Washington Square Capital Management Blog

If you’re new to investing and thinking about putting your money to work using an approach that incorporates social or ethical criteria, it’s important to know what types of strategies are available to you and how to differentiate between them.

When we consider the socially responsible investment (SRI) universe, there are five main strategies most often used by investment managers.  SRI investors will usually incorporate some combination of these five when picking their investments.

1.  Positive Screening.  With positive screening, the investor looks for profitable companies that integrate corporate social responsibility (CSR) into their business practices and operations.  Typically, this investor wants to see the company actively engaged in the following issues: environmental conservation, human rights, labor rights, fair trade and indigenous rights.  This investor may also consider companies whose products or services directly address CSR issues, like a solar power company or an organic food manufacturer.  However, it’s important to note that just because a company is engaged in a sustainable business, doesn’t necessarily mean they are exempt from other CSR considerations.

2.  Negative Screening.  With negative screening, the investor excludes certain companies that do not place a high value on CSR within their business practices.  Often times, this approach means eliminating entire industries, like tobacco companies or defense contractors.  Like positive screening, negative screening can be subjective, as each SRI investor has his or her own idea of what does or does not constitute an ethical company.  For example, an investor who uses religious screening criteria may want to avoid a medical devices company that manufactures products used in abortion procedures.  However, a pro-choice investor will likely not take issue with this company, and rather, may actually consider it as a candidate for a positive screen.

3.  Best-in-Class.  With best-in-class, the investor often targets a progressive company within an industry likely to have a poor CSR track record.  An example would be an oil company that’s an industry leader in environmental conservation.  While the type of business (oil drilling) may not be considered socially responsible, the way the company conducts their operations (making environmental protection a priority) is the chief criteria.  In a way, this investor seeks to encourage and reward good corporate behavior with their investment dollars.   It’s important to note, however, that this approach can be susceptible to greenwashing, as a company may market themselves as being an upstanding corporate citizen, but in reality, may not live up to that image.  A prime example of this would be BP, which was once a top pick for best-in-class SRI investors prior to the Deep Horizon disaster.

4.  Activist Investing.  With activist investing, the investor targets those companies with poor CSR track records in the interest of changing the company’s business practices.  This approach uses proxy votes and shareholder resolutions to pressure management to alter corporate behavior.  This approach is most effective when used by large institutional investors (mutual funds, pension funds or foundations) or a coalition of smaller investors.  The activist investor, while a bit unorthodox in their approach, can achieve significant long term CSR victories when successfully petitioning large corporations to change their business practices.

5.  Community Investing.  With community investing, the investor is less concerned about the financial returns of their investment then they are about the greater social impact.  The main goal with this approach is to deploy investor capital to individuals, organizations or geographic areas that have historically been denied access to capital by traditional financial institutions.  Often times, this style of investment is done by larger institutions.  Individuals can also take part in this approach through microfinancing, for example.

In addition to considering the social and ethical approaches discussed above, it’s also important to make sure that an investment is a good fit for you, especially in terms of risk tolerance (how much risk you are comfortable taking – some investments can be riskier than others) and time horizon (when you will need access to your money – investors with short time horizons generally should stick to less risky investments).

As always, if you need help finding a socially responsible investment that’s a good fit for you, let us know and we’d be happy to schedule an introductory phone call.

Image Credit: Tom Magilery

We read a number of startup, entrepreneur and venture blogs with great interest, and since many of our clients are entrepreneurs we have an interest in matters that touch on personal finance issues specific to them. We were struck by Fred Wilson’s blog post on his own experience recycling capital earned from investments in startups and how this has sometimes led to difficult times with his personal finances. He writes about how very early, concept-stage companies are financed in the US by angel investors and why that has been difficult to replicate elsewhere (i.e. not venture capital firms). His post is worth a read, and it got us thinking.

One thing that sets the US apart from most other parts of the world is a willing group of investors who are prepared to fund concept-stage companies, and who rely largely on their own experience founding similar companies in the past.

The second reason we think this happens in the US more than in other countries is far more tenuous and abstract. It’s trust. In many other parts of the world, legal systems and societies are not mature and trusting enough to permit someone to invest as an angel and not be branded a fool or worse if things go wrong. We also suspect that the number of charlatans masquerading as “entrepreneurs” is higher in other parts of the world than it is in the US.

Fred is focused on startup financing and advocates angel investing for successful entrepreneurs. Our view is a little different: we think successful entrepreneurs should capitalize on their unique hard-won insight into their industry and opportunities to judiciously fund startups, but we also believe there is a role for opportunistic investments in the public market  (stocks, bonds) in a successful entrepreneur’s portfolio. We also firmly believe successful entrepreneurs should set aside an income generating, ring-fenced portfolio that is robust enough to support them and their families if their angel investments fail spectacularly.

Some successful entrepreneurs may also need help controlling their urge to spend on expensive toys, but that is a different discussion.

The challenges faced by an aspiring entrepreneur are of a different cast.

Based on our own experience founding a business from scratch, and from working with clients who have done similar things, we’ve created a short check-list aspiring entrepreneurs should at least consider before diving head-first into a startup. Most of them relate to personal finance, some of them delve into the realm of personal fulfillment, a necessary discussion since starting a business can be such an emotional and stressful exercise.

1. Evaluate yourself: are you ready for everything the world and your startup are going to throw at you? Will you be able to work outside your comfort zone, sell when all you’ve done is analyze (or vice-versa)? Will you be able to view your friends who remain in the corporate world in the right perspective as they fly around business class and wield expense accounts? When the romance of being an Entrepreneur/Business-Owner/CEO dies and you’re fixing the thirty-eighth thing to go wrong this week or reliving the latest deal that fell apart, where will the reserve to keep going come from?
2. Evaluate the business you’re entering: particularly what the relative value of sweat and capital are in the business. This will tell you a lot about what you need to bring to the table and how you should treat partner’s contributions (in both sweat and capital).
3. Get buy-in from your family and friends: They are along for the ride. Whether you acknowledge it or not, you are going to cause them financial and emotional stress as your business gets going. Make sure they know that.
4. Be Cheap: You will have to become an arch conservative, make sure you are ready to cut expenses to the bone. Figure out what’s essential to retain your sanity and keep that.
5. Be fair to your partners: Your ultimate success will depend on this more than anything else. Joel Spolsky has a great post on how to allocate founder’s equity, you should read it.
6. Know when to quit (in advance): There’s a point where it makes sense to quit. Or regroup to fight another day. Think about what that point is for you along emotional, temporal and financial axes.
7. Protect your fortress of solitude: Keep a reserve of both emotion and money, so you can, if necessary, exit gracefully to stage right.

We’ve been fielding client questions about IRA contributions recently and thought a blog post would be in order.  Here are the top five things many people aren’t aware of when it comes to IRAs:

1. Most people can make an IRA contribution for tax-year 2010 up till their tax-filing deadline (April 18 in most cases), and remember you need to file form IRS 8606 in many cases.
2. You may be able to take a federal tax deduction for your traditional IRA contribution. Some people may even be eligible for a tax credit equal to their contribution.
3. You can contribute to an IRA even if you are currently participating in a retirement plan at work (401k, 403b, etc.), but you may not be able to deduct the amount contributed.
4. You may be able to make a contribution to your spouse’s IRA, even if your spouse does not have earned income for the year.
5. The maximum amount you can contribute for 2010 to a traditional IRA is 5,000 for 2010 (6,000 if you’re over 50 years old).

For many people, Roth IRAs are attractive since distributions during retirement from Roth IRAs are not taxed. Distributions or withdrawals from traditional IRAs or retirement plans are subject to income tax in most instances.

In effect, you are saving more with a Roth IRA since you’re paying the taxes up-front. A $100 saved in a Roth IRA may mean lower income today than a $100 saved in a traditional IRA, but when it comes time to use the money, you will have more available since you pay no income taxes on regular withdrawals.

Here are five things people often don’t realize about Roth IRAs:

• Income limits that govern who can contribute to a Roth IRA have risen slowly over the past few years, the 2010 limits are here.
• Virtually anyone who has a traditional IRA can convert it to a Roth IRA (this started in 2010). The $100,000 income limit has been removed. You may have to pay taxes on part of the converted amount (typically contributions you claimed a deduction against and earnings).
• Unlike traditional IRAs, there are no required minimum distribution rules for Roth RIAs, so you could leave your Roth IRA savings undisturbed after you turn 70 and a half.
• Just like a traditional IRA, you could contribute to a Roth IRA for your spouse, but this is subject to income limits.
• You may be eligible for a tax credit if you contribute to a Roth IRA, have income below certain thresholds and meet a couple of other criteria.

The IRS website on publication 590 provides the definitive overview on IRA plans (we’ve linked to many relevant sections of the document in the text above).

Of course, there are many other considerations when saving for retirement. We’re happy to answer questions you may have, just give us a call at 646-619-1157.