annual performance of +9.7% — significantly more than the S&P500’s annual return of +8.8%. The record in Canada is shorter but no less interesting. Since January 1, 2000, the Jantzi Social Index has returned 5.92%, edging out the S&P/TSX60’s annual returns of 5.79%.

Could it be true that companies with better environmental policies and more effective employee safety programs have more efficient workforces and are less likely to be the subject of negative press and lawsuits, thereby generating higher returns for their shareholders? Whatever the future financial returns, many SRI investors appreciate that they are also able to get a good social return on their money. In effect, they have a triple bottom line when it comes to their investments: financial, environmental and social returns weigh into their decisions.

If one is looking for a more proactive approach to investing responsibly, there are more than a few SRI mutual fund families that can deliver decent returns while making a positive difference. You can also talk to your financial advisor about picking what’s called “best of sector”; that is, investing in specific companies that are the most progressive in any particular industry — such as petroleum.

While no investing process is perfect, having the peace of mind that one is making a difference, and not just standing idly by, can be compelling. After all, we all want to leave the world in better shape than when we arrived. SRI is a way to start making a small difference with your investments.

About the author

Edwin Palsma is a Langley, BC-based Financial Advisor with Raymond James Ltd. The views of the author do not necessarily reflect those of Raymond James. This article is for information only. Raymond James Ltd., member of Canadian Investor Protection Fund.

Guaranteed Investment Certificates

By Troy Peart The Afro News Vancouver

In the not too distant past, Guaranteed Investment Certificates (GICs) were merely a promise by banks to repay money lent to them by individuals after a period of time or “term”. After this term, GICs were said to have matured and the money would be returned plus a predetermined amount of interest. There was nothing more to know and an individual could base their decisions merely on rates and terms.

Since then, GICs have evolved to become more appealing to a much wider audience of investors. Given the plethora of choices available, it has become progressively more challenging to determine which option is the best for a particular situation or individual.

While there are so many choices available, there are a few fundamental benefits that are present with all GICs. For example, all GICs have a term after which they will mature and no longer be invested. In addition, as the name suggests; GICs are guaranteed. More specifically, this means that one will at least get their principal returned to them at the end of the term. As a result of the aforementioned evolution of GICs, the similarities are overshadowed by the potential differences.

Despite the abundance of options that are available, there are a few categories one can use to classify all GICs. These are: short vs. long-term, cashable vs. non-cashable and fixed vs. variable interest.

The distinction between short and long-term is the length of the term for a particular GIC. Terms generally range between 1 day and 10 years. Longer terms usually pay higher interest rates to compensate individuals for the inconvenience of not being able to access their funds. One should consider how long their investment horizon is prior to committing to a particular term to ensure liquidity is not an issue.

Cashable vs. non-cashable indicates whether or not one can redeem their GIC prior to maturity. The ability to redeem a GIC prior to maturity adds a level of flexibility that usually results in a lower interest rate when compared to an identical GIC that must be held to maturity. As such, one must evaluate whether the added flexibility of a cashable GIC warrants the reduction in interest payments.

The difference between fixed and variable interest is whether or not the interest payments are predetermined prior to one purchasing a GIC. Not surprisingly, fixed interest is predetermined (or fixed) and one can calculate exactly what they will be receiving prior to investing. Conversely, the amount of interest payable for variable rate GICs is determined by some other factor. These factors range from market indexes and individual mutual fund performances to the prime lending rate for an individual bank. As mentioned earlier, the repayment of one’s principal is unaffected by the type of interest payable. Determining which option is most appropriate should be based on one’s risk tolerance, time horizon as well as the other investments and financial obligations that they have.

In addition to selecting the characteristics of individual GICs, one must be cognizant of how these individual investments relate to the remainder of their portfolio. For example, the lack of flexibility inherent with a 10 year GIC may seem undesirable if considered as a stand alone investment. However, if it is combined with GICs of shorter maturities, this may not be an issue and the portfolio could benefit from a higher overall return.

It is important to note that GICs are a small subsector of the larger category of fixed income, which in turn is a subsector within the broader category of investments. As with all financial products, GICs are merely tools that can be used to achieve one’s financial goals and diversification is often strongly recommended. One must evaluate their individual goals and objectives in conjunction with their personal circumstances to assess the suitability and allocation of GICs in addition to other financial products. Professional advice should be consulted as there are other potentially important factors not mentioned in this article like: taxation, inflation, currency and estate planning issues.

Troy Peart B.B.A., CFP, CFA can be emailed at troypeart@shaw.ca. Your questions, comments or suggestions for future articles are encouraged.

Lessons learned by Boards of Non-profits and Charities

By Heather Holden PhD, Wealth Advisor The Afro News Vancouver

If you’re a member of a non-profit or charity board with an investment portfolio, you’ve likely had at least one meeting recently full of consternation regarding the state of your organization’s assets. And if you’re like the non-profits and charities I work with, the themes of those conversations were similar. Here is a brief summary of lessons learned.

1. Develop a benchmark measure of acceptable risk

Board members are paying more attention to articulating their organization’s tolerance for risk and including this measure in their Investment Policy Statements. Benchmarks to evaluate performance with respect to risk are being added to the typical return evaluation benchmarks.

Whether defined as volatility or uncertainty, the debate and discussion regarding risk tolerance have raised the profile of this important component of a non-profit’s investment policy.

Board members are also demanding full transparency and are asking questions about how returns will be generated and the risks associated with their portfolio. People are thinking about risks more broadly and asking questions about the risks of passive vs. active investing, individual securities vs. managed products, and inflation.

2. Be explicit about liquidity needs

Boards members are including explicit statements in their investment policies regarding the speed at which they need to be able to convert their investments to cash.

Organizations with funds in alternative investments with low liquidity may have enjoyed higher returns over the long run, but the focus has returned to the need for liquidity.

Because many organizations rely on their investment portfolios to supplement or even fully fund their annual operating budget, the market crash combined with a lack of liquidity compromised or stifled their ability to meet their objectives.

3. Healthy reflection

Smaller charities and non-profits often find themselves at a disadvantage with respect to staff and board member skill sets and time to devote to investment management. Many are being more realistic about their resources and are taking the time to weigh perceived investment opportunities against their risks with more focus on minimizing mistakes.

As fiduciaries are being even more vigilant about due diligence, they are especially focused on their ability and willingness to take on risk and reassessing what they can do as volunteer board members. This healthy self-appraisal has lead to many productive conversations and modifications to many organization’s processes and policies.

4. Rethinking the definition of success

It would seem that many organizations are moving towards definitions of success that are more broadly measured. Conversations and strategic planning session debates are focused on evaluating progress as a function of meeting well-defined goals.

Board members seem to be much less concerned about beating benchmarks or the results of their peers because they recognize that their constraints and needs are unique.

5. Back to Basics

The sheen of complex portfolios perceived as more sophisticated has dulled. Conversations are focused on the benefits and elegance of simple portfolios and long term investing. The long track records of traditional asset classes have the advantage of more reliable historical risk and return records.

The more complicated investment innovations do not always allow fiduciaries to fully gauge risk-return ratios and appropriate asset-allocation decisions. As a result, many boards found that their portfolios were not as well diversified as they thought.

I would be delighted to speak with you, attend a meeting of your investment committee, or even hold a workshop for your board if you feel like your organization could use a healthy second look at your investment policies and procedures, so feel free to ask!

Heather Holden, PhD, Wealth Advisor

ScotiaMcLeod, 650 West Georgia St. Suite 1100

(604) 661-1523  Heather_holden@scotiamcleod.com

www.heatherholden.ca

Registered Retirement Savings Plans (RRSPs)

By Troy Peart The Afro News Vancouver

It is once again the time of year when advertisements for Registered Retirement Savings Plans (RRSPs) can be found everywhere. As a result of all this coverage, most people have heard about RRSPs. Unfortunately, far too many people are not sure about how they work or what they are intended for.

RRSPs are not one particular type of product or investment, but instead can take the form of any number of financial products or investments. The significance of RRSPs is how they are treated from a tax perspective once they are placed under the RRSP “umbrella”. Basically three things happen.

First, any money that’s contributed to an RRSP is tax deductible. For example, if someone made $60,000 in salary income and they contributed $10,000 to an RRSP, then for tax purposes Canada Revenue Agency (CRA) would say that they made only $50,000. Assuming one’s employer withheld exactly the right amount of taxes for $60,000 of income, then that individual would get a tax refund of $2,970.

The second thing that happens with RRSPs is that the investments are allowed to grow on a tax deferred basis. This means that the CRA does not take its portion of the gains from the investments every year. Most investments do not have this advantage and the difference between a tax deferred investment and a regular investment can be quite substantial, especially over longer periods of time.

The third thing that happens with RRSPs, is that in most cases when money is withdrawn it is fully taxed. An individual can even end up paying more in taxes when they take money out of an RRSP than the deduction they received when they put it in. The whole idea behind an RRSP is that one contributes to it when they are making an employment income, and then they take it out when they retire and are earning less. Two exceptions to this rule are the Home Buyers Plan and the Lifelong Learning Plan.

The amount of money one can contribute to an RRSP is not unlimited. An individual can contribute a maximum of 18% of their gross income up to a recently increased limit of $21,000 for 2009. If one did not use their full limit in previous years, this amount automatically is carried forward indefinitely. Conversely, if one put money into an RRSP then immediately took it out, they would lose this contribution room. In most cases, RRSPs should be long term accumulation vehicles used for retirement planning.

An individual’s RRSP allocations should be determined by their particular goals, personal circumstances, investment knowledge and risk profile. RRSPs are a great financial planning tool and likely belong in most individuals’ tool box for building financial independence. One should ensure this planning is carefully executed because the difference of a couple percentage points in rate of return can make the difference between retiring in style and barely getting by.

P.S. The deadline for contributing to one’s RRSP this year is March 1st .

Troy Peart B.B.A., CFP, CFA can be emailed at troypeart@shaw.ca. Your questions, comments or suggestions for future articles are encouraged.

Investing in the midst of Uncertainty

By Heather Holden PhD,The Afro News Vancouver

Given recent economic conditions and government interventions, it would be a good idea to consider the potential impacts on your long-term investment planning. Now may be a good time to think about your portfolio return above the inflation rate, in real terms, and to prepare for the risk of higher inflation.

Most investors would agree that preserving and even enhancing their purchasing power over time is a desirable goal. Different investments will serve you differently in your ability to clear the inflation hurdle.

Read the full story

By Troy Peart The Afro News Vancouver

As a professional in the financial industry, it always amazes me when I read of studies showing a significant percentage of Canadians that plan on winning the lottery as major part of their retirement planning. Considering that I do not personally know of anyone that has won even as much as $50,000 in a lottery, I am even more surprised (and saddened) when I hear of the even greater percentage of multimillion dollar lottery winners that are broke within 5 years. Although it is quite rare to win a substantial amount of money in a lottery, many of the same elements are present when one receives a large inheritance. Read the full story

By Heather Holden, PhD The Afro News Vancouver

University tuition has been increasing by more than the rate of inflation, according to the Statistics Canada’s report, The Daily (October 9, 2008). Add to that the trend of decreasing government funding, and the high cost of post secondary education will become even more of a barrier to entry. You have a number of options to consider if you’re starting to plan for the future education of the children in your life. Financial aid and scholarships are certainly an option for many, but they cannot be counted on to cover the full costs. And although Canadian students can apply for government student loans, not everyone qualifies. Read the full story

By Thomas J. Powell

The following is a fictional example. It never happened, except for in my head.  June, 2006  Las Vegas, Nev.

There is and always has been stiff competition between Las Vegas casinos. Located miles from the strip, Sin and Tonic Casino relies on clever ideas from their owner, Dale, to increase profits. In the summer of 2005, Dale decided to unveil a ‘Play Now, Pay Later’ program to his loyal customers. Dale’s customers, most of whom rarely left the casino because they had no home or job to maintain, were allowed to gamble and drink while management kept tabs on how much money they were each blowing through.

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Keeping your Principles AND Principal when Investing

Being socially responsible in life is different for everyone—for some it means speaking publicly at City Hall to hold elected officials accountable; for others it means going to church every week; and for others it means taking responsibility for their own health so as not to be a burden on the health care system.

Socially responsible investing is just as broadly defined and worthy of your attention, but not necessarily in the traditional ways – and this makes it a lot easier to also make money!

While a trusted mentor has insisted to me that the best way to invest responsibly is through flexing your consumer muscle when choosing what products to consume, I still take great pleasure in researching and debating the existence of a line between responsible and irresponsible investing.

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Canadian residents over the age of 18 now have a new way to invest: the Tax Free Savings Account (TFSA). You likely know that we can now contribute up to $5000 each year to our TFSAs, which are widely available at financial institutions.

Remember though that the contributions themselves are not tax deductible, but the great thing is that you do not pay tax on interest, dividends, and capital gains earned within the TFSA. Withdrawals, which you can do at ANY time, are tax-free and if you contribute less than your $5000 limit in 2009, you can carry forward the unused contribution room indefinitely!

Be aware that since earnings are tax-free, the interest on money you borrow to contribute to your TFSA will not be deductible for income tax purposes.

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