Operating in a socially responsible manner gives companies an advantage over the competition and leads to higher profits, say the founding partners of Reynders, McVeigh Capital Management LLC in Boston.
Investors who want to have a positive impact on the community and the world do not have to make financial sacrifices, but can make money by making investments they can feel proud of, according to Charlton Reynders III and Patrick McVeigh.
Reynders founded Zephyr Productions to fund and produce socially oriented IMAX projects. He worked on Dolphins, an Academy Award-nominated film produced with the National Wildlife Federation, and on Coral Reef Adventure, among others. He was then executive director of the Whale Conservation Institute in Boston. McVeigh worked with Volunteers in Service to America. He moved to Boston in the early 1980s, where he helped to get Trillium Asset Management off the ground and grow it to more than $700 million in assets before departing.
After 18 years at Trillium, McVeigh became director of research at Lowell, Blake & Associates in Boston. He also served as managing editor of Investing for a Better World, contributed chapters to The Social Investment Almanac and to Working Capital: The Power of Labor's Pensions. He has been project manager for studies by the Social Investment Forum, tracking the growth of socially responsible investing and its implications in the investment markets.
McVeigh and Reynders paths crossed when they worked together at Lowell, Blake. Their similar views on investing and on the world led them to form their own firm to put their shared investment philosophy into practice. Since the firm's inception, its overall return on investment has been nearly 20%, they say. Meanwhile, the S&P 500 was up .307% for the five years ended May 31.
In the last two years, one of the most crippling investment periods in history, Reynders McVeigh grew from $260 million in assets under management to $475 million in AUM. The firm now has ten employees. It does its own research and investment management and sells no products. Fees are based on AUM and range from 1% up to $3 million and 75 basis points above that. The firm has no minimum investment, but clients usually have at least $400,000 to $500,000 to invest.
Says Dallas Sacher, a member of the board of directors for the Sixth District Appellate Program, a not-for-profit that administers state court appeals for indigent criminals in San Jose: "We have a small $2 million pension invested with Patrick and Chat and we trust them. We judge it by the return on investment, but if there was a company or industry we really hated, we might tell them, but I trust they would not invest in companies we don't like anyway."
The partners' real pride comes from investing primarily in socially responsible firms that do not sacrifice on fundamentals: firms that sustain the environment, treat employees well and look to the future betterment of the community, as well as to sustainable growth of the bottom line.
"Progressive thinking, rigorous fundamental research, careful portfolio management and social responsibility together lead to outperformance," says McVeigh.
Reynders, chairman and CEO of Reynders, McVeigh, and McVeigh, president and CIO, admit to being contrarians, even in the socially responsible investing world, and they look for market disruptions as potential areas for profit.
"When we worked together at another firm, we both had the same investment style of looking at the long term, at least the next three to five years," Reynders says, "but we also felt it was important to have a positive social view as a part of what we did. We both believed strongly in starting a firm that would emphasize investments in companies that are socially and economically sustainable."
They feel that how revenue and earnings are produced must be transparent. They want the employees of the companies they invest in to understand the owners' goals and to support them. They also want a company's debt to be limited to no more than 35% of capitalization and cash to be at least six times the interest coverage on the debt.
While investment diversification is a priority, they are more concerned about balancing risk by doing thorough due diligence and what a firm is doing for the social good. For instance, multinational corporations they invest in must provide developing nations with modernizing services or components such as energy and infrastructure improvements and food and potable water solutions.
Domestically, they want to invest in long-term positive trends. When the real estate market was booming, they felt the business models of many companies were not transparent enough. They felt disaster was coming and stayed away from real estate. "For instance, we believed what Wall Street and the mortgage industry were doing was quite irresponsible," says McVeigh. "We looked at Fannie Mae as a big hedge fund, and you saw what happened."
Reynders adds, "Most socially responsible advisors are using screens to select companies that apply to the last decade. You need to look into the future. Most indexes measure little more than popularity. We look to the leadership of the companies.
"At the same time you have to be open-minded. A company may have made bad decisions in the past, but may now be making real effort to improve. If that happened, we would take another look at them after initially rejecting them."
Wal-Mart is an example. Shunned in the past because of its business practices, Reynders and McVeigh feel it is now trying to improve by requiring vendors and partners to be accountable for the carbon impact of their products and services. "This is a huge change and it is real, so personally I would look at them again, and this might encourage other companies to do the same. But if a client had a mindset against Wal-Mart, or another company, we would not try to persuade him," McVeigh says.
Some companies Reynders, McVeigh have invested substantially in include PortlandGenElecCo.; Johnson & Johnson; Emerson Electric Co., an energy and technology company in St. Louis; AptarGroupInc., a packaging company; and Encana Corp., a Canadian natural gas company. The team say they have invested in natural gas companies that meet their environmental standards, because the energy market is ripe for changes. They feel water is a market that is going to experience extreme disruption, making it a good investment, as well as transportation and health care.
"Enzyme companies, such as Novozymes, are providing new, greener replacements for chemicals that often pollute with by-products. Such progressive industries often do not make socially responsible screens, but we see incredible promise," Reynders says.
The two have embraced community investing and are particularly proud to be a part of Boston Community Capital's Stabilizing Urban Neighborhoods initiative. SUN invests in foreclosed homes, keeps the owners in the house, and creates a model to reverse the blight that is impacting inner-city neighborhoods. The project is proving successful in the community and profitable for investors as well, because there are ample loan loss reserves and applicants are thoroughly screened to make sure they will be able to meet readjusted mortgage payments for the long term.
"We look for fair treatment of employees, the environment, suppliers, customers and shareholders because we believe that is the right way to do business and because we believe it leads to competitive advantages for the companies we invest in," says McVeigh.