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Private and Confidential

March 2005

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


March blossoms from winter for the northern hemisphere temperate climates. The spring equinox focused attention on nascent growth which it is hoped will flourish in the months to come. In nature we can enjoy the warmth of spring without the manic activity of summer - weeds have not yet overpowered our efforts. Easter, this year contemporaneous with a solemn mood as the Pope's health wavers, also creates a mood of hope and optimism for plans set but not yet carried out. This mood almost seemed to be reflected around the world: the US administration attempts to become more conciliatory and cooperative in international politics, Israeli and Palestinians seem to be agreeing a way forward, Hong Kong and Taiwan are slowly shaking off their parental cocoons.

But the mood of optimism should be tempered by the growing list of priorities for global management. Our failure in rich economies to make progress to the Millennium Development Goals and the increasing concern over the failure to reduce poverty of most people in the world are signs of increasing economic and geopolitical tension which will loosen only with whole system change.

Relevant to our wake up call is the film The Corporation, briefly reviewed below, which should be required viewing for all managers as a fast primer on challenges facing large businesses today. It focuses on the US jurisdiction but has lessons for us all. I do not take issue with corporations per se - that is too emotive. But the disconnect between owners ( i.e. you and me with an investment portfolio, pension or other savings) and the management of business has become too extensive. We should not complain about the way things are if we do not take responsibility for our own behaviour, whether it is consumption or investment.

A paper from IMD on the need for integrity in managers offer the sobering advice that integrity is not necessarily important, because corporate culture does not value it! (Do you need integrity to be a successful leader?) While integrity and flexibility are reported to be the most important factors in successful managing, the paper recognises that not owning up to mistakes etc is likely to be undiscovered or ignored if certain objectives are met. It is of course this culture that leads to Enron risk and disasters.

People in America have thought much about life and death and the rights of people during March because of the legal debate over Terri Schiavo. It is in stark contrast to views expressed about death in Iraq. The end result of this bioethics dilemma was ironic - allow her to die, but by starvation! It is emotional and uncertain issues like this that demand our attention in order to remove tensions and liberate people's energy.

Global culture has not yet fully emerged to an enlightened dynamic.  Many executives from traditional businesses and organisations that we meet have sympathy with more responsible initiatives both at work and home, but they are reluctant to change first.  Often they say "a crisis is needed, then economic and social behaviour will adjust".  This is sensible.

However, it is rare for humanity to wake up until it is too late, perhaps the best example is the Second World War in which the USA was supplying finance and industry to Germany into 1942 despite many innocent deaths in the years before.  The perspective of the Asian Crisis (not the tsunami but the economic debacle of 1996 till after 2000) offers a frightening lesson.  It was not until currency devaluation of 50% took place that government and business in Thailand began to contemplate reforming practices which were unethical, collusive and inefficient.  In fact it is only recently that people feel real changes have started to be implemented and many unsavoury practices have rejuvenated.  What if this is the sort of shock that is needed to wake us up?  Can you imagine the pain of a one time shock of a depreciation of your currency so that it can only buy half what it does today?  It is unthinkable. We must change our behaviour, habits and consumption, individually, today if humanity is to succeed, even survive.


Investment, Finance & V. C.

John Kenneth Galbraith long ago observed "We have 2 classes of forecasters: Those who don't know . . . and those who don't know they don't know." I'm pretty sure I'm in the first group though the tensions in financial markets are making prognosis increasingly difficult. When Greenspan indicates that globalisation and the US government debt are making expectations volatile, we mere mortals should indeed worry.

On a geographic basis, Japan and Germany remain interesting to us, though not yet assured. Initial data on Japan has been revised indicating that economic growth may be resuming. The Japanese economy expanded slightly in the last three months of last year, emerging from a mild recession. Japan's gross domestic product rose 0.1% over the period, beating government forecasts of a 0.1% shrinkage. The most positive contribution to the increased growth seemed to come from Japanese businesses building up inventories so a turnaround is far from assured.

Of particular interest in Japan is the new appointment of a foreign CEO of Sony. This signals a major opening up of custom which reflects the cultural shift we see in Japan.

Germany's bounce back is still not certain, however, signs of good performance in automotive and real estate sectors have been seen. The UK appears to be under pressure as UK retail sales are reported to be stagnant and house prices leveling off.  To mitigate some of this pain UK consumers might consider a trip to America where the low value of the dollar means a great holiday and inexpensive consumption may be enjoyed.

The Harvard Business Review reports some remarkable results of a study of the business "topple rate" - the probability that a top company (a firm with revenues in the top 20% of its industry) will lose its revenue leadership position within five years. The data shows that the likelihood of "toppling" doubled from 1972 to 2002. Many of the successful "attackers" that topple incumbents come abruptly from far behind. Companies are traveling through the ranks today about 40% faster than they did in the 1970s and 1980s. The average new leader was in the middle of the pack just five years before rising to the top quintile. Researchers Patrick Viguerie and Caroline Thompson point to globalization, constant changes in technology and deregulation as the major causes for today's rapid market shuffle.

Thailand remains a favoured place to invest but a drought could affect economic growth this year though the prime minister said the government remained hopeful the economy would grow by 6.5% in 2005 after 6.1% growth in 2004. . The drought is hitting most of the country - with water in many dams declining significantly. The drought hit fourth quarter economic results by significantly affecting output in the agricultural sector, which accounts for just under 10% of GDP. Hopes for a second rice-crop this year have been frustrated by the drought, and crops have been withering in fields. It is also affecting energy resources - water at hydro-electric dams has fallen close to the minimum needed to produce electricity. Other areas of the Mekong River delta are also affected.

Value investing was encouraged by DKW's James Montier in a recent paper viewable here. Extracts from the research are enlightening:

" However, the table also shows the difficulty of picking growth stocks ex ante. If you had invested an equal amount into the 20% of stocks with the highest forecast earnings growth then you would have underperformed by 2.5% p.a. on average! In contrast, if you had invested in the 20% of stocks with the lowest growth expectations then you would have outperformed by 4% p.a. on average. The role of expectations in this process couldn't be much clearer. It is far easier to surprise on the upside if the expectations are low in the first place. "

The UK government's new Sustainable Development Strategy has had a mixed reception. Tony Blair unveiled the UK's Sustainable Development Strategy 2005 along with a Shared Framework for Sustainable Development. You can read bout the strategy here, which has implications for long term investment and business strategy.

Responsible Investing

UBS Investment Bank, a division of financial services giant UBS, is integrating environmental and sustainability criteria in the bank's overall assessment of investment risk and opportunity based on information provided by Innovest Strategic Value Advisors. Innovest will make the research available through a dedicated website available to UBS employees globally. "The bank views this global site license as an important due diligence tool which will improve our ability to identify, analyze, and manage environmental and social risk," said Joel Forbes, global head of environmental risk management at UBS Investment Bank.

AIG's dominant boss Maurice "Hank" Greenberg unexpectedly resigned his role as CEO to become non-executive chairman only.  This came after a period of investigation of AIG's operations mounted after Marsh McLellan's problems came to light.  Greenberg has been replaced as chief executive of AIG, the world's top insurance firm by stock market value, by Martin Sullivan. AIG also replaced its chief financial officer, and delayed its 2004 accounts. In November, AIG paid US authorities $126m (67m) to settle an accounting probe. It faces more investigations. AIG it appears has poor governance, but this is not surprising in a public company that has effectively been ruled by an individual, now 79, for decades.  The feudal pyramid must be high and formidable and had been acceptable to equity holders.  Economic pressure on the insurance industry, exacerbated by climate change, and increased concern by society over unethical management has catalysed this change.   The changes will be beneficial for all stakeholders in time, though expect risk and volatility for the moment.

Updating earlier reports of shareholder action at energy companies, activists recently announced their withdrawal of climate change resolutions at six oil and gas companies because they have taken concrete steps to measure, mitigate, and disclose data on the environmental impact of their businesses. The shareowners withdrew resolutions at Apache (ticker: APA), Anadarko Petroleum (APC), ChevronTexaco (CVX), Tesoro (TSO), and Unocal (UCL), and chose not to re-submit a resolution at Marathon Oil (MRO). The campaign was organized by the Interfaith Center on Corporate Responsibility (ICCR), a coalition of 275 faith-based institutional investors, and the Coalition for Environmentally Responsible Economies (CERES), a consortium of environmentalist institutional investors.

The Global Reporting Initiative's (GRI) announced that six microfinance institutions (MFIs) in developing nations on three continents-- Africa, Asia, and South America--are preparing sustainability reports incorporating GRI Sustainability Reporting Guidelines. MFIs offer microcredit, or small loans typically accompanied by technical assistance and financial counseling, to low-income individuals or microenterprises overlooked by mainstream financial institutions. The MFIs include one in Asia (Acleda Bank in Cambodia), two in Africa (K-Rep Bank in Kenya and Centenary Rural Development Bank in Uganda), and three in South America (FIE in Bolivia, Banco Solidario in Ecuador, and FINDESA in Nicaragua). Acleda Bank currently has a brief Environment, Social and Community Report posted on its website, but the difference between this relatively perfunctory document and a sustainability report based on GRI guidelines is significant. The six MFIs will utilize GRI's handbook for small and medium enterprises (SMEs) for support in producing the in-depth reports.

A clean energy ETF began trading in mid-March, enabling investors to purchase shares in a fund based on the index's basket of clean energy stocks. PowerShares Capital Management LLC is introducing an exchange traded fund (ETF) replicating the WilderHill Clean Energy Index, the "PowerShares WilderHill Clean Energy Portfolio" (Amex: PBW). Shares started trading at $15. See more here.

Another sign of changing colours is the move of Adam Seitchik from Deutsche Asset Management, where his team managed $60 billion in assets, to Trillium Asset Management, which manages around $1 billion. Seitchik see this as"upward mobility".  An article on the move is here.

Venture Capital

A multi-million pound venture capital fund to invest in companies in the natural, organic and Green industries will launch in the UK this month at Natural Products Europe. Greenmont Capital Partners, based in Denver, Colorado, was formed last year by a group of natural and organic industry stalwarts from both sides of  the Atlantic. Its founding partners include former Horizon Organic executives Barney Feinblum, Mark Retzloff and Paul Repetto, together with Fresh & Wild founders Hass Hassan and Bryan Meehan. Greenmont launched formally in the US last November. It has already made two investments both juice businesses and assessed 20 candidate companies to date. Having built up an $18 million (10 million) fund, Greenmont is now set to launch in the UK and Europe.

A recent paper, Smart Institutions, Foolish Choices?: The Limited Partner Performance Puzzle found that endowments generate annual private equity returns that are 14% higher than average. You can see the paper here (pdf). The primary driver was recommitment strategy, in terms of follow-on funds. Endowments and corporate pensions are much less likely to recommit than are public pensions or advisors, and they do a better job of predicting the performance of the follow-on funds to which they do commit.

In 2004, cleantech investment captured $ 1.209 billion (5.8%) of the $ 20.9 billion of venture capital invested across all industries. Furthermore, in Q4 2004 Cleantech captured more than 6% of the $ 5.279 billion invested in North America overall, up significantly from 4.7% in the previous quarter. Cleantech now ranks 7th in size as an industry segment behind Software, Biotechnology, Telecommunications, Medical Devices and Equipment, Semiconductors and Networking Equipment.

Though focused on restructuring more than VC, the Emerging Markets Private Equity Association will be interesting to readers, particularly institutional professionals.

Interest Rates and Currencies

Acceleration of interest rate increases is imminent. The effect of interest rate increases may be more dramatic than anticipated, being exacerbated by weakness in the housing markets.  Not only are many home-owners highly leveraged, it also seems that the cost of buying has now become more expensive than renting in many countries.   Anecdotal reports suggest that prices are stagnating in many countries and downward pressure is now perceptible.  The combination of rising interest rates, high levels of mortgage debt and demand for houses leveling off is a recipe for volatility.

Trade and FDI

In early March a conference and a separate report on banking in Europe both targeted the lack of a central payments processing facility as a principal hindrance to business and investment.  Charlie McCreevy, erstwhile successful Finance Minister of Ireland, now EU internal market commissioner has called time up and wants to see the product from four years' work soon.  If he makes it happen, the reduction in transaction costs and increase in transparency will have an immediate positive effect on market dynamics in Europe.


Activities, Books and Gatherings

Astraea is launching a retreat for personal and business transformation: Nurturing Natural Performance. You can download a pdf flyer here or call + 353 59 9155037 for more information. The guides leading the retreat offer over 150 years of life experience including global CEO, healer, publisher, therapist, investor, author, yoga trainer, parent, entrepreneur, gardener and more. The retreat offers the opportunity to significantly enhance your capacity in less than a week and is well suited to executives and managers in business, government, or international development. It is invaluable to those embarking upon career or lifestyle changes.

Pam was published in March. Yoga Therapy Ireland featured a two page spread on yoga in Carlow by Pam. It has received compliments from the yoga community - congratulations! You can read the draft here.

A range of books were screened or read. Our complete selection to date is online here, though it is worth noting a few here. At the suggestion of a best selling author and friend, we read Gurdieff. Gurdieff was an unusual character who attempted to link eastern spirituality with western culture in the early 20th century. While his work was hindered by the nascent understanding of atomic physics at that time, his critical thinking and experiential approach was ahead of its time and the school of thought deserves some attention in the study of the practical connection between body and spirit. The occult references can be a bit off-putting but are necessary for want of a non-partisan language.

Emergence by Barbara Marx Hubbard is a valuable exposition of the opportunity to open humanity to spiritual development while we have the opportunity to rescue earth from pollution. A passionate author this is becoming required reading for mangers building sustainable systems.

The Corporation - a documentary on corporate power is required viewing for all managers in large corporations. The two hours required to watch this film will prepare managers for responding to public debate on corporate failures of ethics and motivate solutions. It is unfortunate, however, that the focus is on US and US companies which have plainly escaped the law of the state as well as social morality. The authors do not point out that the form of organisation itself is not to blame - because of course there are good corporations and bad partnerships, individuals etc - but the people behind them, including consumers and shareholders who can change behaviour. This movie is a wake-up call for capitalists who think everything is OK.

The most enlightening and best value gathering on new thinking is coming up at the beginning of May. Book your place at BeTheChange while you can.





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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