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Private and Confidential

February 2005

Our Review has been restructured to focus on Investment. Other sections are delivered through Astraea. If you would prefer to receive the Astraea review please contact me. Thank you.

The following sections are now delivered through Astraea. The links below will take you to those sections.


The world is not flat. We do not realise it, but our children are beginning to. One of my children remarked how beautiful the sun looked coming "around" in the morning ... not coming up!  She unconsciously recognises that planet earth revolves around the sun and is part of a bigger universe.  Unlike we, who still think that the earth is the centre of everything. Its easy to be a discworld thinker, and often quite comforting, but its so far removed from reality that it matters whether or not we act as if we know the difference.

If you have not been struck by the weird weather patterns of recent months, perhaps the quake and tsunami in Asia may have helped teach us that we are connected to nature. The effects of the Tsunami are still reverberating around Asia.  But an interesting live example of the potential for humans to reconnect to nature was provided by wild life there.  All along the coasts where the tsunami hit species fled prior to the wave arriving because they sensed its arrival.  Reports came in from all over the region - elephants in Sri Lanka, Indonesia and Thailand, buffalo, goats and dogs in Thailand and India, a flock of flamingoes in India all headed to higher ground.  The evidence is also in the numbers as the death toll was lower among these animals than among humans.  And the reason is not seismic per se, because animals further inland did not display the same flighty behaviour.  Perhaps modern life has dulled human's connectedness to nature's energy.  What is evident is that animals may be a valuable tool in early warning systems.  www.sheldrake.org can offer more observations. Humanity certainly needs to reconnect to nature.


Investment, Finance & V. C.

Energy efficiency is moving to the top of the business agenda with the long-awaited Kyoto Protocol on climate change coming into effect in mid-February. The issue was already at the front of business leaders' minds, and anticipated rises in energy costs of around 25 per cent in the pipeline this year and next mean that reducing electricity and gas consumption is now a key business objective for many companies, even if concern for the environment isn't!

Where to invest?  While generally positive about Europe and Asia, two economies which deserve attention are Germany and Japan.  Perhaps this is a contrarian view because they seem to be down at the moment, but both are showing signs of fundamental change which will allow productivity and innovation to flourish.  In Germany unemployment has catalysed some new flexibility in unions and employment terms.  In Japan, pressures to move to new industrial relationships are helping break down barriers to entry.  While caution and observation are required, we expect both economies to rebound in the coming business cycle and their equity markets to show some sparkle in the coming year.

Caution should be observed as the Japanese economy has officially gone back into recession for the fourth time in a decade with gross domestic product falling by 0.1% in the last three months of 2004. The fall reflects weak exports and a slowdown in consumer spending, and follows similar falls in GDP in the two previous quarters. The Tokyo stock market fell after the figures were announced and the Nikkei share index closed trading down 0.38%. However, against this Heizo Takenaka, Economic and Fiscal Policy Minister said "If you look at the bigger picture, the economy is in a recovery stage" . A previous estimate of 0.1% growth between July and September was downgraded to a 0.3% decline. Politicians remain upbeat about prospects for an economic boost later in the year. Ministers pointed to the fact that consumer spending had been depressed by one-off factors such as the unseasonably mild winter. Analysts said the figures were disappointing but argued that Japan's largest companies had been recording healthy profits and capital spending was on the rise. Japan's economy grew 2.6% overall last year - fuelled by a strong performance in the first few months - and is forecast to see growth of 2.1% in 2005. The economy's fragile recovery remains dependent on an upturn in consumer spending, a fall in the value of the yen and an improvement in global economies., which are not assured. Although the overall picture is uncertain, selected businesses will perform well.

The American Federation of State, County and Municipal Employees (AFSCME) Pension Plan has filed a lawsuit against American International Group (AIG) seeking to require the company to include in its proxy ballot this year a binding shareowner resolution calling for the amendment of the company's by-laws to allow shareowners to nominate director candidates. The US Securities and Exchange Commission (SEC) issued a no-action letter allowing AIG, which is currently under investigation by the New York Attorney General, to omit the resolution from its proxy. "We have no choice but to seek relief in the courts because of the current stalemate on proxy access rulemaking at the SEC," said Gerald McEntee, chairman of the AFSCME Pension Plan. For more information on this issue, read a related SocialFunds.com article.

In related developments, the US Securities and Exchange Commission (SEC) denied the request by Citigroup (ticker: C) to omit from its proxy ballot a shareowner resolution filed by the United Brotherhood of Carpenters Pension Fund calling for the election of directors by a majority vote, according to the Investor Responsibility Research Center (IRRC). The decision seems difficult to reconcile with earlier SEC no-action letters issued to Disney (DIS), Halliburton (HAL), Qwest (QWST), and Verizon (VZ) allowing these companies to omit this same resolution from their proxy ballots. On February 17, 2005, an SEC spokesperson said he was unaware of the decision and could not comment, according to IRRC. For more information on this issue, please read the related SocialFunds.com article.

HP's CEO Carly Fiorina was forced to resign by the board. It is unclear what strategy the board has in mind, but clear that bickering at this high level is not helping business execution. HP remains a major player in the computer industry both in printers and personal computers so the strategy pursued will be important to the industry.

Here's the love/hate score for a random selection of brands with a "passion index" against the average number of comments for these brands (positive or negative) in a "I love/hate [brand]" search" from  WebProWorld.    Microsoft, Walmart, and McDonalds are the big losers on the Love/Hate score. No surprise.




L/H Score

Passion Score





























































Thanks to Jennifer Rice  the founder of Mantra Brand Communication for this table.

Responsible Investing

The California Public Employees' Retirement System's (CalPERS) Board of Administration has approved a plan to shine light on corporate environmental liabilities, improving transparency, and timely disclosure of environmental impacts. "Information is a necessary tool for investors," said Rob Feckner, acting president of CalPERS. "Shareowners need information on environmental liabilities to make informed investment decisions and assess costs associated with the impact to the environment." Under the plan, CalPERS will pursue initiatives aimed at improving environmental data transparency including:

  • - Signing on to the global Carbon Disclosure Project, an international effort to improve the transparency of business risks associated with climate change due to rising levels of greenhouse gases

  • - Improving data transparency in the auto industry by supporting shareholder proposals at Ford and General Motors and possibly other auto manufacturers

  • - Exploring opportunities to develop a model greenhouse gases reporting project that ensures timely and standardized disclosure of environmental data in the utilities industry

  • - Recognizing individual companies that demonstrate best practices in environmental data transparency

"We expect environmental corporate stewardship to play a greater role in corporate governance over the next ten years," said Priya Mathur, vice chair of CalPERS Investment Committee. "Data on the corporate environmental impact will be one of the best sources for investors to measure related investment risks."

The Global 100 was launched launched at the World Economic Forum, Davos and provides a useful initial portfolio screen for businesses offering attractive risk/return profiles.

How to Build Your Sustainable Portfolio by Rona Fried, an update on an article from Progressive Investor, the monthly investing newsletter from SustainableBusiness.com was released. It provides on-going analysis of clean tech investment opportunities: renewable energy, fuel cells, organics, forests and emerging areas on the private and public sides.

Fortune Magazine recently published an insightful review of some so called ethical/green funds. It suggests a minimum level of due diligence in selecting these funds. "Imagine that you care deeply about the environment and that you want your investments to reflect your values. You might turn to the Sierra Club Stock Fund, a two-year-old mutual fund that promises to "invest for sustainable growth." The trouble is, the fund does not own shares in a single company that promotes alternative energy, organic farming, or other solutions to environmental problems. Most of the companies it does own--including Best Buy, Costco, Hershey Foods, Outback Steakhouse, and real estate investment trusts--do not even report publicly on their environmental practices."

A groundbreaking new study by the Aspen Institute and management consulting firm Booz Allen Hamilton found that companies routinely identify values as a top agenda issue, and public companies that report superior financial results also report greater success in linking values to operations in areas that foster growth, such as initiative and innovativeness. However, most corporate executives do not see a direct link to growth, and the joint study also revealed that most companies are not effectively measuring their "Return on Values" in areas important to their business strategy.

The study found that ethical behavior is part of a company's license to operate. Eighty-nine percent of companies studied have a written corporate values statement, and 90% of these specify ethical conduct as a principle. Other business values commonly included in formal statements are commitment to customers (88%) and commitment to employees (78%). "Ethics-related language in formal statements not only sets corporate expectations for employee behavior -- companies are using it as a shield in an increasingly complex and global legal and regulatory environment," said Chris Kelly, Vice President at Booz Allen.In contrast, some of the values often closely associated with revenue or earnings growth are found less often in values statements, such as innovativeness (60%), initiative (44%), and adaptability (31%). Commitment to diversity appeared in 41% of values statements studied. The most important factor is the behavior of the CEO. Eighty-five percent of the respondents say their companies rely on explicit CEO support to reinforce values, and 77% say it is one of the "most effective" practices for reinforcing the company's ability to act on its values. Nearly half of the respondents (47%) are based in North America with another fourth (27%) representing companies based in Europe, and a fifth (24%) representing companies based in Asia/Pacific.  Respondents represent many industries: financial services and manufacturing lead at 26% and 25%, respectively, followed by technology and consumer-related companies (including consumer products, media and retail), each at 11%. Utilities (7%), transportation (7%) and energy (5%) comprise the balance along with 8% in miscellaneous or unclassified industries.

Venture Capital

Expansion Capital, a clean tech manager that has been establishing itself for a couple of years had a $ 20 million close on their fund - many congratulations. The fund is still open and expects a final close later in the year.

The Kauffman group has published a report on developing angel investor groups.

Interest Rates and Currencies

US interest rates will continue their upward rise.  Data indicating strong GDP growth and rising inflation in 2004 will encourage the Fed to continue its tightening policy, although leading economic indicators still presage a recession.  We expect inflation to put pressure on real spending power and the consumer and housing markets to begin to feel pressure.  The tightening of rising rates is begining to be felt as real interest rates become positive, though inflationary pressures are increasing.

European rates are being maintained at 2%.  The ECB is implementing a more conservative policy because of slower growth and unemployment concerns, especially in Germany.

The US dollar is under pressure and at risk of further weakness as central banks restructure their currency portfolios. In particular it is likely that Asian central banks are/will lower their reserves of dollars. Japan is the biggest holder of dollar reserves in the world, with South Korea the fourth largest. The weight of US dollar holdings by Asian central banks must decline.  Observations of the need for dollar buying to shore up its value keep occurring.  But alternatives are increasing.  And the dollar is a poor investment currency for these central bankers.  As we mentioned recently, our US only listed equity portfolio appreciated 28% last year, but only in dollar terms, in terms of other currencies performance was flat.  Central bankers are watching their currency portfolios depreciate by tens of percent now and the last out of the door will suffer the greatest fall.

As Asian currency holdings adjust and the dollar is sold to be replaced with other currencies related to trade as well as the investment outlook, the dollar depreciation will continue.  As this occurs dollar interest rates will be rising.  The global impact could be recessionary, particularly for international accounts exposed to dollars.  The timing of this change has begun and is expected to continue into 2006 though an accelerated shift, possibly catalysed by currency speculation and hedge funds, could occur.  Unfortunately, as in the game of scarcity Musical Chairs, the last to move will suffer most.

While Asian central banks stand to lose significant value as the dollar declines there are other shifts which may mitigate this.  The reinvesment in other currencies is one move which will moderate the effects of a dollar decline.  The other will be the increasing investment by Asian businesses in US and Europe.  Germany, for example, is already seeing Chinese companies establishing themselves there where they will build an dsell in local markets, increasing the value added of goods.  Similar investment in the US by Japanese business has been ongoing for 2 decades now and Chinese and other Asian businesses are beginning to make the same FDI.

Trade and FDI

The shape of trade is shifting.  The lifting of quotas will be a significant immediate part of that change. A useful report on the lifting of quotas and the impact on global trade has been released by Deloitte, entitled "Uncertainty Continues".

The gap between US exports and imports hit an all-time high of $ 672 billion in 2004. The US Commerce Department said the trade deficit for all of last year was 24.4% above the previous record - 2003's imbalance of $ 496.5 billion. The deficit with China, up 30.5% at $ 162 billion, was the largest ever recorded with a single country. The US consumer's appetite for all things from oil to imported cars, and even wine and cheese, reached record levels last year and the figures are likely to spark fresh criticism of the administration's economic policies.

The consumption habits of the US are increasingly important.  The trade deficit is exacerbated by a significant appetite for imports which continues to exceed the growth of exports.  While there is no apparent move to reduce this craving, the natural forces of the market will increasingly bear on the US consumer.  While US exports tend to the higher tech, higher fashion and big industrial, which people may not notice so easily, tourism is one area where we can all feel the difference.  Europeans can have a "cheap" holiday in New York and eat out, whereas American travellers to Europe are feeling the pain as dollar denominated prices have risen significantly.  Although non-US exporters are seeking to maintain volumes by keeping prices down, they are also finding new markets, both locally and among other trading partners.  Intra-Asian trade is expanding as is trade with Europe and South America.  America will feel the need to open their markets, especially commodity markets like cotton, in order to balance their budget, but this is a cultural issue as much as an economic issue and change will be unfamiliar and slow.

The complement to net-imports is investment by foreigners in America, but this is also becoming less attractive and other options are increasingly viable which suggests that foreign purchases of debt and assets will not be so aggressive.  Another indication of this trend is that financial investors are flush with cash and are eyeing Europe as a playground for private equity and M&A, rather than the US. These trends suggest a more insular US economy in a year's time which is neither healthy nor valuable for America.  Nor will it be healthy for global trade because of America's weight in the economy, but it may be a stage that is required in the evolution of markets to more efficent and equitable dynamics.


Activities, Books and Gatherings

A busy month both in the office and the garden.  The most stimulating experience was losing and recovering a hired digger from a boggy patch of water garden being reclaimed.  Anthony and Michael gave inspiration, humour and energy till together we had sawn boughs and trunks from 4 trees, burined them under the tracks and removed the 3 tonne "sculputre" from its swamp.  The garden, surrounded by rhododendron and Japanese knot weed, will be beautiful and accessible as spring draws into summer.

Chinese New Year was a modest affair for us, but has really blossomed in Ireland, where the community in Dublin is becoming a vibrant centre of culture.  The year of the Rooster seems to be bringing a positive feeling to Hong Kong and perhaps it will enter a new dynamic this year.  The CE is possibly mooted to go.

Extracurricular reading was rather muted in February, though a re-read of The Hungry Spirit led to a useful summary in three pages.  I also am rereading Pratchett's Mort, a topical subject with euthanasia in the cinema and weather caused loss.

The date for Be The Change is 5 May (05/05/05).  BeTheChange was originally a gathering in 1974 (the year the Tao of Physics was drafted) which addressed holonic dynamics, without the language since developed.  Thirty years later, an anniversary event took place in 2004, which was excellent for many reasons - speakers, participants, technology, ideas, spirit.  Its success demanded annual gatherings.  It is likely to be worthwhile and an unusual opportunity to hear, exchange and meet leading thinkers.






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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