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Tag Archives: #ETHICS

ESG : SOCIAL INVESTING = INVESTING

Even the Asian elephant in the room is endangered.

Over 80% of the market value in the S&P is attributable to intangible factors (environmental capital, sustainability governance and stakeholder relationships). Less than 20% is accounted for by physical and financial assets.

Global sustainable investing assets grew by 61% over the 2012-2104 period and now stand at $21.4 trillion. The domicile of these assets is telling; 99% are in the United States, Canada and Europe.

Environmental and social issues affect both valuation and financial performance. If your investment decisions focus only on financial disclosures, you will not be getting a complete picture of the drivers of value.

Global ethical principles have never been more important or, it appears, more wanting than in current times (i.e. VW, Phoney Express aka Well Fargo, global Trumpism, and global lawsuits imperiling not just returns but the very viability of global commerce beyond national borders).

Community manager education world tree concept with colorful abstract leaves and earth icon illustration. EPS10 vector file organized in layers for easy editing.

The UN supported Principles for Responsible Investment (PRI) ,a not-for-profit organization, held their 10th anniversary conference in Singapore last week (Sept. 6-8th) which I attended. No conference bag full of binders and junk mail at this conference, your 1 page agenda fold up into your name tag and all meals were vegetarian, a subtle but effective message. Forbes Magazine The conference domicile was not chosen by chance. Asia has been termed the cradle of disorder for a reason, it is home to 5 of the world’s 7 billion population and on metrics of social investing if the game has even started it is is the 1st inning. When a region has practices like dynamite fishing and farmers still clear land with a match much work lies ahead.

Chris Sanderson, Co-Founder of The Future Laboratory focussed largely on the sustainability of the capital markets. He characterized global citizens as being tired of austerity, wary of politicians and perhaps even more wary of brands. Backlash culture; http://shop.thefuturelaboratory.com/products/backlash-brands-report.

Elliott Harris, Head of the United Nations Environmental Program (UNEP) gave a rousing speech on environmental and social sustainability. The end game is that all investments will be social. Elliott introduced the concept of thick profit versus thin profit, a concept akin to quality, hard to define, but you know it when you see it.

Georg Kell of Arabesque Partners Arabesque spoke of  Generation S, a cross-section of all age groups working towards making the world a better place, one worthy of handing down to future generations. While ESG (environmental, social & governance) alpha may prove illusory, ESG smart beta appears to have legs.

Millennials were of course discussed with the most shocking realization being that the oldest ones (born 1990) are in their mid 30’s now! Generation D (Digital), whose only need or want in life is wifi and lithium, was out in full force, albeit well behaved and overall attentive. The 600 conference attendees were largely baby boomers, representing approx. 50% of global financial assets under management (AUM), signatories to the PRI whose mission states, “We believe that an economically efficient, sustainable global financial system is a necessity for long term value creation. Such a system will reward long-term, responsible investment and benefit the environment and society as a whole.” Clear, concise, devoid of the typically mumbo jumbo one gets when issues like climate change and the environment are normally tabled.

The session run by GS alum David Blood, Managing Partner at Generation Asset Management Generation Investment Management was excellent. Al Gore is the Chairman of Generation Investment Management. If Obama delays the election to allow Clinton to get her legs perhaps they could run as a Third Party choice? Could not lose with the ticket “Blood & Gore”. Both men can readily point out Aleppo on a map too. In any event, David’s sage words rang true to all in attendance. Finance and capitalism is not working for everybody was a key statement. The transition to a low carbon economy will clearly not be an easy one. A full 1/3 of aggregate world equity and fixed income market value lies in the cross hairs. We can do this the hard way or the easy way, but de-carbonization is a trend now moving under its own power. Mr. Blood noted that while the majority of global asset managers in attendance (120 signatories, 50% of global AUM) were managing to sustainability factors, those not present (i.e. non PRI Signatories) are largely American. The reasoning to date for USA firms reluctance is that becoming signatory could put them in breach of their fiduciary duty. We must collectively get the remaining 50% on board as priority #1.

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Investing for the long term. Short termism. A great panel on investing for the long term had some serious panel power. The headliner was Hiro Mizuno, CIO of Government Pension Investment Fund, Japan (GPIF), the world’s largest funded pension plan. GPIF manage their liabilities to a 100 year time frame. Their most recent result showed a loss of ¥5.3tln (US$5.2bln) for the current fiscal year through March 2016. The fund’s quarterly loss through June 30, 2016 was > ¥5tln (-3.88%). They run ¥130 trillion (US$1.27 trillion) leading Mizuno-san to characterize the latest qtly loss as peanuts. The joke was not well received, perhaps because it was so unexpected, leading Hiro to quip that perhaps there were Japanese pensioners in the audience. The fund increased their allocation to equities in recent years. Global equity investment totals US$600bln, 80% of which is allocated in a passive fashion and 20% ($120bln) of which is actively managed. All investment are mandated to external manager, counter to the global trend in the pension arena of in-sourcing. Fellow panelist Paul Smith, President & CEO at the CFA Institute noted that one advantage of being old is that “you see everything twice” with such decisions as out-sourcing vs. in-sourcing set to very long term market cycles.

Several panels touch on infrastructure finance with GPIF mentioning their joint investment effort with Canada’s CPP on ESG brownfield infra projects. Mizuno-san noted the challenges of crafting/originating greenfield projects as funding challenges often drive the cheap option and the cheap option is usually dirty (materials, supply chain, etc.). GPIF will not finance dirty deals, full stop.

A deeper discussion ensued on better was to measure and compensate performance with a general aversion shown to managing to qtly earnings guidance. The average hold period for SPY, the > $100bln S&P 500 SPDR, the largest ETF tracking the benchmark for US stocks is 5 days. In the last 15 years 52% of the Fortune 500 companies as no longer in existence. In 1955 the average Fortune 500 company life expectancy was 55 years, in 2015 it is 15 years. Traditional valuation metrics clearly must evolve to address the realities.

ESG toolkit for Fund Managers: http://toolkit.cdcgroup.com/

Q&A with Author of the PRI’s Practical Guide to ESG Integration for Equity Investing

The ESG investment construct must be turned on its head, to my mind. Social investing = investing and “dirty” or non-socially minded investment should be the type requiring explicit sponsor/board/member approval. JCG

Follow me on twitter @firehorsecaper

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Shenzhen “beach” September 2016

Mark Carney, Chair, Financial Stability Board (FSB). Awesome 30 minutes of your life, watch it. Carnage, indeed.

 

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$CXW, $GEO REIT – DOJ THROWS AWAY THE KEY ON PRIVATE PRISONS

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Investors in listed private pension companies Corrections Corporation  of America (CXW), and The GEO Group, Inc. (GEO), got murdered yesterday. $CXW fell nearly $10 to close $17.57 (mkt cap $2.1bln), down 35% on the day, with $GEO closing down 40% to $19.50 (the smaller of the two, mkt cap $1.44bln).

Most articles published since that I have read focus on the morality issues, but IBC readers have their own steady compass on that front, the Peanut Gallery is here to guide your investment thinking and analysis when tape bombs like Deputy Attorney General Sally Yates memorandum to the Bureau of Prisons (BOP) hit the wire (link to actual letter at top of post). Amazon’s Washington Post broke the story that stated the US Justice Department plans to end the use of private prisons.

This is a big deal and should not be discounted as a driver of the valuation of these companies going forward. The Democrats have had this issue on their radar for some time. Obama has been keen to push reforms of the criminal justice system in the US, acknowledging the fact that the US incarcerates too many,almost 0.7% of the entire population (the “1%” nobody likes to talk or think about) with an undue weighting of African-American inmates (2.7% versus 0.5% for other races). It is clearly too late for “Obamabars” or whatever catchy reform slogan they might come up with, but Hillary is clearly ready to take the baton and she is not likely to miss the hand off. In her well publicized tweet of November 2015 Hillary tweeted, “We need to end private prisons.” The aforementioned prison outsourcing stocks were down 4-6% of the day of the tweet, but bounced back in the absence of immediate follow up. Enter Sally Yates.

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The typical legacy contracts which granted private prison operators 20 year terms with 90% occupancy will be no more. More lucrative deal which were negotiated on a “set price” basis, irrespective of occupancy levels, will likely be re-negotiated.

The Bureau of Prisons (BOP) contracts for Federal prisons and have traditionally have up approximately 1/2 of the revenues for both $CXW and $GEO. State and Municipal contracts make up the remainder and while BOP’s directive will have sway going forward, the pace of contract roll-off will likely be measured due to tight budgets.

While only 8% of Federal prisoners are housed in private prisons, 62% of immigration detainees are housed in private facilities. Immigration & Customs Enforcement (ICE), a division of the Department of Homeland Security (DHS) are the ones that contract for immigration detainees. Immigration offenses now exceed drug offenses in absolute number and full 1/3 of all Federal criminal cases are immigration related.

Politicians, regardless of level of government, do not like having things blow up in their faces. When the US already spends 6x more on prisons than on education, cost containment will be key as BOP figure out the optimal way to respond to the clear DOJ directive (a 5 year run-off period has been assumed).

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Private prisons are officially in the “sin” category along with tobacco, liquor, and casinos.

What to do. My focus will be on $CXW; Correction Corporation of America. For those, like myself, without current exposure to either name this is a time for study and analysis.

Brave analysts to comment thus far appear to be in the buy the dip (BTD) camp and appear to have a modest preference for $GEO over $CXW, speaking to the listed equity. Looking at the capital structure, $GEO has more debt, $2.23bln with Senior secured rated Ba3 and Senior Unsecured rated B1. CXW was upgraded by Moody’s to Baa3 in June 2015 and has $1.4bln in debt.

CXR 4.625% May 2023’s were not immune from the carnage of yesterday’s trade, falling from $102 to $85.50 (-16.2%) on the day. My expectation would be for the equity to rebound from the current levels and for the bonds to drift lower concurrently. The catalyst for a sharper move in the debt would be loss of investment grade rating by Moody’s. Assuming the debt is taken back (i.e. downgraded) to Ba2 (speculative grade) from investment grade there may be an opportunity to buy the debt ($70.00ish) on a hedged basis, shorting $CXR equity to the expected recovery rate on the bonds. As this opportunity unfolds, I would expect there would be cuts to the dividend on the common shares which would reduce the negative carry on the hedge.

The closest proxy I could come up with in analyzing private pension debt is military housing debt. To be clear, no analogy is to be drawn between criminals and brave service men and women that protect the nation, this is purely an asset valuation exercise. A large portion of the USA’s military housing has been privatized. The debt issued is not municipal debt, an important distinction, but is supported by the “Basic Allowance for Housing” (BAH) that is earmarked annually as an appropriation from the Federal budget by the Department of Defense (DOD), the world’s largest employer. On balance, the location of the private military housing complexes is favorable (something to think about as bases get slated for closure on occasion) to private prisons. Military housing has a much better alternate use as well, including civilian use and/or re-purposing.

The fix is in, it would appear. Private prisons will be as popular as a coal seam in the Appalachians. Trade accordingly. JCG

 

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