GRI Equity - integral investing

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

Perspective

The major issue that rose up in November is global food/agriculture management: Most importantly liberalisation of regulation of genetically modified seed took place, despite much negative press and in the face of scientific evidence - the result will be catastrophic loss as now being seen on some farms in the US which have been using GMO for two decades. Also trade liberalisation of agricultural commodities is known to be the simplest course of alleviating poverty in emerging economies but the Doha trade round appears stalled by bureaucracy.

In Europe the payout agreed in November to a tiny minority of businesses (subsidised sugar farmers) for a long time predictable event is further evidence of unacceptable failure of ethics and governance which is costing EVERYONE ELSE a multiple of the nominal payoff (i.e. the millions in subsidies). And the allowance of GMO is plainly criminal in light of the evidence and recent news such as that from California that "roundup ready" seed has made land unusable after transgenic pollination. There is more on this in the section on Holonics and LOHAS.

And the reality that smacked us in the face is the unnecessary inequalities within our developed economies which provided the fuel for emotional and violent eruptions in France. Yesterday it was Theo van Gogh, today it's the suburbs of Paris. The problems in France are symptomatic of the problems of privilege. Its the same as ghetto violence in South Central LA. Its not about race. Who in France or any other European country can claim to be of the blood of that country, except in metaphorical terms. Even the Queen of England is of Germanic lineage! The most that can be said is that we come from our mothers. The problems in France are to do with greed and envy. People in communities are naturally distressed if they have no opportunity but the neighbour appears to have it easy. Only when the economy of France, or anywhere else, is buoyant enough to support the whole population, and does so reasonably equitably, tension will subside. But the potential for tension is rising with immigration from the south, both Africa or Mexico/South America. Young men in Africa have no jobs (often they have been eroded by agricultural subsidies) but see TV and other media telling them they might have a chance over the border - so they risk their lives to move to the European suburbs. In Ireland we saw problems is of the same cause but different symptoms, where immigrants get jobs because they perform better than "locals" - the strife over Irish Ferries changing its ship staff from Irish to central European is the high profile illustration.

More practically one should ask: Why is there so little tension in the global village? Because the millions starving in Africa are not next door. They are coming closer - refugee migration is significant and growing. But until they are within our lives, like the people next door, we'll continue to nail their farmers to the floor with subsidies, destroying their food systems to grow wheat for our fat little children (I have 4), paying $/€ 2 a day to have our shirts and jeans stitched in China while demanding a minimum wage because otherwise we can't afford modern conveniences.

To be fair, its not our fault. We just do as we're told. If things are going to change it has to be the rich who modify their behaviour. Oh, you mean like me? Like the hundreds of delegates going to Hong Kong for Doha to stay in fine hotels, eat luxurious food and decide to continue to subsidise rich farmers? Or like Bob Pitman of the US whining and arm twisting and bribing a deal for China to rein in their booming clothing and textile shipments to the United States until 2008? Ah well! as we like to say in Ireland, another fat country with massive agricultural subsidies (see box).

In his final speech as president of the Royal Society, the UK's top scientist, Lord May of Oxford urged scientists to speak out against fundamentalism, especially the climate change "denial lobby", warning that core scientific values are "under serious threat from resurgent fundamentalism, West and East".

"Ahead of us lie dangerous times. There are serious problems that derive from the realities of the external world: climate change, loss of biological diversity, new and re-emerging diseases, and more. Many of these threats are not yet immediate, yet their non-linear character is such that we need to be acting today. And we have no evolutionary experience of acting on behalf of a distant future; we even lack basic understanding of important aspects of our own institutions and societies. Sadly, for many, the response is to retreat from complexity and difficulty by embracing the darkness of fundamentalist unreason."

Lord May notes that fundamentalism applies not only to organised religions but to lobby groups on both sides of scientific debate such as climate change and GMO debates. The climate change "denial lobby" and non-governmental organisations (NGOs) opposed to nuclear power are not exempt from a denial or misrepresentation of scientific facts, he told reporters in London. The huge problems with nuclear power had to be weighed against the problem of putting more carbon into the atmosphere and the future potential of land and sea turbines, he said; "rather than ruled out of discussion on what you might call some fundamentalist belief system".

He also noted another danger to the enlightenment of science comes from the growing network of fundamentalist and lobby groups in the US that campaign for creationism to be taught in science classes. He called on scientists to take a more active role in speaking out against so-called "intelligent design" and other threats to modern scientific values. "The only thing I can see scientists doing is being more energetic as citizens - getting out there and trying to convince people that that's not a very wise way to behave," he explained. "That's no easy recipe."

By strange coincidence in November, I came across The Declaration of Interdependence published at the Earth Summit in 1992. It is timely to recognise the fundamental dynamic of interdependence as a higher order system characteristic than independence in modern times when global interdependencies are so critical to our lives, even life. Today we behave as if ignorant of this new dynamic, though the wind of change is felt everyday noticeable by new and more used vocabulary of organic, integral, sustainable, ethical, interdependent, ... holonic. It reflects the critical thinking needed in this world where our daily actions are rocking the biosphere.

Investment, Finance & V. C.

By coincidence, since focusing our business and culture on holonics last month, two leading publications have referenced this emerging science. Booz Allen Hamilton have devoted a website, orgdna.com to a model which uses some whole systems thinking to describe organisation types and behaviour and how to improve them. The CMA also published their balanced scorecard approach - another tool to broaden business analysis (discussed below). And the Venture Capital Journal published a cover story on the use of coaches and psychologists to manage internal problems: "VCs are increasingly turning to professional therapists and mediators to achieve the elusive objective of managing their internal struggles. These clubby capitalists haven't gone suddenly soft. They are on a self-improvement swing with no end in sight, thanks to their heightened appreciation that not addressing underlying tensions at one's firm can have far worse implications than seeking outside help." You can see a summary of Astraea's model of emergent intelligences in organisations and people here.

When global liquidity starts to decline, according to the laws of economics, either GDP growth will slow or financial markets will suffer, or both. Niels C. Jensen, Partner of Absolute Return Partners says that "It is virtually assured that a significant deterioration in global liquidity will cause some sort of crisis somewhere. It always does." As GaveKal quips, "We are rapidly moving to a period of more fools than money. And in such times, fools and their money are soon parted."

The worry that inflation will erode the value of bonds and shares, may be offset by currency strength. And safe haven commodities have done well to date, but may be leveling off.

The new German coalition unveiled its policy, which has some bold initiatives. Here are some key points: A 3% rise in VAT, higher income tax for top earners, no protection from dismissal for the first two years in employment, pensions are being frozen, subsidies for first-time home owners are being scrapped and for the first time since the war, the budget deficit will not adhere to Germany's constitutional rules. The conservative leader also said she wanted to treat smaller members of the European Union more fairly, and to maintain strong ties with neighbouring Poland and France. More good news for Germany.

Japan's economy continues to be buoyant and investors are flowing in. Goldman Sachs for example has made around 8 significant direct investments in Japan this year. The Nikkei share index has touched the 15,000 mark for the first time in five years, as strong demand for domestic shares continued. Recent data shows industrial output up, improving production and household spending, and more people seeking work. Industrial production rose 0.6% in October from a month earlier. Analysts are optimistic about the outlook for output, after a period in which companies seemed to have been selling off stock rather than boosting production. A separate government report showed that spending in households with a wage-earner rose by 1.3% in October from a year earlier. Japan's economy has bounced back this year as a pick-up in consumer spending and capital investment has made up for a slowdown in exports, particularly to China. In November the OECD upgraded Japan's economic outlook, saying its domestic demand is recovering, along with corporate profits and employment. The OECD expects Japan's economy to grow at 2.4% this year and 2% in 2006, up from previous forecasts for 1.5% growth in 2005 and 1.7% next year.

We came across a smallbusinesseurope.org, a useful site of information particularly relevant to EU regulation and economic conditions. The Issue Tracker is comprehensive in itself. It does have a UK perspective which means UK particularities are covered, but covers general EU subjects well.

Responsible Investing

A report commissioned by UNEP FI and prepared by Freshfields attorneys dispels the persistent myth that laws prevent fiduciaries from considering environmental, social, and governance issues. The often used excuse that fiduciary duty precludes environmental, social, or governance (ESG) considerations in institutional investment decisions was demonstrated to be false by a report released at the United Nations Environment Programme Finance Initiative (UNEP FI) Global Roundtable last week. The report, entitled A legal framework for the integration of environmental, social and governance issues into institutional investment, was conducted pro bono by Freshfields Bruckhaus Deringer, a London-based global law firm.

Also, the CMA has weighed in on the subject of how to effectively align consumer and employee values with corporate strategy to generate long-term cognizant benefits — a better understanding of precisely with whom, what, when, where, how and why an enterprise makes a profit or surplus. They have described their Balanced score card, a focused set of key financial and non-financial indicators.” See CMA review here. The 10 major forces motivating companies to change their behaviour and use CSR as a strategic instrument are:

Five Mega-Issues:

Climate change
Pollution / health
Globalization backlash
The energy crunch
Erosion of trust

Five Demanding Stakeholders:

"Green" consumers
Activist shareholders
Civil society / NGOs
Governments and regulators
Financial sector

China's leaders want their national economy to grow not only fast but to grow green. They have asked state planners to develop a new indicator to measure the country's growth, a 'green GDP' that would account for the costs of environmental impact and resource consumption. IPS editorial here. Take it with a pinch of salt - the track record is poor and the pressure has been on for some time, particularly because the eyes of the world will be on China in 2008 when the olympics are in Beijing.

SunPower Corporation (SPWR) replaced Cypress Semiconductor Corp. (CY) in the KLD index. SunPower was a subsidiary of Cypress Semiconductor until its initial public offering on 17 November. The reason for the change is that SunPower's leadership in renewable energy had been the primary rationale for including Cypress on the Index. SunPower manufactures high-efficiency solar electric panels. With panel efficiencies of up to 18.3 percent, SunPower's products produce up to 50 percent more power in a given roof area compared to conventional solar panels, and also reduce per-kW installation costs.

The Eurosif report on the chemical sector is available here (issued in November 2005).

The Economist's survey of microfinance published in early November is worth a browse. It declares that "financial services are at last spreading from the rich to the developing world—and even making money". It is a readable introduction to the subject. However, finding commercial investment vehicles is not as easy as one expects. Many funds receive significant donations, which temper the commercial thrust or have high transaction costs which reduce net earnings. Our industry notes are available here (subscribers/members).

In November, microfinance took another step toward establishing itself in the mainstream as a new asset class with the launch of the Global Commercial Microfinance Consortium, a $75 million fund, linking mainstream financial institutions to socially responsible investment practitioners with microfinance experience.

Premier Foods has added its growing portfolio of meat-free food brands by acquiring Cauldron Foods for £27 million. Earlier this year Premier paid £172 million for Britain’s leading vegetarian brand Quorn. This combination in itself is powerful. Cauldron Foods, which supplies major supermarkets with vegetarian sausages, falafel, tofu and other products has regarded Quorn as its arch rival for shelf space on supermarket shelves, where most of the two companies’ sales derive. The Cauldron range will sit well alongside the Quorn products and will benefit from higher investment. Premier will benefit from tighter market control.

Investment bank Goldman Sachs sold on a 12.4% stake in Mitsubishi Motors, just three days after buying it from German car maker DaimlerChrysler. The new buyers of the shares have not been named, but analysts believe Goldman Sachs has sold them to global institutional investors. Shares in Mitsubishi Motors, Japan's only loss-making car maker, fell 11% on the news. No doubt investors were not pleased by the quick resale and whatever the motivation for the action it was not carried out in a sensitive manner.

Venture Capital

When I first started in VC 20 years ago I was attracted by the stories of creative business development and the passion of the players - my first job included work for Richard Onians looking at an investment in Richard Noble, land speed record holder who was building a private jet business. Perhaps I was naive, but professional VC seems to have changed to become over-focused on windfall type returns. It seems to be attracting more "finance types" with little sensitivity to the breadth of needs of growing a business that adds value and succeeds for generations. Tom Hicks seems to have come to similar conclusions.

Tom Hicks, the 59-year-old LBO dealmaker who helped popularize the “build-and-buy” model of investing and founder and former chairman of Hicks, Muse, Tate & Furst, has changed his stripes and sounds like an integral investor. Hicks is concerned with what he terms The X Factor. This means that he would not be satisfied with a 2x over 3-year return that would translate into strong IRRs for most private equity firms. Instead, he is looking for 10x over a 10-year holding period. He has left HMTF but now invests via his family office. Why would he rather invest via a family office than through another HMTF fund (pre-marketing is just gearing up for HMTF VI)? The basic answer, he says, is that the fund structure itself had become too constrictive. LBO firms, he believes, are forced to bow at the idol of IRRs, because high paper returns are required to feed the beast (i.e., raise the next fund). “We have a much longer-term investment holding period than HMTF or other LBO firms,” Hicks explained. “Our goal is to build long-term value, not IRRs.”

For an anecdotal review of the PE industry including comments on Refco and the PE overhang, see a BusinessWeek article here. And this NY Times article is another view, perhaps a little more rigorous, offering another perspective on the PE market. Take both perspectives with a pinch of salt. Having just participated in a PE survey I am particularly alert to the fact that there is no black and white, but a spectrum of colours and success is mostly dependent on particular choices at the front line, especially in the world of VC, not on revising one's mission statement or another cosmetic change.

As noted above, the Venture Capital Journal this month explores how VC firms are turning toward professional therapists or mediators to handle particularly thorny problems. Find the preview here, and a full list of November stories here.

Homegrown Naturals Inc., a Napa, California-based owner of natural and organic food brands, has acquired Annie’s Naturals, a North Calais, Vt.–based maker of all-natural and organic salad dressings and condiments. No pricing terms were disclosed for the deal, which was facilitated via an additional investment by Homegrown majority shareholder Solera Capital.

Top

Interest Rates and Currencies

The decline in global liquidity alluded to in the section above may also lead to a strengthening of the dollar as in the past. Ed Yardeni (yardeni.com) shows a strong negative correlation of liquidity with dollar strength, and scenarios for this should be built in to your strategic planning.

Commodity prices have been climbing. Precious metals have often been a safe haven in times of uncertainty. Gold prices have passed the $500-an-ounce mark, It is at its highest level since February 1983. More gains are predicted as investors look to protect themselves against inflation fears. Platinum topped the $1,000-an-ounce level. Industrial metals have also been under pressure as strong demand from Asian economies for metals has been squeezing supply at a time when producers are finding it difficult to boost output. The copper market has also been trying to interpret stories and data from China where industrial demand and significant trading positions have created price uncertainty. Whether your prognosis is for short or long term seller or buyer what is evident is that volatility is up, in fact basic risk is higher because of the deterioration in market information.

Trade and FDI

The Doha round is increasingly embarrassing for us all. To quote Jean-Pierre Lehmann, Professor of International Political Economy and Founding Director of The Evian Group:

In 1937, Cordell Hull, at the time President Roosevelt's Secretary of State, wrote of his "belief that enduring peace and the welfare of nations are indissolubly connected with friendliness, fairness, equality and the maximum practicable degree of freedom in international trade". This has often been quoted. From the ashes of World War Two, the architects of the global trading system sought to prevent a repetition of what had occurred mainly through the strengthening of both principles and institutions of international economic activity.

To that end, the principle of non-discrimination, which is THE core principle embedded in the GATT and the WTO, has been rightly described as perhaps the most enlightened, innovative and radical contribution to global governance that occurred in the whole of the 20th century.

As we stand on the threshhold of the 21st century, perhaps one of the greatest causes for alarm is the erosion of the principle of non-discrimination and indeed the acute intensity of discrimination in many different pernicious ways.

Let me give the more flagrant and alarming:

1. Discrimination Against Developing Countries

This point does not require too much elaboration as it is - or certainly should be! - well known. The playing field is heavily tilted against developing countries in all sorts of ways, by no means only in agriculture, but also in labour intensive products. There is in fact here a double-discrimination. Poor countries are discriminated against because of high tariffs and other barriers, while poor citizens of industrialised countries are made to pay more for essentials (such as clothes) than would be the case if tariffs were lower. Just one out of countless examples: in 2002, imports of gems and jewellery into the US amounted to $17.1 billion for which tariffs of $181 million were paid; in the same year, imports of baby clothes amounted to $1.9 billion, for which tariffs amounted to $187 million. This is wrong, wrong and wrong. Gems and jewellery are luxuries, baby clothes are essential. Economics cannot be divorced from ethics. Every effort must be made by everybody (including you!) to press governments to cease these discriminatory practices.

2. Discrimination Through Growing Bilateralism and Preferential Trade Agreements (PTAs)

There has been an immense proliferation of these PTAs in the last few years, partly due to the understandable deep frustration with the apparent paralysis of multilateralism. However, just as multilateralism aims to uphold the principle of non-discrimination, PTAs are by definition discriminatory. The spread of PTAs intensifies discrimination against poorer countries. Thus, in South-East Asia, for example, all trading powers will be keen to sign a PTA with Singapore (as many are doing), but Laos and Cambodia will be shunted aside. The same applies to Chile in Latin America as opposed to Bolivia or Paraguay. In an article in the Financial Times ("Bilateral deals destroy global trade", 4 November, 2005), Dr Victor Fung, Chairman of Li & Fung and Co-Chairman of the Evian Group, pointed out how "bilateralism distorts flows of goods, throws up barriers, creates friction, reduces flexibility and raises prices". The most likely scenario of a continued stalemate of Doha will be the replacement of the non-discrimination based multilateral system with a plethora of discriminatory PTAs. Is this what we want? If so we should be clear that we will be perilously regressing to a 1930s scenario.

For more please go to eviangroup.org

Top

Activities, Books and Gatherings

November became much busier than expected as we were asked to deliver three new projects in short order. It has been lots of fun though some of the winter garden chores took a back seat. I should be able to catch up in December ...

Early in the month we were encouraged into the GM debate publicly with publication of our letter to the Irish Farmers Journal followed by an interview on local radio. Both exciting and unexpected events in our local community. The continuing coverage in global media of the dangers of GMO following liberation of regulation in Europe has been surprising, though it is unlikely to be reaching many who were previously unaware of the issues (outlined above in Holonics and LOHAS).

Spiral Dynamics by Don Beck and Christopher Cowen was finally cracked and is worth reading for any manager, executive, politician or change agent. It may be a little obscure if you have no idea at all about emergent values and modern psychology, but the authors offer examples throughout the text to help ground the reader's thinking.

Several Pratchett's were consumed in November, including his latest, Thud!. Thud! uses a novel design which I've never seen before, including the incorporation of a children's book Where's My Cow? which is also newly published and has been read by my children! Thud! also presents a paradox of today - we fight for peace. A brilliant piece of work by Dr Pratchett. The Johnny Maxwell books were also re-read: Johnny and the Dead, Johnny and the Bomb and Only You Can Save Mankind. I had forgotten how well he plays with concepts of time travel, death and ethics. Great for teenagers, but they opened my thinking too. As Johnny finds out - if you don't save mankind, who else will?! Pratchett is in the league of Asimov - though Pratchett's writing may be better and the relevance to modern life and frontier science more acute. Required reading for enlightened thinkers with imagination and a sense of humour.

"Om" in the corner office continues to attract followers with the publication of Resonant Leadership which relates stories of executives who have learned how to get in touch with themselves and reaped the benefits in personal and organisation performance.

The Battle for the Soul of Capitalism by John C. Bogle has been published. Bogle is the founder of Vanguard the fund manager which strives to offer structures and fees that are economical.

Potential and budding young entrepreneurs (and parents and teachers) may enjoy hotshotbusiness.com a game website by Disney and the Kauffman Foundation. You can play the game in Opportunity City to begin to learn of some of the ups and downs of starting up.

Our experience with Linkedin.com a web-based network tool has grown organically and gently since we joined a year or so ago. It has been non-invasive and helped screen introductions. If you are not yet a user, it may be worth reviewing, especially if you are involved in international or multi-discipline business or services.

Top

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.

archive signup credits

Private and Confidential

November 2005