Author: A.T.

I’ve always been fairly cold-blooded about “socially responsible investing” — the notion of shunning investments in companies that have subsidiaries in South Africa (back before the fall of Apartheid) or that make cigarettes or that make bombs.

I feel I’m as anti-Apartheid, anti-tobacco, and anti-bomb as most, but that limiting my investment choices will ordinarily do no good at all (except maybe to make me feel good), while reducing the returns I can earn and then contribute to fight Apartheid, tobacco or bombs.

I would never buy a new issue of stock or bonds from a tobacco company, because that might in some small way help raise the money needed to build a new cigarette factory. But the tobacco companies (to continue with this example) are awash in cash, so my buying their securities in the secondary market will in no practical way help them — while the considerable profit I once made speculating on R.J. Reynolds zero-coupon bonds, bought at a huge discount long after they had been issued, was a dandy source of funds to finance anti-tobacco activities.

What’s more, if you do buy shares in a company doing something you find objectionable, you can vote against management if and when a shareholder resolution is presented to stop it. Not that they ever win, but sometimes management does notice.

So you can see I have been something of a skeptic when it comes to clearly well-intentioned but, in my view, merely “feel good” mutual funds that promise to shun the bad guys. Collectively, they have so little clout as to be infinitesimal.

Now comes Sophia Collier, who, readers of the last couple of days will recall, has already proved me wrong on the issue of money-market funds. I assumed her E*Fund’s unusually high total return — #1 among 287 — had to be the product of taking more risk, but no.

Would she also prove me wrong for ruling out “socially-responsible” mutual funds?

Here the answer is a little less clear. But at the least, my respect this type of fund, and her success in particular, has risen substantially.

Let’s start with the E*Fund, the quasi-checking account money-market fund. Sophia tells me she won’t invest in Treasury securities because she can’t be sure what they’re being used to finance. Her money could go for bombs! Well, that strikes me as pretty silly — except that she winds up getting an even slightly better return for her fund by investing, instead, in government guaranteed Small Business Administration securities. She likes them because they help to finance small community businesses. “Money funds have been criticized for taking money out of local communities,” she says. “Investments such as the SBA guaranteed small business notes we hold in the E*Fund are one way to address this concern.” So why not? If you can get a good return at the same time as you cast your vote, as it were, for the things you believe in — why not?

Twenty-three thousand investors in the seven Portsmouth, New Hampshire-based Citizens Trust funds apparently already like this idea, so who knows — it could catch on and develop at least a little clout along the way.

The six funds besides E*Fund (paraphrasing loosely from their own web site):

The Citizens Emerging Growth Portfolio was the No. 1 overall performing “mid-cap” mutual fund for the year ending August 29, 1996, among 134 mutual funds analyzed by Lipper Analytical Services, Inc., with a one year total return of 30.64%. It’s an aggressive fund that concentrates its $50 million or so in small-and mid-sized U.S. companies.

Citizens Index Portfolio has $153 million in assets and seeks capital appreciation through investment in a market-weighted index of 300 of the country’s top socially responsible companies. What’s interesting is that, at least these days, the socially responsible companies often seem to be the most forward-thinking — e.g., the high-tech companies — and they are among the ones doing best, both in real terms and in the stock market. So at least for now, screening on the basis of social responsibility may not be a handicap at all. It could be a plus.

The “plus” could in some small measure be because good social policy improves morale or attracts more of the best people. (For example, IBM recently extended spousal benefits to same-sex couples. That could encourage a brilliant gay man or lesbian to join or stay with IBM. It would be less likely to cause someone outstanding to quit or fail to apply. So in that sense, IBM improves its position in the competition for talent.) Good social policy could also suggest a wider vision and a greater motivation. Or fewer regulatory actions and liability suits down the road.

Then again, if your competition is packing more chickens into the coop, to their discomfort but your lower costs; or using live bunny rabbits to test something quickly that you test in a more humane, roundabout way; or you subcontract to Chinese prison labor in order to get your costs down — in these and countless other ways, the less “socially responsible” company might be able to bring goods to market faster or cheaper than the competition, and thereby reward its shareholders with higher profits.

So it’s not at all clear that past success achieved by social screening equals future success. But it’s possible. And worst case, with a universe of choices this broad, it’s unlikely you’d be sacrificing much.

So I’ve gone from being a respectful scoffer to being — well, just respectful.

Meanwhile:

The Citizens Income Portfolio is a bond fund focused on current income. It seeks issuers “whose financial strength is improving, so the fund has the potential to gain higher than average return without taking on too much rate or credit risk.”

Citizens Global Equity Portfolio, still tiny with only about $20 million, seeks gains throughout the world (including the U.S.).

Working Assets Money Market Portfolio makes no sense for most individuals, since it lacks the extra juice of the E*Fund. I suppose if you had $100,000 in one of the other funds and wanted to switch temporarily to cash (but exceeded E*Fund’s $15,000 maximum), this would be a convenient place to do it.

Recognizing that most crazy liberals live in California — OK, let’s call a spade a spade: San Francisco — there’s the Muir California Tax-Free Income Portfolio. Can a fund for Greenwich Village and the upper West side of Manhattan be far behind? These funds (and here of course I am decidedly not paraphrasing from the press release) are for socially responsible investors who want to avoid paying taxes, leaving that socially necessary act to others.

And there are other potential ironies. Is a company that produces life-saving drugs, but sells them much cheaper abroad than in the U.S., gouging it’s richer U.S. customers, or practicing a sort of Marxian strategy of “from each [nation] according to its ability [to pay] to each according to its need?” Or what of George Washington’s dictum that “to be prepared for war is one of the most effectual means of preserving peace?” If true, might our top military defense contractors not be the best anti-war bet of all?

In short, finding the moral high ground ain’t always simple. But does that mean there’s no such thing as a good corporate citizen? Or that Sophia is wrong in trying to invest in them?

About 750 of the nearly 2,000 companies Citizens Trust has screened have made it to the “approved” list of investments. “In choosing its investments [reads the press materials], Citizens Trust portfolio managers seek successful companies that are contributing to a better, safer world and creating value for their customers, shareholders and the community. They do this through a series of screens that include environmental concerns, workplace policies and community involvement. In addition, Citizens Trust shuns investments in companies that derive significant revenue from nuclear power, weapons, tobacco or alcohol products or that use animals to test personal care products or otherwise treat animals in a cruel manner.”

Yesterday I described E*Fund, a relatively new quasi-checking account that pays 6% interest, yet charges almost no fees. Write as many checks each month as you want. Use it with CheckFree. No minimum balance.

E*Fund is the brain child of Sophia Collier. Other funds may copy her idea, but so far none has. E*Fund leads the pack. So, is this tall 40-year-old the typical Harvard MBA who cut her teeth at, say, Morgan Stanley?

Actually, she didn’t go to B-school.

Or college.

She was born in Brooklyn. At 19 published her autobiography, Soul Rush. Library Journal described it as a tale of “hop-skipping and ego-tripping through the Seventies,” and Book of the Month picked it up as an alternate. It deals with, among other things, the time she spent living in an ashram. My dictionary defines ashram as “(1) A Hindu hermitage.” (Nah.) “(2) A religious commune.” (Nah.) “(3) A commune of hippies.” (Bingo!)

Anyway, that was the Seventies. In the Eighties, she helped pioneer the all-natural beverage business by founding Soho Natural Soda, which she later sold to Seagram. I don’t know how much she got for it, but when for some reason she was moved to announce her net worth to Katherine Graham, publisher of the Washington Post, Mrs. Graham apparently replied: “How touching, dear.” (Proving yet again that one woman’s windfall is another’s wine-and-cheese budget.)

Part of the windfall went to buying the mutual fund business of Working Assets, which Sophia renamed Citizens Trust and which now has seven different funds and $370 million under management. In the words of the press release, Citizens Trust “is becoming recognized for its socially-responsible investing and product innovation.”

Well, E*Fund is an example of product innovation. But “socially-responsible investing?” Isn’t that just a code-phrase for substandard returns dragged down by an inability to invest in as wide a range of alternatives (like tobacco companies, say) as everybody else?

That’s the question we’ll explore tomorrow.

Well, it’s technically not a checking account, even though it functions like one. It’s a money-market account called E*Fund issued by Citizens Trust, a small mutual fund family. You could read all about it just by clicking, but then I wouldn’t have the fun of telling you myself, so PLEASE DON’T CLICK THIS.

E*Fund is in New Hampshire. To open an account you need $1,000 to start, but after that your balance can be as low as a penny or as high as $15,000 (or your monthly direct-deposited paycheck, if you earn more than $15,000 a month). E*Fund accepts both electronic “direct deposits” and regular old checks that you send in by mail. You start earning interest from the day your checks are received. (There’s a 5-day “escrow” period before you can spend it, to be sure checks clear.)

Apart from a $35 annual fee, and 65 cents each time you get cash from an ATM, the account is free — and pays about 6% interest.

E*Fund was the #1 money market fund for total return out of 287 recently.

“There’s no free lunch,” I told its founder, Sophia Collier. “You must be taking more risk than other money-market funds.”

No, it turns out, she’s not. Indeed, E*Fund sticks to ultra-safe investments. It doesn’t “reach for yield,” as do some of its slightly-more-risky competitors.

Rather, the secret of its higher total return is the free debit card all E*Fund clients get. It works like any other MasterCard debit card — use it to buy anything and the cost is immediately subtracted from your account balance.

But here’s the twist. As you know, when you buy something with plastic, the merchant pays 2% or so to the card company for processing the transaction. (It’s often a little more that 2% with a credit card, usually less than 2% with a debit card.) Well, with E*Fund, 1% of each transaction gets added back into the fund, up to a limit set by law (9.75% of the fund’s gross investment income.) So E*Fund’s award-winning total return is generated not by risk — but by innovation. (And by very low overhead and expense charges.)

Note that you do not have to use the debit card yourself to get this extra return, although it’s encouraged. If no one used it, there would be no extra return.

You get no float or frequent flier miles for using the debit card (which is why I wouldn’t use it if I had an E*Fund account); but neither do you risk racking up 18% interest charges (which is why those of you who run occasional balances on your credit cards should switch to debit cards).

The $15,000 maximum account balance is to keep rich folk from free-riding, as it were, on the debit-card transaction fees generated by ordinary folk paying for their groceries with the debit card.

Interestingly, here’s a case where the little guy can actually do better — earn a higher return — than the big guy. Sophia likes that.

Tomorrow, I’ll tell you more about Sophia’s background and philosophy. You may or may not agree with her politics, but you can’t beat her total return.

Incidentally, as an avid CheckFree user, I was happy to hear that, yes, CheckFree works fine with the E*Fund account. As do the checks you write by hand or print with Quicken or Managing Your Money.

OK, NOW YOU CAN CLICK.

Tomorrow: Who Is This Sophia Collier and How Come WE Didn’t Think of This?

Listen. I know most of you don’t come here for stuff about ostriches or ostrich recipes or (yesterday) their nutritional value, let alone to read about chickens. But this account, which has been making the rounds of the net (my apologies if you’ve seen it), I felt was important to share. Tomorrow I will tell you about a checking account that pays high interest. But today: a chicken account.

My thanks to Feathers, the publication of the California Poultry Industry Federation, from whence this account apparently originated:

“It seems the US Federal Aviation Administration has a unique device for testing the strength of windshields on airplanes. The device is a gun that launches a dead chicken at a plane’s windshield at approximately the speed the plane flies.

“The theory is that if the windshield doesn’t crack from the carcass impact, it’ll survive a real collision with a bird during flight. It seems the British were very interested in this and wanted to test a windshield on a brand new, speedy locomotive they’re developing.

“They borrowed the FAA’s chicken launcher, loaded the chicken and fired. The ballistic chicken shattered the windshield, went through the engineer’s chair, broke an instrument panel and embedded itself in the back wall of the engine cab. The British were stunned and asked the FAA to recheck the test to see if everything was done correctly.

“The FAA reviewed the test thoroughly and had one recommendation: ‘Use a thawed chicken.’”

Tomorrow: A Checking Account that Pays High Interest

Following up on the 401(k) comment I first did September 20 and some of the discussion since then, here’s an opposing perspective I hadn’t thought of, from Cola Allen.

“I like the idea of investing heavily in your own company’s stock — in or out of a 401(k). It must be a financially sound company. My reasoning is the culture (cult?) of downsizing. When a layoff is announced, the stock price generally rises. I consider it ‘my personal unemployment insurance.’”

Hmmm.

Could this be an example of “thinking outside the box” when the answer lies within the box? Well, it’s moot. No sane company would ever lay off such a creative thinker.

Lately, we’ve been talking about how to allocate your 401(k) assets, and you’ve taught me a thing or two. Now comes this question from a couple switching jobs:

“We plan to roll over our 401(k) to an IRA account at [a well known $18-a-trade deep discount broker named after the Roman goddess of grain from which comes the word “cereal” (and also the name of the first asteroid to be discovered), but I don’t want to name it, lest I appear to be plugging that firm, toward which I have warm feelings, but from which I wish to maintain my editorial independence — A.T.].

“We called and talked to the fund manager of our previous employer and were told that if we rolled over to an IRA account, no tax will be withheld and no penalty will be applied. Is this true? Is there any limitation such as gross income or $ amount that can be rolled over in one year? Is there anything that we need to watch out for?

“Our concern is that if our combined income is about 100K, can each of us roll over about 30K this year without getting any type of penalty? Please do not include my name or email address in your reply.”

The information you got is correct. The IRS places no limit on the size of a retirement account that can be rolled over from a company plan, once you leave your employer, to your own personal IRA rollover account. (Your other good option would be to roll the money over to your new employer’s plan, if you have a new employer, and if its plan accepts rollovers.)

Incidentally, you are wise to be rolling this money straight from your retirement fund to the IRA, rather than having it paid to you first and then passing it on. If you did that, 20% would be withheld for taxes (which you would not recoup until tax-refund time) and you would also run the risk of somehow missing the 60-day deadline to complete the rollover. Then you’d have to pay taxes and (if under 59-1/2) a 10% nondeductible penalty.

There are just a few arcane exceptions to what you can rollover, but these don’t apply to you, as best I can tell. The only one remotely worth mentioning is that voluntary after-tax contributions you may have made to your 401(k) cannot be rolled over. Very few people make these extra contributions, but many retirement plans do allow them. For anyone who did make these extra contributions, that money comes back to you free of tax (because you already paid tax on it). But the money those after-tax contributions earned remains happily under the shelter of the IRA rollover.

Tomorrow: The Last Word (for Now) on 401(k) Strategies

Recently, I suggested that putting all, or even many, of your 401(k) eggs in the your-own-company-stock basket — as an alarming number of participants seem to do — is dumb. (Would you advise a friend to put his or her entire retirement nest egg in your company’s stock? Then why do it yourself?) According to a survey cited by The Wall Street Journal, that’s where 42% of all 401(k) assets sit.

“Regarding your comments on 401(k) allocations,” writes Dennis Faucher of Hewlett-Packard, “did you consider that the percentage in company stock could be high because of aggressive company matching or discounts on stock purchase? This is no excuse for not being diversified, but may be one of the reasons that the percentage is so high.”

Well, no, I hadn’t considered this. See how self-employment can limit one’s experience? Dennis and others of you who were kind enough to point this out are certainly right: this twist must certainly skew the percentages somewhat.

As John McInnis explained: “Your column on 401(k)’s is right on the money — people do have too much invested in their company stock. But you and The Wall Street Journal missed an important point. Sometimes we have no choice. Take my own 401(k) as an example. I invest my contributions 100% in an equity fund. Yet when I got my latest statement, I found that roughly one-third of my retirement stash is invested in company stock. How can this be? Simple. My company (Sanders, a unit of Lockheed Martin) matches contributions 60% on the dollar to the first 8% of salary. A great deal! But there is one catch. The match is made entirely in company stock. We have no choice in this, nor can we reallocate it later on. This, coupled with the fact that the stock has done quite well lately, means that I (and probably most other employees here) are overweighted in company stock. Short of leaving the company, I can see no way out of this situation. I suspect that a lot of other big company 401(k) plans are similarly run.”

Tomorrow:v A 401(k) Rollover Question

“What I don’t understand is why more investors of the long term and hold type don’t just put a majority of their holdings (particularly Keogh and IRA) into BRK and go to sleep for ten years. You have the best money manager money can buy for free. Does anyone really doubt that he will do better than the historical average of 10% growth long term in equities? Are there really more than a handful of money managers who have done as well? The stock has always sold at a premium and always will, so accept the fact and buy it. To me it’s simple: if you think that (1) you can pick stocks better than Buffett, (2) you know he will die soon, or (3) you have found someone better than him to advise you than stay away from BRK. Otherwise load up and wait.”

Well, that one’s a lot harder to answer than the question from a couple of weeks ago about shorting BRK.

In the first place, if you do this at all, I disagree it’s “particularly” for a Keogh or IRA account — quite the opposite. Because BRK pays no taxable dividends, whatever benefit you get from buying and holding will come in the form of long-term capital gains — sheltered from tax until you sell, and then taxed at what’s likely to be a favorable rate. Whereas the same gain within a Keogh or IRA will be taxed as ordinary income, at the full rate, as you withdraw it. I’d use the tax-sheltering power of my Keogh or IRA to shelter the kinds of investments that generate taxable income (including capital gains you actually take every so often, as opposed to those that just mount untouched for decades), and hold investments like BRK in my regular account.

But what of the broader question? I certainly wouldn’t dispute Warren Buffett’s superior skill. But by this logic, NO price is to high to pay for BRK.

It may be instructive that Buffett himself was selling the stock, in effect, earlier this year — not his own, $100 million of new stock . . . but since he controls half the existing stock, it’s at least half like selling shares of his own.

He had a lot of good reasons — for example, at $32,000 a share, giving a child even one share exceeds the annual gift tax exemption — and so he wanted to issue a new class of shares in piddly little $1,000 chunks, 30 of which would equal a “real” share.

It was only a tiny amount of stock being sold (the overall company was being valued at $30-odd billion, so $100 million was spare change).

Still, the smartest investor in the world was selling Berkshire Hathaway stock. So what did the market do? It immediately bid the price of BRK up another $2,000 a share. If Buffett was selling, the market figured, it must be yet another brilliant move for Berkshire Hathaway, and so yet another reason to buy.

After hitting $38,000 a share, the stock is back down to around where it was when he issued the baby shares at $1,000 each (and they, too, are selling around the same price).

Can we assume it’s always a good buy and will “always” sell at a premium? Two events that could shrink that premium are Buffett’s eventual retirement and, perhaps more imminent, a cut in the capital gains tax. If you owned $5 million worth of BRK, almost all of it profit, might you not be tempted to take part of your profit if the tax bite shrank? At least for a while, eager sellers might outnumber eager buyers, damping down the premium.

In sum, if I did this at all, I wouldn’t put “a majority” of my holdings in BRK as my correspondent suggests. But maybe that’s because I feel like such an idiot for never having put ANY of my holdings there. Had I invested $10,000 in the stock when I first wrote about Warren’s brilliant annual reports, in a sort of “book review” for Fortune, I would have a cool million now. A hundredfold gain.

Oh, woe!

But for that same result to hold for the next couple of decades or so, my missed million would have to turn into a missed $100 million — and the total market value of BRK would have to grow to $5 trillion. Somehow I don’t see this happening.

I know, I know: you’d settle for a tenfold gain over 20 years. And do you know what? BRK just might produce it. That kind of appreciation works out to an impressive but not other-worldly 12.2% a year compounded.

But I wouldn’t put all my eggs into even the Buffett basket, and the eggs I did put there would come from outside my Keogh or IRA.

Tomorrow: More on 401(k) Allocation

From Frank Nash: “I question your recommendation of Lindner Dividend, categorically, and as a fund which “makes a little money in down markets.” In fact it lost money (-4.08 in ’87, -6.51 in 90, -3.31 in ’94) in the last three down markets while underperforming the S&P 500 for (at least) the last 15 years. A fund as mundane as Janus, has a lower (Morningstar) risk rating and has outperformed Lindner Dividend consistently.”

Thanks, Frank. You’re right that no one fund can categorically be recommended as the best. But my sense was that Syd didn’t want a host of options, he wanted a concrete suggestion to boost the return — conservatively — for his 96-year-old foster mother-in-law. My own feeling, based on what I’ve read about Eric Ryback, who manages this fund, is that Lindner Dividend is a good choice.

Janus has outperformed Lindner Dividend modestly over the last 5 years (15.4% compounded versus 14.3%) and very substantially over the last 10 (15% versus 11.2%). But Janus’ “standard deviation” — a measure of volatility and thus potential risk — was 2.2 versus 1.6 for Lindner. For example, during the bear market from July 1990 to October 1990, Lindner was down 3.6% while Janus was down 17.2%. So the Morningstar risk rating may not be the only number to look at.

Janus is 95% invested in stocks; Lindner Dividend is 43% in stocks, 39% in fixed income, 18% in cash — another reason to think it could be a more “defensive” holding for a 96-year-old.

(It is Lindner Dividend’s conservatism, of course, that accounts for its trailing the S&P 500 all these years. It’s pretty hard to beat a rising stock market when less than half your assets are in stocks.)

Lindner Dividend’s objective is to “generate relatively high current income and growth of income.” The Janus Fund seeks “maximum capital appreciation by investing in equity securities using aggressive investment techniques.”

So I stick by my suggestion, though not in the sense that it is the perfect recommendation (hey: free advice is worth what you pay for it!). I think it could double her income without taking what would seem to be, in the context of the situation, undue risk.

Thanks for your good question. And thanks to my friend Peter Tanous, author of Investment Gurus, due out at the end of this year, for his help with the answer.