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."
