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Private and Confidential

October Round-up

Its all about performance and ethics, whether investment management or politics.

The world is focused on the election in the US because there is a sense that it affects many outside the USA more than our own elections. The US election is unusual in that it is driven by money – an estimated $ 2 billion has been raised and spent on spin by the candidates. It is donated by lobby groups who expect to get kickbacks – many mature industries survive in the US because of protection afforded by incumbent government. The electorate look to the candidates for their performance track record and evaluates the risk of them not performing as expected.

This attention to performance and ethics is a permanent state of affairs in investment management as we examine expected returns (based on past performance) and risk (the volatility of those expected returns). The reality of investment management is far more exciting than those dry words because it is all about synthesising a mass of data in to those two numbers – expected return and risk. (In fact many investors just look at one – the expected return, which leads to riskier than expected outcomes.) The insurance industry is now under the microscope and changes are likely to be significant if the investigation of Marsh & McLennan is a guide.


October has been exciting as expected. It started with the inspirational Spirit in Business gathering which is setting new standards for productive business gatherings. An unexpected opportunity to hear and meet Michael Braungart who visited Dublin for the Convergence gathering was a boon – Michael is a high powered but low key materials scientist and innovator and a principal proponent of natural systems design. (You can get an introduction to The Cradle to Cradle design approach here.) We also had the opportunity to tour SheepDrove a 2,000 hectare organic farm and conference centre in the UK which is an extraodinary demonstration farm.

Private portfolio and client businesses are being enhanced and new developments are planned after what has so far been a good year bringing them to another stage of growth. After a sluggish summer, VC deal flow has picked up again and we've seen more interesting opportunities than we can manage. The listed stock markets have picked up as expected and we have expanded our coverage concurrent with a significant increase in capital invested.

We had the pleasure of whistle-stop visits by two of our non-executive partners. Ursula, who joined recently, has already been a boon in the area of CSR marketing, and then Marc who spent a brief sojourn of retreat and discussion at Ballin Temple and pitched in on our Halloween festivities. We enjoyed their company tremendously.

Perspective and Market Commentary

We've put Joe Average in charge of planetary forces. We have immense power as a whole population of humanity, but have taken little responsibility for this power. The escalating issues of climate change and global ethics have highlighted the fact that humanity is an incompetent in charge of instruments of great power. Take the car at the top of the list. The use of vehicles by individuals when aggregated equals the force of a huge automotive machine which is controlled by “a person” with average capabilities, intelligence and ethics. We all use a car in the same sort of way and the aggregate of all its consumption (fuel, oxygen and water) and its waste (particles, hydrocarbons etc) equals a very large vehicle consuming and polluting at a factor of some millions times the individual usage. We act as if the vehicle is singular, not as if it is this massive device which is how it impacts the planet. The Kyoto treaty, now able to come into effect, and other symbols show that we are recognising this, but too slowly.

There is another Joe Average in charge of planetary forces – the president of the USA wields massive power over our planet but is well removed from the omniscient and omnipotent qualities that that responsibility demands. Our current incumbent is a friendly down home fellah, the kid from next door, and he's in charge of the planet. That is an extreme characterisation, but one that has been adopted by most of the world. The election for President of the USA may be an internal event, but its occupied the attention of more voters around the world than in the USA! Why? Because it affects their lives more than elections in their own country. It appears that the global population has voted “Not GWB!” but the likelihood of another term is real. The world should not worry too much – we have survived four years of depressed global economic vitality and heightened risks and will survive another four years. And the USA will survive another four years international infamy and continue to live the American Dream founded on hope - hoping to get healthy but overeating (which also shortens life expectancy), hoping to get out of debt but increasing credit card debt, mortgages etc, and hoping to save but buying new cars (SUVs). However, to do more than survive we must do more.

"Real Americans aren't interested in your pansy-ass, tea-sipping opinions. If you want to save the world, begin with you own worthless corner of it," wrote one from Texas. But of course the issue is real and America's election is more important for its effect outside America than that in America. The world is in a race between education and catastrophe,said HG Wells. Unfortunately this election has exacerbated the tension of opposition. People in America have become more xenophobic. Foreigners look on as their lives are impacted by geopolitics driven by America. My personal interest is borne of a hereditary link to the founding fathers, who were not all good and great. Even the descendants of the signers of the constitution can make reparation by opening hearts and minds to find equitable and honest solutions to the world's challenges. What is important is that we continue to strive to create a world that we know to be achievable – without great inequalities, without massive poverty and starvation, without war and murder. As more of us spend our time and money on activities, goods and services which are honest, ethical and equitable the pace of change for the better will continue to accelerate.

Whoever wins the election will be facing a winner's curse – a tough economy and a popular demand for reinvigoration with little opportunity for growth. There are many positive statistics that paint a rosy picture of the US economy: Inflation-adjusted consumer spending is up 3.6%, residential housing investment and capital goods investment are up over 13%, exports and imports are up nearly 11%, corporate profits after tax are up 19%, the core consumer-spending deflator (excluding food and energy) is up only 1.4%, interest rates are at 45-year lows, with short-term rates at less than 2%, 15-year mortgage rates are just above 5%. Nevertheless, the reality is more sanguine. Much positive news has been driven by virtual stimuli, like reduced interest rates and extending credit combined with strong demand for commodities from emerging markets like China and much financing of US debt by foreign lending and investment. Consumer spending seems to be slowing down and job growth is sluggish, currently failing to match growing demand. There is little economic stimulus available as both domestic and foreign stimuli have been used up. The US can expect rising interest rates and increasing competition. Job growth is poor with particular weakness in middle trades like retail and education as these activities are adopted by emerging economies that can offer comparable products with lower wage costs.

Terror Risk and War

The Italian ransom paid at the end of September changed the game. It signals the willingness to discuss terms with terrorists. This is traditionally considered self defeating. But another perspective reflects value. Value for security and a value (cost) that people, the tax payer and voter is willing, even happy, to pay. This value may also be transferred in a different way – by developing emerging economies and encouraging trade. The results of channeling value in this way would better resolve the inequalities that engender terrorism.

A 1,000-page report commissioned by the American government and written by Charles Duelfer said it had found no evidence of stockpiles of weapons of mass destruction in Iraq but added there was considerable evidence that Saddam Hussein had intended to resume production as soon as sanctions fell away.

Investment Management and Venture Capital

What will happen to the markets after the election? Short term we can expect a rally if Bush wins, mostly driven by emotion than any fundamental change in opportunity. If Kerry wins there is unlikely to be a great effect; some positive movement because of emotion, some negative movement from risk of increasing taxes, especially for the rich and on dividends. The outlook for next year remains bearish and broad index funds are unlikely to offer exciting performance. Stock picking and medium sized companies will offer better risk adjusted returns. And selecting for those in “the next big thing” space of whole systems change will be most interesting. It is a stock pickers market.

The recent pariah is the insurance industry which is increasingly under attack for collusive practices, inefficiency and overcharging. Ironically it is March & McLennan, which was represented at SiB, which is highlighted at the moment by prosecution in New York. The whole organisation appears to have some serious conflicts – it has been connected with other insurance businesses influenced by Hank Greenberg (AIG) family, it pursues businesses which can benefit from shared proprietary information including insurance brokerage, asset management and wealth advice.

SocialFunds reported on a global survey of what investors take into account when considering socially responsible investment (SRI), and what obstacles there are to the uptake of SRI. Respondents were frustrated over the reliability of social and environmental information on their SRI holdings, and financial planner ignorance of SRI. "Investors in this study, in particular, were dissatisfied with the apparent ignorance of fund managers and financial planners with respect to social and environmental issues. Financial planners were considered ignorant of SRI products and unable to offer relevant advice." Lack of information on social criteria hindered respondents from pursuing social investment, most of whom intended to purchase or maintain their SRI holdings. This situation of limited information on holdings is common in fund management as the costs of administering assets detracts from the economic performance. However, it highlights two areas of opportunity: to use software that enables low cost monitoring of portfolios and to manage assets in such a way that relevant information including financial, social and environmental, is archived regularly.

British Telecom (a holding) has announced a three-year plan to get almost all its electricity from renewable sources. The three-year contracts with Npower and British Gas are the largest for renewable energy anywhere in the world.

McDonalds turnaround in culture which we have noted over the past three years is bearing fruit. Quarterly earnings per share in September surged 42% to 61 cents (against analyst forecasts of 49 cents) on the back of strong US sales. Same restaurant sales were up 10.6% in September, and 8.5% on the quarter, offsetting weak sales in Europe, which rose just 0.3% during the three months. McDonald's has been reaping the benefits of a new, healthier menu - which now includes salads.

Our our anecdotal view of the venture capital market (and the equity investment market generally) is that there is plenty of money around (a sea of cash as one Swiss fund manager acquaintance says) and interest to invest, but few commitments. An investor overhang, particularly in the VC market, may be developing. There appears to be an influx of new investors – in the hedge fund market it is banks getting in as experienced teams move on – and an increase in allocations to this asset class, which may be driven by the rising risks of the listed markets and a desire to make investments.

The US third quarter VC disbursement figures (courtesy of PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association) were poor, but similar to last year's Q3 level. 601 U.S.-based companies raised $4.33 billion, down over 26% from the $5.87 billion raised by 794 companies in Q2. The decreases were seen across the board, with IT companies dropping from $3.8 billion for 539 companies to $2.59 billion for 394 companies; Medical and life sciences companies dropping from $1.63 billion for 171 companies to $1.32 billion for 136 companies and non-tech, non-health companies dropping from $442 million for 84 companies to $419 million for 71 companies.


The big news on trade is already in the pipeline but is worth noting. As the quota restrictions get lifted next year China and India are likely to dominate the garment industry because they are the low cost producers. It is expected that their share of business will triple to the detriment of others. Similarly the food industry is seeing an increasing dominance of China and India as their low wage base provides a competitive edge. Investors may consider their holdings of Asian garment and food businesses.

The impact of trade restrictions is generally negative, though may be appropriate if there is dislocation between consumer and producer. The US steel industry is an example of protection damaging the overall economy. Oliver Cattaneo of YaleGlobal reports that “in 2002, each of the 40,000 jobs that President Bush saved by raising tariffs and establishing quotas on steel imports cost American taxpayers about US$500,000. Meanwhile, higher steel prices may have cost up to 200,000 jobs in steel-consuming industries. In the long run, keeping a non-competitive industry alive is both illusory and detrimental to the whole economy.” Applying resources to technology development and new industries is more effective for raising living standards. Why is free trade said to be universally beneficial? The answer is a doctrine called "comparative advantage." But free trade may be increasingly a problem for developed countries. In a world where large countries with far lower wages, such as India and China, are increasingly able to make almost any product or offer almost any service performed in the United States, then the powerful drag of their far lower wages will begin dragging down developed country average wages.


The Kyoto protocol was ratified by Russia which now allows the treaty to come into effect. This has enhanced the optimism that trading of carbon credits will be a liquid market soon. This combined with high oil prices will continue to encourage alternative energy solutions.

Oil rich nations are seen as the most corrupt, according to the latest survey published in October by corruption monitor Transparency International.


As Europe considers amalgamation of Turkey, the world's largest, secular Islamic state, we learned of an extraordinary illustration of differing cultures. Although, the Turkish parliament last month approved legal reforms including heavier punishments for assaults on women, the recognition of rape in marriage and life terms for perpetrators of "honour killings", a study revealed that Turkish women think beating by husbands is acceptable. The poll of 8,075 married women by Ankara's Hacettepe University revealed that 39% thought domestic violence was justified in certain circumstances, such as if they argue with their husbands or deny them sex. In rural areas, 57% said their spouses were right to beat them, the study funded by the EU and Turkey showed. While this view of belligerence may have historical precedent, enlightened intelligence demands a non-violent solution to disputes. While even Iyengar would approve of appropriate physical discipline of children,it is well removed from any value system in which life demands a high premium. An appropriate solution requires communication and cooperation, which may be enhanced by experiential education.


China's economic growth has slowed for a third straight quarter as efforts by the government to rein in booming expansion continue to take hold. A modest change in the third-quarter gross domestic product (GDP) was 9.1%, down from 9.6% in the second and 9.8% in the first. Rather than raising interest rates, curbs on investment spending and bank lending have been introduced amid signs that the world's seventh largest economy was in danger of overheating. Other capacity restraints may also be affecting the economy. Labour supply is becoming less assured as productivity demands increase and competition for people increases. The capacity for migration from inner provinces to the coastal industrial areas shows signs of becoming exhausted.

Indonesia continues its development with conclusion of its Presidential election. S. B. Yudhoyono was elected and appears to be unusual in that he represents many interests, including the military, and listens to advisors prior to making decisions. His approach will be watched by investors with interest as he takes over responsibility for a significant Islamic country (population 200 million) and oil producer.

There is of course a long way to go to transparency in Indonesia as well as elsewhere. The conclusion of investigations in to mining pollution by Newmont suggests that power politics isn't going away soon. Although Newmont espouses “sustainable values” (“act with integrity, trust & respect” and other sweet sounding rhetoric) its massive contribution to the Indonesian government of over $ 540 million in the form of taxes and fees makes it unpalatable for the authorities to stop their operations. It is likely that the claim by Indonesian authorities that they have found no traces of mercury pollution in Buyat Bay, the site of Newmont's Minhasa mine, may prove to be premature.

Bird flu is taking its toll in Thailand. At least 11 Thais are known to have died after contracting a human form of the disease and as many as 80 tigers are being culled. It has also caused the redundancy of the responsible minister. The dense stocking rates of poultry farmers helps the disease to fester and spread but is unlikely to change significantly until market demand for “clean meat” grows. Thailand is a significant exporter of bird meat.

The Malaysian leader, Datuk Seri Abdullah Ahmad Badawi, has publicly endorsed improved corporate social responsibility saying that companies need high levels of transparency and governance to compete in a global market place. This reflects the increasing attention paid to environmental and social responsibility in Asia, though examples of change are modest as yet. The opportunity for Asian companies to address whole systems change and thereby gain a competitive edge in export markets, where behaviour auditing up the value chain is demanded, is wide open.
In Thailand the perhaps unsurprising disclosure of a $ 1.1 billion surge in bad debts at state owed Krung Thai Bank has brought the central bank governor and the prime minister head to head. Pridyathon Devakula will not reappointed Krung Thai's president, who is close to Thaksin, and the central bank is reining in state lending. This move is clearly healthy, the question now is whether or not the central bank governor will be able to continue or be ousted.

IT and CT

Apparently Microsoft may be getting its way over consumers again. The proposed text of the Induce Act says "Whoever offers to the public a peer-to-peer product ... shall be liable as an infringer." This sounds like a monopoly preserving concept which should not exist.

For a bit of Halloween fun ... Go to www.google.com , type in "weapons of mass destruction" but don't hit the enter button, instead hit the "I'm feeling lucky" button next to the normal Google "search" button. Read the error message.


For those still asking for evidence of the value of whole systems technology, the Natural Capital Institute have produced a quantification of the cost of retarded ethics on the economy. The Market Impact of Corporate Governance Ratings by John Bodt and Howard Sherman of GovernanceMetrics International shows how the cost of capital will be lower for companies with higher governance ratings, particularly over longer periods of time. The authors point out that, prior to the scandals of 2002, and subsequent introduction of the Sarbanes–Oxley Act, there were no corporate governance ratings for US companies. They estimate that the cost of poor governance to the US economy through the failings of Enron and WorldCom was in the region of US$ 79 billion. Their own studies with over 2,100 companies show that the highest-rated companies give significantly higher returns for their investors compared to those with the lowest ratings. (The Spirit At Work award offers case studies like ANZ Bank.)

An acquaintance recounted the image of a BBC World News Report film of a young boy in a bombed out area of Baghdad playing with a modest toy - a cycle tyre which he is rolling down the street. Though perhaps, things are so bad that he salvaged it in the hope of trying to make a few cents. He's wearing what seems to be a new shirt: a replica Manchester United soccer team shirt. “One has to ask how he knows about them, what would encourage him to dress like them and how in the midst of all that mess, there are such "frivolous" items?” Its a small world, isn't it!

Genetically modified organisms (GMO) seem to be entering mainstream food despite real problems with it. Genetically modified genes were reported to have been found 20 km from their original site by Newsweek. This evidence demonstrates how the opportunity to choose non-GMO is being jeopardised. The consequences of GM are uncertain and not fully researched. The dangers of GM like the “terminator” gene are far higher than we are used to comprehending.

Some of the most basic plants – the grasses, are most exposed to transport, including potentially transatlantic movement. This is a new risk to which plants were previously not exposed. Even a red blooded meat eater is going to be disturbed when Monsanto's terminator gene gets into the grass that feeds steak. Who opened Pamdora's box is irrelevant. We all need to close it, fast. Unfortunately the Pope recently endorsed the use of GMO too. This public announcement was not tempered by disclosure of the vatican's vested interests in investments in companies like Monsanto that pursue genetic engineering.

On a personal note, the permissive proliferation of GMO raises the risk of that species in the ancient woods of Ballin Temple may be endangered in a few years. Ballin Temple has a few acres of ancient primary woodland which are irrecoverable once lost, including rare species like toothwort, a fungus that has reproduces asexually and can not travel.

Another high profile view raised awareness of the problems of permissive policies on food production. The Observer reported that the UK's rural affairs minister, Alun Michael, admitted that his body contains a cocktail of toxic substances, many of which have been banned on safety grounds for decades. The minister agreed to have the results of his blood test published to make people aware of the issue of pollutants and chemicals contained in everyday items such as sofas, cosmetics, mattresses and televisions. Tests on the enthusiastic hill-walker and keen supporter of organic food detected 33 hazardous man-made compounds in his blood, including pesticides, flame retardants and industrial plastics. What is worrying campaigners is that more than 90 per cent of these have been banned, some as long ago as the 1970s, after being linked to cancer, immune-system disorders and neurological problems.

The flu season is here. Chiron, a significant supplier of vaccine to the US was forced to cease shipments because of contamination. This stopped half of US supply. Other countries are more insulated from this risk because they are supplied by more manufacturers. However, vaccine treatment is limited by the fast action of flu, spreading in weeks. A more appropriate action would be to change habits - such as organic growing (especially in chicken market where bird flu is a particular problem and healthier lifestyles including fresh fruit and veg!

The stormy weather experienced in Ireland at the end of October has illustrated the fragility of our brave new world – with power out for a day and telephones down for nearly a week now it has been a challenge to keep up productivity. Planning for extraordinary events takes on a new dimension, when they are not so unusual and their effects are so total. A balance with nature is our safety net.

A couple of gatherings ...

4-7 November, Findhorn Foundation, Scotland. Walk Your Talk, the annual gathering of pioneers from the field of socially and environmentally responsible business. Participants to include Peter Kindersley, Neil Crofts and our own John Whitmore. Further info: http://www.walkyourtalk.net

5-6 November, Imperial College, London;  a Sustainability Intensive -  ‘hands-on exposure to some of the best tools and methods available for making sustainability happen’; with Alan AtKisson, Hunter Lovins and Junko Edahiro. Further info from http://www.atkisson.com/workshop/


This report has been prepared for information purposes and is not an offer, or an invitation or solicitation to make an offer to buy or sell any securities. This report has not been made with regard to the specific investment objectives, financial situation or the particular needs of any specific persons who may receive this report. It does not purport to be a complete description of the securities, markets or developments or any other material referred to herein. The information on which this report is based, has been obtained from publicly available sources and private sources which may have vested interests in the material referred to herein. Although GRI Equity and the distributors have no specific reasons for believing such information to be false, neither GRI Equity nor the distributors have independently verified such information and no representation or warranty is given that it is up-to-date, accurate and complete. GRI Equity, associates of GRI Equity, the distributors, and/or their affiliates and/or their directors, officers and employees may from time to time have a position in the securities mentioned in this report and may buy or sell securities described or recommended in this report. GRI Equity, associates of GRI Equity, the distributors, and/or their affiliates may provide investment banking services, or other services, for any company and/or affiliates or subsidiaries of such company whose securities are described or recommended in this report. Neither GRI Equity nor the distributors nor any of their affiliates and/or directors, officers and employees shall in any way be responsible or liable for any losses or damages whatsoever which any person may suffer or incur as a result of acting or otherwise relying upon anything stated or inferred in or omitted from this report.


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