Speak Up If Your 401(k) Lags

Frightfully few employer-sponsored retirement plans have socially responsible investment choices available to their employees. It does not have to be this way. Insofar as adding a mutual fund to a plan, it is extremely easy from an HR perspective. It just means placing a phone call to your 401(k) administrator. Almost all employers, even the very large ones, have contracted this duty out to Third Party Administrators (TPA's). More than likely, the TPA is a well-known financial institution where mutual funds is their business: your Vanguards, your Fidelities, your Scudders of the world. Even the 401(k) plans that are offered by Professional Employment Organizations like Administaff or ADP have the ability to add almost any fund out there with a simple web interface that is available to your HR department.

HR Administrators want their employees to be engaged in their retirement, so if enough hay is made, they will listen. But, even if they are not receptive initially, be persistent. The only cost that MIGHT be shouldered by the employer is the cost of communicating the change in options. More often than not, even this is not required, because the TPA makes the necessary changes on a hosted web site for the employees.

While you're at it, take a look at ALL the investment options. Are they made up exclusively of high cost, actively managed funds? There may be a reason for this. In exchange for waiving set up and administration fees, these TPA's often only offer the high cost alternatives which pad their own pockets. Employers are all too happy to accommodate them because it means no out-of-pocket expenses for set up and administration. Unfortunately, when it comes to actively managed funds, you most often get what you DON'T PAY FOR. Actively managed funds consistently lag the indexes, mostly because of the high fees they pass on to shareholders. It may not sound like much, but over 40 years, the extra fees can add up to well over six figures. For example, if your 401(k) balance is $50,000, the extra 1 percent or so amounts to $500 PER YEAR. This extra 1 percent might be worth it if it was accompanied by sound advice that took into account the employee's entire financial picture, but statistics show that advice is rarely asked for or given.

Employers who offer 401(k) options have a fiduciary obligation to look after their employees' funds, so make them live up to it. I think they would all too happy to accommodate, seeing as a healthy 401(k) is one of the most important employee retention tools available.

Now, if you are a small business owner, First Sustainable can offer 401(k) administration and we make certain that the low-cost options AND the socially responsible options are available. Furthermore, it comes with free consultations for every employees and their spouses. I would be happy to chat with you about it.

How's That "Do No Evil" Coming Along?

A company that proclaims as its motto "Do No Evil" invites a certain amount of scrutiny from socially responsible investors. Google is finding out that it is hard to live up to. Let's take a look.

The KLD "Pass" Database, which is one of the widely used research tools for the SRI community shows "diversity" as a "concern". Otherwise, it passes as an otherwise socially positive company. I, personally, believe they need to do more work on it, especially now that Google has shown its willingness to be in bed with the Chinese government.

This week, Google caved in to demands from the Chinese government to censor its search listings. To be fair, Google was the last holdout on this point among its competitors in the search space. Their defense was that a "little bit of freedom" is better than none at all, considering that the Chinese government had within its power to block the service altogether.

Another troubling story emanating from Google this week entails a refusal by the company to hand over search data to the feds. The feds claimed a need to have the data to combat child pornography and enforce laws dealing with the same problem. Most civil libertarians would say the company did the right thing.

Truthfully, I am surprised that the media has not made more of the fact that Google and Yahoo must now be the largest beneficiaries of the global pornography industry. How do we know this? Check out Wordtracker's list of the top 1,000 searches without the adult filter on. Fully one half of the top 1000 searches (accounting for five percent of all searches) are for porn-related terms. Seven of the top 10 were porn related (six if you think all the searches for "paris hilton" were from "Simple Life" fans and not from the fans of her well-publicized sex tape). Jennifer Aniston appears twice in the top 1,000. Twenty two percent of the searches for Jennifer Aniston were in the term "Jennifer Aniston naked" (13,132), as opposed to "Jennifer Aniston" (44,354).

Many of the searches are clearly conducted by those seeking illegal pornography, including "preteen" (#31), "incest" (#56), "lolita" (#61), "teen girls" (#71), and "preteen models" (#77).
Both major search engines serve PPC ads along side these terms.

The companies themselves would have to release data telling us what the click to impression ratio would be, but I would bet that the price of these keywords is more than average. This means that a significant portion of their revenue is derived from those selling pornography.

In our business of socially responsible investment advisory, we are careful to never pass judgment on the moral correctness of anybody's social criteria. However, if a company is willing to proclaim its virtue in its company motto, I would expect it to cover its bases more carefully.

Natural Food, Unnatural Prices

Stan Cox of Alternet wrote the above-named article, putting Austin's hometown favorite, Whole Foods Market, to the Wal-Mart test. It would not come as a surprise to anybody who has every shopped at WFM that a basket of similar groceries came out to be significantly more expensive than Wal-Mart. Twice as expensive, as a matter of fact. The hypothetical baskets came to $232 for Wal-Mart, $564 for Whole Foods.

Cox then subjects Whole Foods to the so-called "Wal-Mart Test", referring to a previous article wherein he determines that a typical Wal-Mart worker is unable to afford to shop at Wal-Mart while supporting your average family. Even though Whole Foods is on Fortune's "100 Best" places to work, presumably because they pay better wages and benefits, Cox concludes that a typical Whole Foods employee is also unable to shop at that store.

The underlying pun here is so bad, it is begging to be used. The Wal-Mart vs. Whole Foods bout is like comparing apples to oranges. First of all, Whole Foods has never claimed to have low prices. They claim to have high quality, and they deliver that in spades. You can not get organic, locally grown produce at Wal-Mart. Secondly, it is unfair to paint Whole Foods with the low-wage, worker-exploiting brush. Where in the U.S. do grocery clerks and stockers get a sustainable wage? Nowhere. Third, has he ever shopped at Whole Foods? I do, and I see workers doing their shopping in the store all the time.

The Economic Value of Corporate Eco-Efficiency

One of the biggest hurdles to the mainstreaming of socially responsible investing is the perception that there must be a sacrifice in performance to engage in SRI. The question alone is loaded, but in general, it is not so. More on that later. Innovest Advisors presented the winning paper for the 2005 Moskowitz Prize (awarded annually for research in the field of socially responsible investing) which hopefully debunks this perception once and for all. To be fair, the paper addresses SRI in terms of practicing "eco-efficiency", eliminating wasteful business processes in the course of running an operation. This does not apply to those that define SRI as screening certain companies based on certain social criteria, although that would depend on what that social criteria is.

The paper makes the point that not only is there NO penalty for investing in eco-efficiency, but that there SHOULD BE a premium attached. Ec0-efficiency is certainly a harbinger of other efficiency benchmarks. Going over the empirical minutiae would be beyond the scope of this blog.

So, it begs the point: If there is no penalty to investing with an SRI methodology, why wouldn't you?

Hydrogen Fueling Stations in Minot, ND?

Hydrogenix (NASDAQ:HYGS) issued a press release nine days ago indicating their intention to build a hydrogen refueling station in Minot, ND. This would not be unique, except that they also contracted to electrolyze water on site with energy from a nearby Bismarck windfarm. So, with wind energy, they will obtain their hydrogen for vehicles from simple H2O. Everything is clean and renewable. Hydrogen fueling stations are beginning to dot the land, but the majority of them obtain their hydrogen from methane or other non-renewable source.

This news makes for a good press release, but there are many problems with this method. Electrolyzing water requires many times the energy to split the molecule than is yielded in the process, which is why other stations are using methane, itself well more expensive than refining plain old gasoline. Many clean technologies are more expensive because they lack large economies in manufacturing, but this particular conundrum is not going to be solved by volume.

Although it will strike many greens as anathema, I think the effort to get the transportation infrastructure running on fuel cells is misplaced effort. Fuel cells will be a major force in energy production in future decades, but its promise lies in stationary applications. The properties of hydrogen are just too problematic to make it competitive in mobile applications. When you take into account the cost to electrolyze, the cost to compress, the cost to store, and the cost to transport the gas, it becomes clear that it will have a hard time being competitive with non-renewables. If you add to that the hundreds of billions required to put a fueling infrastructure in place before vehicle sales can gain traction, the proposition becomes a loser. Although I wish it would happen through virtue alone, the American economy is not going to adopt non-polluting transportation sources unless it presents a clear monetary advantage.
Sorry.

Fuel cells should certainly be explored for stationary applications. For example, an infrastructure that currently carries natural gas can be adapted to carry hydrogen to homes and businesses where electricity is generated on site by a fuel cell stack.

Further, the strategy to wean America off its gasoline addiction is multi-pronged, but the technologies are available right now. First, the auto industry should build lighter cars using carbon materials that are just as strong as steel. This alone would shave 20 percent off our vehicle energy usage. Second, the auto industry should push plug-in hybrids. These babies get their electricity from a battery that is charged at home in addition to the standard braking energy. They deliver enough juice for most daily commutes and city driving. Moreover, if a customer who is concerned enough to get a plug-in hybrid also gets his electricity from clean sources such as a Green Choice-like plan, the wind energy gets channeled directly to vehicle usage instead of electrolyzing water.

This is the way to go. Any thoughts?

A Rundown of SRI ETF's

In only a few years, exchange traded funds have grabbed an astounding share of invest-able assets. They have existed for years, going by the un-sexy moniker "closed end funds". In the late 1990's, the American Stock Exchange jumped on the indexing bandwagon and listed sexier-sounding closed-end index funds that went by the names Spiders (to reflect the S&P 500 index) and Diamonds (to reflect the Dow Jones Industrial Index). As investors awakened to the high costs and underachievement of their actively managed mutual funds, these simple instruments caught fire.

Today, there is an ETF for virtually every flavor of index, including SRI and its various off-shoots. I am going to discuss the pros and cons of these funds, but first a rundown of the options out there.

1. Powershares WilderHill Clean Energy Portfolio (PBW) - Meant to reflect the WilderHill Clean Energy Index, the fund has returned approximately 14% since its inception last March, far outpacing the S&P 500. The expenses are capped at .6%. The components can be found on the AMEX web site.
2. KLD Select Social Index Fund (KLD). Part of the Barclays iShares family, the index has underperformed the S&P 500 over the last year. The expense cap is at .5%.

There are other indexes without corresponding ETF's that track fuel cells, clean water, environmental, and other SRI styles.

Pros

1. Simplicity. ETF's give you instant diversification in one security.
2. Liquidity. Unlike open-end funds, these symbols are traded throughout the day, giving you the option to buy and sell at any time.
3. Low Transaction Fees. Unlike many open-ended funds, the cost to get in and out of these funds is just a commission for the trade, which depending on your broker can range from $0 (such as offered at First Sustainable) to much more than that. Many SRI open-ended funds charge a front end load, and possibly a back end load as well.
4. Relatively low expenses. Compared to the actively managed SRI funds, expense ratios in the half percent range sound great.

Cons

1. Automatic Investment may increase transaction charges. Since an ETF consists of placing a stock trade, you may get dinged this transaction charge every time you invest. For example, if you are saving $100/month, but your broker charges you $10 every time you purchase, you are getting dinged 10% up front every time.
2. "Relatively low" expenses does not mean "low". In the pros, I mentioned relatively low expenses compared to open ended funds. However, the largest ETF's charge five basis points as a management fee. Why does it take ten times that to run these passively indexed funds? These funds do not need to keep up with investing and redeeming shares. I believe that they are taking advantage of the SRI customer, who is typically willing to pay more for any product to be assured of its social responsibility. This irks me, as I believe it prevents the mainstreaming of the SRI strategy.
3. Tax Inefficiency. Just like all mutual funds, ETF's are required to pass through capital gains and dividends. However, they are not able to pass through losses, only those losses offsetting gains. Owning individual stocks can make managing your tax bite more favorable.
4. Premiums and Discounts. It is important to track the market cap of the ETF compared to the Net Asset Value of the underlying shares. The WilderHill ETF for example has a 20 percent premium right now. This means that if the fund were liquidated, you would not get your full investment back. Theoretically, this can work the other way with discounts, but if a discount to NAV gets too pronounced, a fund board just votes to open up the fund, and *poof* the fund starts trading at NAV again.
   

Again and again, I have stated in this space that the key to long term success is reducing costs and adhering to passive styles. To that end, ETF's are great, especially for small investors. For large investors (those with $50,000 or more), I still recommend the Folio Method of investing.

Whole Foods and the Future of Green Power

Austin is a great town for the green-loving, tree-hugging, hybrid-driving crowd. We not only have the most successful green power program through Austin Energy. We also have the prototypical tree-hugging corporation in the organic grocer, Whole Foods Market. This week, Whole Foods became the largest private consumer of renewable energy in the nation with a 458-million kilowatt-hour purchase of wind energy credits. That is enough to offset the energy usage at all Whole Foods Stores. The way these deals work is that they buy the credits through a producer like Colorado-based Renewable Choice Energy. Although their stores may be hooked up to grids using non-renewable power, the renewable electricity is brought online to offset the use of another consumer who would otherwise be using non-renewable sources.

Back to Austin Energy. I have been a customer of Austin Energy's Green Choice program for three years now. Green Choice means that the equivalent kilowatt-hours we consume in our home is purchased from a wind or solar provider. For a couple of years, the rate I was paying to be green was about 35 percent higher than the typical Austin Energy customer who used the basic (non-renewable) service. Last year, as natural gas prices spiked, however, my bill remained the same while the basic customers saw a fifty percent increase. My bill is now cheaper AND greener. Green Choice customers lock in their kilowatt-hour price for 10 years.

Therein lies a great model for utility companies, who love nothing more than locking in rates of return. Every couple of years, Austin Energy puts out a bid to buy the electricity production of a renewable energy plan, or the "offtake". Wind always wins. Solar production is not quite there yet (although AE runs one of the largest solar plants in the nation, too). AE offers to buy the offtake for 10 years. The wind farm developer, whose costs are fixed in the up-front purchases of wind turbines, needs this kind of contract to get financing for the project. AE then signs up enough customers in the Green Choice program to consume that offtake. When they reach the number of new Green Choice customers, they freeze the program. If their Green Choice customers consume more electricity than the wind farm produces, AE has to buy renewable energy credits on the spot market, a more expensive proposition. But, the green choice customers get a locked in cost of energy. The utility gets a locked in wholesale rate. The wind farm gets their contract.

Everybody is happy, and able to project their income and costs years out into the future, which is what utility company shareholders want. However, there is room for improvement. While researching a paper in grad school (which I never actually finished), I discovered one hitch in AE's program and others like it. While utilities put out 10 year contracts to bid, financing institutions who lend money to build wind farms like to see 17 year contracts before they are willing to lend. Without the 17-year contracts, the developers need to put up more equity. More equity reduces the number and size of projects going forward. The seven year difference is holding wind and solar back!

Dealing with the fluctuating costs of their feedstock -- whether coal, oil, or natural gas -- has always been the curse of any electric utility. In most cases, regulators only allow the utilities to charge a politically-expedient amount and the rates of increases are usually reined in as well. If the commodity price spikes before regulators let their rates catch up, the utility just has to eat the difference. Wind and solar eliminate this problem. Green programs like AE's should be expanded.

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When Buying Organic Pays (and doesn't)

Consumer Reports put out an article on the items that are worth buying when labeled organic. It goes further by explaining which products are "must be" organic, "can be" organic if price is no object, and "don't need to be" organic.

For many products, the price premium attached to "organic" has invited abuse among food companies. In Austin, a gallon of Horizon organic milk is $5.25 right now at the HEB Grocery store, sixty percent higher than the non-organic store brand. Rightly so, organic apples, strawberries, grapes, and bananas carry a similar premium at the Whole Foods Market down the street (HEB has lousy organic produce). Like so many new developments, however, unscrupulous companies have glommed on to the organic movement to take advantage of the price premium without delivering any real value. Organic cosmetics? Organic ice cream? Come on. I actually saw a bag of potting soil at Home Depot labeled organic as a point of differentiation, as if soil was ever anything but organic.

The Future of Hybrids

The pictures below were taken from an article hybridcars.com about future hybrid concepts. Automakers are starting to really clue in to how to up the fuel efficiency. It isn't with the engine. The key to upping fuel for hybrids, and all other cars for that matter, is to replace steel as the material of choice for the body. We have new materials now that are far lighter, but still just as strong.

Another intriguing technology to watch in hybrid cars is the evolution of the "plug-in" hybrid. Some automakers, and even some hobbyists, have rigged hybrids to run on batteries that can be plugged in at your home. You still have a gas tank, which eliminates the range problem, which has hampered the acceptance of other electric vehicles. However, especially if you mostly drive within urban areas, the electric charge is enough for 90 percent of your consumption.

Even if your electric utility is a coal-fired plant, the kilowatt-hours will be cleaner than most automobiles on a per-unit-of-energy-consumed basis. If you live in a city such as Austin with an option for getting your power from renewable sources, your footprint from driving can be drastically reduced with a plug-in hybrid.

These technologies are here today. If you combine light weight materials, plug-in hybrids, and green choice electricity, fossil fuel consumption can be reduced enough to eliminate dependence on foreign oil. Of course, we might be held hostage by foreign auto-makers... that's another story.

Sunlight powers streetlights, Wi-Fi access

Before I go further, let me just get it off my chest. Texas 41, USC 38. What a game! Now back to the post:

Staying on my theme of unique business models powering technology commercialization and sustainability, check out this article from CNET.com. To summarize, a company in Scotland has developed a solar-powered streetlight which can also be used to power a Wi-Fi or WiMax router. The company is doing a test run in the Scottish town of Dundee.

The article does not touch on what model these streetlights will be sold. However, imagine this. A city needs streetlights. A city does not NEED a universally accessible wi-fi cloud, though having one can be a boost to business recruitment, image, and emergency communication capabilities. Furthermore, it can enhance the city's schools by bridging the gap for disadvantaged kids and involving parents. Schools enhance property value. Increasing property values enhance a city's tax coffers.

Community wi-fi initiatives are pitifully underserved. Municipal priorities are rightfully focused on police, fire, EMS, sewage, hospitals, infrastructure (such as those streetlights), etc. If a city has extra budget -- and when does that happen? -- wi-fi just does not fall onto the radar. Some cities, such as Austin where I live, have non-profit organizations dedicated to bringing free wi-fi, but they are mostly geared towards getting store-owners to buy equipment, and the store-owners use it as a means to generate traffic. Austin is one of the most wi-fi'd cities on earth, and I still get frustrated with its lack of availability and uniformity. When I leave town, just finding free wi-fi is a pain.

Now, an innovation such as the streetlight product, can pay for itself while helping the city save on electric bills and providing that needed wi-fi connectivity. Going solar always involves a large up-front expense, but the elimination of ongoing electricity bills. I envision a model whereby a city can use its municipal borrowing capacity to fund the purchase of the units and the cost of setting up the wi-fi cloud. Immediately, the city's increased cash flow from the elimination of electricity usage can fund part of the interest and principal payments on the muni bonds.

Secondly, the wi-fi cloud can be outsourced to a management company which will, in turn, cut the city on royalties from advertising. In many places, when you log on to a wi-fi network, the opening "splash page" on the browser requires a login. Don't you think local merchants would love to target upscale, laptop-owning right in their neighborhood? The city could sell premium ad space to, say, realtors specializing in one particular neighborhood. Grocery stores could show their insert specials. Conversely, advertisers could target only upscale neighborhoods for products that sell in those neighborhoods, and increase reach in the poorer neighborhoods.

This model really isn't that different from the model used in radio today. The government gives a license to a company that will put up a tower and broadcast commercial messages as long as they can co-opt the tower in times of emergency. The city could also mandate decency standards for the splash page.

So, revenues from advertising, cost reductions from electricity bills pay the coupons on the interest and principal from the underwritten bonds. The city gets a wi-fi cloud for free. Schools win. The community wins. The technology wins. The environment wins.

2006 Technology To Watch: Thin Film Solar

Something about the start of a new year inspires writers the world over to make their bold predictions. For an advocate of passive investing styles, predicting the direction of the market seems counter-productive, so instead, I will venture into technology commercialization and predict that 2006 will be the year of thin film. One of the most intriguing companies in this field just happens to be down the street from me. Heliovolt was listed on PriceWaterhouseCoopers' Futurecentric List for 2005, a development which will surely raise its profile. Heliovolt is not a public company, and I have no connection whatsoever with management.

Solar Energy as a technology has been held back for decades due to the industry's reliance on silicon. Solar panels are rigid, difficult to install, fragile, and most of all, expensive. The silicon alone costs approximately $2.50 per watt installed. In the most hospitable envinronment for silicon -- those areas with bost abundant sunlight and generous tax subsidies for installing solar -- the cost of generating solar electricity comes to $5 per watt. To be competitive with fossil fuels and even wind, that figure needs to be in the $3 neighborhood.

Heliovolt uses Copper Indium Celenide, a thin film capable of generating electricity. Thin film can be incorporated into shingles and curtain walls. Some visionaries and other technologists foresee solar energy-generating paint on the horizon. I am not the person to consult on the engineering behind any of this, but Heliovolt claims that its manufacturing process can lower the price of installing solar energy to $1 per watt, knocking out a significant chunk out of a non-renewable advantage.