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Private and Confidential

May 2005

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


The trouble with cancer is that you don't try to cure it until you're diagnosed with it, and then its too late.  And the world has cancer, but we haven't admitted it yet.  Another example of "the emperor's new clothes".  The evidence and caricature presented by Common Weal is incontrovertible - new diseases, habitat loss, species extinction, climate change, biological mutation and more.  And humanity continues to inject itself with the drugs of the petro-economy and war-like commerce.  But the tide is changing.  We are Waking Up To The Wave.  In curing cancer the success rate is low, certainly less than 50% maybe as low as 20%, so we can be sure that our cure will be painful, imminent and contribute to uncertain side effects.  The best cure is certainly for individuals to change behaviour, especially consumption habits, one step at a time, but now.

America has provided us with the luxuries of goods, services, policies and social openness that we all love.  But it seems that lost in middle America is a pillar of deafness descended from the founders of America.  A righteous rejection of science, starting with a creation myth which has even been admitted as such by the Vatican.  Perhaps I ought to apologise for this bigotry, being a relative of one such founder who stood in the way of the emanicipation of slaves, but I remain not just surprised but shocked that so many wealthy, well educated families in the Bible belt (and elsewhere) continue to hide behind superstition in the face of science.  The consequence of this blindness is felt around the world daily - today by textile workers in Asia and most Iraqis, tomorrow by someone else, maybe you or me.

However, rumblings are being felt.  The evangelical Christian movement is sweeping other denominations out of the way in middle America.  And this reflects a growing demand for spiritual awakening across all sectors of American society together with a more critical appreciation of religion.  This will lead to heightened ethics in all areas because a critical appreciation of spirituality and consciousness leads quickly to empathy for those with less opportunity and an inner need to put yourself in others' shoes.  Evangelical Christians for example are less prone to support killing for faith.

Putting yourself in the other person's shoes can be uncomfortable as the US and Europe are finding out.  Proclaiming the virtues of competition and free trade is now haunting developed economies, as it should.  America has been addressing the challenge of outsourcing in professional services for a few years now and it remains high on the political agenda.  European labour mobility is providing opportunities for people from eastern European economies to find better prospects in richer European economies and helping to keep wage inflation dampened.  And now the cry against "cheap Chinese imports" has been raised.  How self-serving!  American and European businesses, as well as politicians, have long known that that they needed to move up the value added chain, retrain their employees and provide alternative employments.   Stories of people trying to retrain in North Carolina and having to pass high-school equivalency tests testify to the gross neglect of the wellbeing and nurturing of workforces throughout America - failure to offer vocational and recreational training is now punishing businesses and ALL their stakeholders - owners, managers, employees, customers, communities.  Now that expectations have come to fruition they cry like children.   Do not minimise the challenge of reengineering an industry, the pain of unemployment (that many of us have felt) and the disruption of uncertainty.  But remember that the longer one takes to change, the more pain must be absorbed, so extending protectionism again is only going to retard the opportunities in America and Europe.


Investment, Finance & V. C.

Two thirds of the way through the second quarter and the markets are down and under pressure.  Many fund managers are facing declining portfolios, the urge to go to cash though their job is to be invested and the prospects of more volatility.  This is the situation we expected, though there is much more and worse that may yet transpire. Lower growth and higher inflation are becoming reality. Sentiment is becoming bearish - portolios are moving into cash and bonds and fund managers are expressing uncertainty.  Positive moves seem to be driven more by hype than fundamentals - just look at valuation benchmarks.  So playing currencies may be the best trading game in town. 

For those who prefer to invest in businesses, as we do, there are plenty of opportunities available, sometimes in unexpected places.  Our conjecture that Germany and Japan are rejuvenating themselves seems to be showing signs of confirmation.  Although general media coverage remains negative the reorientation of these cultures to more open institutions and competitive labour practices is continuing.

Germany is changing.  The regional elections in May saw increased backing for Conservative Democrats while Socialists lost ground.  This is a sign of an opening of German culture.  Schroeder is certainly facing difficult challenges as employment law liberalisation causes unpopularity, but the changes being encouraged will add to the flexibility of German industry.  One example of movement inthe right direction is the opening of BMW's high tech auto plant in Germany - this will support local wellbeing rather than exporting jobs.  (It is exactly the sort of investment that textile manufacturers should have been pursuing throughout Europe in the last 10 years to avoid the pain of clothing quota lifting in January.)  the whineging about foreign investors is understandable though misguided.  It is unlikely that private equity is going to take over Germany, but the corporate transactions have galvanised a cross-section of industry to seek compromises.

John Mauldin has raised the point that with returns under pressure, the ability of investment managers to offer decent returns and be profitable is declining.  Their cost structures will make it difficult to offer attractive products and it is likely that investors will become increasingly unhappy with underperforming portfolios, investment management houses will be vulnerable and investors will look for alternatives.  One of the likely trends is going to be a restructuring of the relationship betweeen investor and fiduciary.  The Vanguard model (where fees are a much lower proportion of funds under manangement) is going to become increasingly attractive as are other arangments of fixed fee and club structures.

Charlie McCreevy, EU commissioer with responsibility for Internal Market and Services, announced that an investigation into the uncompetitive market for retail banking is underway and a report will be delivered in September.  McCreevy, who guided Ireland through its Tiger Decade may be the person who can force change.  And it would be welcome.  Not only might consumers see cost and time for cross-border (same currency!) transactions reduced, but it is likely that cross-border M&A will be facilitated.  Both moves will raise competitiveness of the sector as well as liberate potential in other industries.

In a similar move, the UK government has demanded that retail banks improve their infrastrure so that electronic payments occur on teh same day instead of delays of 3 days, which earn banks an estimated $ 50 million in interest annually!  It will be some time before the banks comply, but at least the pressure is on.

Although it had been expected that indictments in 2003 would make the market for independent research more buoyant, it appears that this has not been happening.  BusinessWeek noted that poor promotion, hindrance from brokerages, competition and paid research is confusing the market.  The benefits of obtaining independent research therefore remain high.

Responsible Investing

The 15-year track record of the index demonstrates that SRI performs competitively, and indeed sometimes outperforms, the broader market. "The Domini index has helped validate socially responsible investing through its long-term record, which is very similar to that of the S&P 500," said David Kathman, an analyst with mutual fund rating agency Morningstar who covers SRI. Since its May 1, 1990 inception through April 30, 2005, the DSI has generated 438.79 percent total returns, almost 60 percentage points more than the S&P 500's returns of 381.89 percent.

The majority of investment managers worldwide expect that SRI practices will become a common component of mainstream investment processes within 10 years, according to a survey by Mercer Investment Consulting (Mercer IC).  This is likely to be an underestimate because the critical mass has obviously been achieved and the ability to offer integral investment management processes and structures is now a critical determinant of competitiveness.  U.S. investment managers lag behind those in Asia, Australia, Europe and Canada in their belief that socially responsible investing will become the norm within a decade. Of the 195 managers questioned, 28% of those from Asia, 44% from Australia and 42% from Europe feel social and economic performance indicators will be mainstream in five years, compared with 11% of U.S. investors.

We were fortunate to receive a copy of the much talked about Natural Capital Institute Report on the SRI Industry. It is recommended reading, particularly for investors, but also for investment managers who wish to refocus their activities on more authentic SRI. Its available on line here.

In this the year of microfinance, the FT has written a colourful case study of successful microlending in Mexico.  The story describing microfinance in action is here.

Sirota Consulting tracked the stock prices of 28 companies that had monitored their employee morale during the past four years. The results: The 14 companies with "high morale" saw their stocks increase more than five times those of the half-dozen companies with "low morale" (16% vs. 3%). The stock performance of high-morale companies also bested the results of the industry average by a significant margin (16% vs. 6%).

We came across an obscure but potentially very revealing site The CatBird Seat.  It offers a wealth of company information particularly relevant for due diligence checks.

Cadbury Schweppes has acquired leading organic chocolate brand and fair trade pioneer Green & Black’s in a deal estimated to be worth around £20 million.  Green & Black’s CEO said “The premium quality chocolate market is growing fast globally and Green & Black’s taste combined with its organic and ethical integrity puts it into pole position to benefit from this".

Between 15 and 30 percent of Kimberly-Clark tissue products fiber originates from the Canadian Boreal Forest, according to a Greenpeace report, and only 19 percent of its fiber is recycled. Just before the annual meeting at Kimberly-Clark Greenpeace released a report skewering the company for sourcing fiber from the Canadian Boreal Forest and using minimal recycled content in its tissue paper products, such as the ubiquitous Kleenex brand.

As Sarbannes-Oxley starts to bite, the costs of compliance are not insignificant.  Unfortunately the costs are proportionally much higher for small businesses at 2.5% of revenues for business under $ 100 million in turnover, compared to about 0.2% for businesses over $ 1 billion on turnover.  The implication is that business design throughout the value chain, structure and operations will have a significant impact on profitability for starups and SMEs.

Venture Capital

Hedge funds are not the panacea that investors imagined.  The Economist's chart here shows that returns have been lacklustre.  Presumably the risk profile is also higher.  These vehicles are loosely regulated, speculative in nature often run by traders (rather than investment managers) and often leveraged.  45% of assets are in fund of funds which have a double expense hurdle to cover before making money.  As interest rates rise the challenge of covering the costs of leverage is rising.  Poor performance is encouraging redemptions - investors don't want risk, just returns! - which often requires liquidation of better assets in the portfolio prematurely, while the dogs fester.  The industry accounts for about $ 1 trillion in assets and though the pain now will result in a more robust marketplace, the reverberations will be felt throughout economies.

The number one reason for making angel portfolio companies unattractive to VCs is the fact that angels tend to give start-ups overly high, unrealistic valuations.  78% of VCs cited this concern in this survey by Lab2IPO, while only 50% of the angels (who answered this question; this question had a low angel response rate) reported that this was an often heard VC criticism. Not surprisingly, in answer to the open-ended survey question  What do angels need to better understand? , valuation and valuation methodology was a top ranked response by the VCs.

A guide covering global emerging market VC was launched. The "Venture Capital and Private Equity Funds for development - Index 2005" is an initiative of the Netherlands Committee for Sustainable Development (NCDO). It is a first attempt to create a comprehensive list of all the Venture Capital Funds worldwide that invest in developing countries. The Guide contains 259 Venture Capital Funds investing in developing countries - 112 investing in Africa, 103 in Asia,  26 in Eastern Europe and the Middle East,  81 funds investing in Latin America, and over 60 funds with social and environmental criteria.   More on the Guide Venture Capital Funds for Development can be found here.  

A cleantech blog by expansion capital an emerging leader in cleantech VC is here.

Interest Rates and Currencies

As China takes on the role of commodity good manufacturer to the world, others, especially the US, are calling for a loosening of currency control.  Do not expect this to happen soon, nor quickly.  It is not China's culture to react in such a way nor is the rationale for doing so proven.  When the change comes it will be gradual and done by China in the Chinese way.

The Euro faced weakness attributed to the difficulty of generating enthusiasm for teh European Constitution in France.  It is trading about $ 1.25 /€ at the end of May.  We expect this to be temporary and may offer an opportunity to restructure currency portfolios or a short term trading opportunity.  The fundamental strengths remain.

US interest rates reached 3% in early May and are likely to continue rising steadily for another 1 - 1.5% before the pace slows.  The fundamental imbalances in domestic and international policy and budget are not yet affecting consumer behaviour suffiently.  The difficulties of managing the economy is increasing.  Long term interest rates are flattening and there are emerging pockets of speculation in the housing market.  Both trends contribute to volatilty.

NASA imageThe Federal debt is out of this world - So far in 2005 the total is almost $8 trillion. If you stacked that many dollar bills on top of one another, the pile would reach nearly 821,000 miles into space - 3.5 times the distance from the earth to the moon. (from BusinessWeek and David Batstone). 

While normal economic adjustment, such as rising productivity and increasing value added,  might mitigate concerns under normal circumstances, America is not tackling this problem at its root in basic manufacturing.  In the textile sector, despite having a decade to rengineer industrial capacity to move up the value chain, nothing has been done so that today China is THE efficient low cost producer and the US administration is bullied by lobbies into protectionism of low end, uncompetitive businesses.  This lack of efficiency and the attendant cost, either in currency/trade/investment or subsidies, are not going to go away until causes rather than symptoms are tackled.

Trade and FDI

The EU and US have moved to limit garment imports from China because of the boom in imports from China (resulting from lifting of quotas in January) and the threat to domestic clothing manufacturers. China had voluntraily  raised tariffs on 78 groups but has now withdrawn these in the face of protectionism from the EU and US.  The EU trade commissioner admits that the protectionism, which he insists will be limited in scope and duration, are to allow breathing room for adjustment.  However, this removal of quotas was expected and some manufacturers have already adjusted business infrastructure.  The UK garment manufacturing industry has already taken the pain and during tthe past 5 years has moved in to specialist manufacturing only with nearly all of the manuifacturing being outsourced, often along with investment in manufacturing plant, to China and similar low wage environments.  The US and EU moves are disingenious and to the detriment of consumers and tax payers, as well as resource poor Chinese labour, with only antiquated and inefficient domestic manufacturers benefitting from continued "life support systems".

Wal-Mart is America's—and the world's—largest corporation. Its revenues are eight times those of Microsoft, and make up 2 percent of America's GDP. It employs 1.4 million people, more than GM, Ford, GE and IBM put together. It is legendary for its efficient—some would say ruthless—efforts to get the lowest price possible for its customers. In doing this, it has used technology, managerial innovation, but, perhaps most significantly, China. Last year Wal-Mart imported $18 billion worth of goods from China. Of Wal-Mart's 6,000 suppliers, 5,000—80 percent—are in China, not the United States.  Popular demand in the US is not for more expensive US made clothes, but for less expensive Chinese made ones.

Pascal Lamy of France has won the race to lead the World Trade Organization.  His diplomatic abilities may be what saves the Doha round of trade talks, though their utility seems to be waning.


Activities, Books and Gatherings

May was great fun.  I gave myself the luxury of spending three days at BeTheChange.  It was an invigorating and rewarding time which continues to provide fuel to our various activities.  Some notes are online here.

The retreat Nurturing Natural Performance is now available.  A course will be run during the week of July 11 (as well as bespoke sessions).  It is challenging, fun and will test the potential of even the most successful executives and entrepreneurs.

It appeared that my reading list conspired to synchronicity.  Finishing Pratchett's Pyramids (for the second time) during BTC was appropriate - the parody is of quantum mechanics and space-time phenomena, the setting "ancient Egypt".  At the same time I finished an excellent book on philosophy from Socrates to 1940ish called The Idea of Nature by RG Collingwood.  This is well written, disciplined and covers all the bases.  It should be rquired in any Philosophy 101 course and what is most interesting is the advanced stage of his thinking - he recognised the immanence and transcendance of nature, the emergence of enlightenment, the indivisibility of matter and energy.  And all before 1945.  It had been a coincidence picking it off a bookshelf at home - one of my grandparents must have read it!  On the way to BTC I happened to see a reviewers copy of Pratchett's Darwin's Watch in a used-book store and picked it up before the official release!  Its pretty advanced stuff (fortunately tempered by Dr Pratchett's insight and wonderful use of language) and discusses space-time phenomena.  It referenced Pyramids and Zeno/Xeno's paradox within the first 20 pages!  A new acquaintance generously gave me a copy of Intelligence in Nature by Narby an anthropological study on intelligence other than human - an enjoyable read.  All of these readings and the  ideas expressed by leading scientists like Chopra and Sahtouris dovetail with one another to support the rationale for a new emerging paradigm of human behaviour.  It has all enhanced my confidence in the rationale for Astraea and GRI Equity.  The past three decades have been tough for pioneers like Whitmore, Henderson, Sahtouris and others, but the emergence of enlightenment among us all is assured.  (Unfortunately it will still be a race against time, like the cure for cancer.)

A friend sent a copy of Orion magazine which some of you may enjoy.  It is in the same space as Resurgence.

The Ecologist continues to impress with its enlightening coverage.  Examples include the disclosure of the toxic and carcinogenic effects of teflon and the destruction of native communities.

Although I've not yet read it Freakonomics is now on my list.  It is reputed to be an enjoyable and disciplined read in economics.  One example the authors provide is that the reason for the decline in crime in the 1990s in America was the leagalisation of abortion in 1973 which allowed mothers/parents who were not well equipped to rear children to opt out of that mistake, thus reducing the proportion of children brought up in resource poor households.

"What The Bleep Do We Know" has opened in Europe and the DVD will be available in summer.  This is a must see for anyone interested in personal development, the meaning of life, consciousness or leading edge science.  And its great fun!

Charles Darwin's original papers are online here.



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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