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Principles Newsletter Q1 2012
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Q2 2011 PRINCIPLES I. CBIS Celebrates 30th Anniversary Christian Brothers Investment Services Inc., is celebrating its 30th anniversary. Since its inception three decades ago, CBIS has remained true to its founding mission of meeting the unique financial needs of Catholic organizations while producing competitive investment returns that unify faith and finance. CBIS has grown substantially in the past 30 years. In 2008, it introduced CBIS Global, its first overseas venture. Based in Rome, CBIS Global offers Catholic institutions around the world the opportunity to invest in accordance with their values. In addition, CBIS now offers Catholic institutions access to alternative investments through CBIS Capital. “Beyond the wonderful track record of success CBIS has compiled over the years managing investments for Catholic institutions, the firm has also grown into one of the leading socially responsible investment firms in the financial services industry,” said Br. Michael O’Hern, CBIS President and CEO. “Our mandate is unlike that of the vast majority of investment-management firms. We strive not only to help Catholic institutions meet their financial goals, but we do so in a way that integrates Catholic ethical and social teachings throughout the investment process.” The firm’s socially responsible investing program has emerged as one of CBIS’s key differentiators. It combines principled stock screening and active ownership that works with companies to become more responsible corporate citizens. Throughout its history, CBIS has been an aggressive champion of human rights and dignity issues, most recently working with corporations to develop strategies designed to help put an end to human trafficking. The firm conducts extensive outreach to hotel chains and other hospitality industry participants in the months leading up to major sporting events, including FIFA’s World Cup and the NFL’s Super Bowl. CBIS was a strong advocate of California’s Transparency in Supply Chains Act of 2010, which requires California businesses to disclose their efforts to stop human trafficking within their supply chains. The Coalition to Abolish Slavery and Trafficking bestowed its Founder’s Award on CBIS for the firm’s continued and unwavering commitment to this issue. CBIS has also worked directly with corporations to improve their governance and oversight. Recent examples include urging the separation of the Chair and CEO positions at News Corporation in the wake of the cell phone hacking and bribery scandal at its now-defunct News of the World tabloid. CBIS has called for similar measures at Goldman Sachs following the 2008 financial crisis. After the BP oil spill of 2010, CBIS led a coalition of socially responsible investors calling for greater transparency of the company’s accounts and reports at its annual shareholders meeting. “We take the rights and responsibilities of shareholders to participate in and influence a firm’s strategic management very seriously and are committed to working with corporate management. When necessary, we will also continue to file shareholder resolutions to ensure that the beliefs of our investors are made known and understood by corporate boards,” Br. O’Hern said. “Faith-based investors have a responsibility to improve the governance and business practices of the companies in which they invest. Corporate dialogues, shareholder resolutions and proxy voting all work to achieve that end.” “We have spent the past 30 years successfully modeling our values and helping Catholic-based institutions manage, build and utilize their wealth in accordance with the Church’s teachings,” Br. O’Hern said. “We take satisfaction in what we have been able to achieve thus far but know that much work remains to be done. We look forward to continuing to meet the emerging challenges of integrating the principles of faith and finance.” II. CUIT/RCT Trust Consolidation Update Transition from RCT to CUIT for all Funds expected to be completed in May 2012 As we announced last year, the Catholic United Investment Trust (CUIT) and the Religious Communities Trust (RCT) are in the process of consolidating into a single trust, which will retain the CUIT name. Following is a list of the Trustees responsible for overseeing your investments and an update on the consolidation process, including a change to the names of the RCT Funds. It is with great pleasure CBIS announces the CUIT Trustees: Sister Patricia Boss, OP Michael W. O’Hern, FSC Mr. Robert G. Doerfler, Jr. Archbishop J. Peter Sartain, D.D. Reverend Peter Koh, CICM Mr. Steven D. Timmel Ms. Gayle A. Lampkowski, CPA The CUIT Trustees are charged with overseeing participants’ investments in CUIT Funds. They are your representatives and would welcome your input. More information about the new Trustees can be found on the CBIS website (www.cbisonline.com). The consolidation process is continuing on schedule. In January 2012, CUIT was converted to a Delaware statutory trust and the full transition is expected to be completed in May 2012. At that time, the current RCT Funds will become CUIT Funds and so renamed. This is the only change that will impact you as a participant. All Fund managers, expenses and investment processes will remain the same, and the Funds’ performance history will remain intact. You will begin to see the new names on your May-end statement, to arrive in early June: Old Names: RCT Flex Cash Fund New Names: CUIT Flex Cash Fund We are very excited about the potential that this new structure brings us, and we move forward with a sense of deep gratitude for the hard work and dedication of current and former RCT and CUIT Trustees. While the RCT name may be leaving us, the spirit and mission of the many dedicated men and women who have served as Trustees will be forever a part of the participants they served and of CBIS. Should you have any questions, please do not hesitate to contact your CBIS Investment Advisor. Frequently Asked Questions: Why are the Boards consolidating? After examining the current structure, the Boards of both Trusts came to the conclusion that merging the two Trusts would serve the needs of participants more effectively. What are the benefits of consolidation? The consolidated Trust will be governed by a single Board of Trustees, offering our participants a single body representing their interests and ensuring that the legal structures underpinning our Funds are uniform across all Funds. The new structure will facilitate the introduction of new products that may not have been possible under the old structure and could speed the process of introducing those products. Over time, the new structure should provide additional efficiencies and economies of scale, potentially reducing costs for our participants. Do I need to sign anything? Do you need participant approval to make this change? No. Given the nature of the change and the fact that the Funds in both Trusts will be unaffected, you don’t need to do anything. In fact, participants really will not be impacted by the consolidation – the managers, expenses, investment objectives and performance history of all of the CUIT and RCT Funds will be unaffected. The only significant change from a participant perspective will be that the three current RCT Funds will be renamed as CUIT Funds. Do I need to order new checks? Should I wait to order checks? No. Your current checks will still be valid and there is no need to order a new supply due to the merger. If you need more checks, you can go ahead and order them. Will my current debit card still work? Yes, your debit card will work as it always has. When your current card expires, we will send a new one with the CUIT name replacing the current RCT logo. What happens if I forget and send in a transaction with the wrong Fund name? We fully anticipate that it may take a while to get used to the new Fund names. All transactions will continue to be processed as always, even if the Fund is referred to as an RCT Fund. Similarly, if you happen to use an old form with the RCT name still on it, our Service Center will go ahead and process the transaction. III. International Investing with CBIS Institutions in search of international equity portfolio management face no shortage of options in today’s crowded industry. The eVestment Alliance database shows more than 90 managers with five-year track records in the EAFE large-cap core equity universe. No doubt each believes they are unique. And they had better make the case they are in order to stand out for consideration among peers. Catholic institutions seeking to apply socially responsible investing (SRI) to their international portfolio face a narrower range of options. And if these institutions are attracted to:
they may find the CUIT International Equity Fund truly stands out from the pack and merits a close look. Paired Complementary Managers As with all active equity programs, CBIS pairs two managers with clearly differentiated investment strategies that exhibit complementary styles and processes. The Fund seeks to achieve the average of the two managers’ returns, but with reduced volatility as the individual managers’ return streams offset each other when they go in and out of favor — as any single manager’s program inevitably will. Bottom-Up Stock Selection CBIS has a strong bias in favor of bottom-up approaches that rely primarily on company-by-company stock selection to achieve added value over a complete market cycle. This is reflected in the Fund’s two managers — value-oriented Causeway Capital Management, whose process emphasizes fundamental research, and growth-oriented Principal Global Investors, whose process combines quantitative and fundamental analysis. The two have been paired together in the Fund since May 2007, accounting for nearly all of its trailing five-year performance history. The complementarity of the two managers’ processes is evident in the correlations of trailing 3- and 5-year excess returns, which tend to run from zero to -0.50 (measured quarterly). Portfolio Characteristics Companies based in developed markets represent 85% or more (by cap weight) of the overall portfolio. Each manager can invest up to 15% of assets in emerging markets (EM) if they choose, depending on their perception of valuations and opportunities. CBIS expects an ongoing EM weight of approximately 10% at the Fund level. With emerging markets now fairly well integrated into institutional portfolios, CBIS does not believe they offer inherently superior return potential relative to developed markets. In addition, many developed market Fund holdings derive significant revenues and profits from EM nations, offering indirect exposure to the strong secular growth of many EM economies. But by enlarging the selection universe to include emerging markets, we believe we give skilled managers more territory to search for added value. We do not expect the Fund will exhibit any persistent quantitative biases — in terms of valuation, capitalization, earnings growth and other typical company financial metrics — relative to the MSCI EAFE benchmark. We are especially sensitive to capitalization exposure, and have ensured that our managers are able to actively manage across the mid-cap to large-cap spectrum in response to changing valuations and opportunities. Performance Goals and Tendencies The Fund’s broad performance objective reflects CBIS’ expectations for all our actively managed dual-manager Funds, which is to produce excess return over a complete market cycle with lower volatility than either manager alone. This can be frustrated at any given point in time by difficult market conditions — but it reflects what we expect from the combined two-manager Fund portfolio. Pairing complementary value- and growth-oriented managers should help temper the volatility inherent in each approach, as the two styles tend to go in and out of favor in non-synchronous cycles. But because both managers emphasize bottom-up stock selection based on company-specific financial analysis and valuation, the Fund will likely perform best (relative to its benchmark) when markets are mindful of underlying fundamentals (as in 2010) and worst when stocks with weak fundamentals do well in speculative rebounds (as in 2009’s sharp rally). CBIS views volatility as the price a true investor pays for long-term excess return. The Fund will experience periods of relative underperformance, but we expect these to give way to excess returns over three- to five-year periods. Screens and SRI’s Impact on Return Stock screens are the most uncomfortable aspect of an SRI program for investors concerned about sacrificing potential growth of capital. And indeed CBIS screens can impact relative return over the short-term, when screened industries outperform. But the impact can also be additive when screened companies trail the market. The longer-term performance impact is actually minimal. As shown in the figure above, the Fund’s screens include four main issue areas:
In practice, because our SRI program emphasizes shareholder advocacy, screens are limited to activities that so violate core Catholic values that Fund investors refuse to profit from them. The Fund restricts only about 19 companies (at 12/31/11) held in the managers’ comparable unscreened portfolios. This number is fairly steady; there were 19 restrictions in late 2007 as well. The 19 compares to more than 200 portfolio holdings, which in turn are drawn from overall investment universes that number in the thousands, offering considerable leeway to adapt to screens. The 19 account for about 8.5% of the MSCI EAFE’s cap weight at 12/31/11, with the following breakdown by issue:
When CBIS screens a company a manager would like to own, the manager has two options: 1) Reweight unscreened holdings; and/or 2) Use substitutes for screened securities. Due to Causeway’s more concentrated developed market portfolio and highly selective process, it tends to reweight companies. Principal Global’s higher-turnover, more diversified, quant-oriented approach and stricter sector weight constraints result in more substitutions. CBIS measures SRI impact by comparing the Fund’s gross-of-fee returns with those of the managers’ comparable unscreened portfolios. The positive or negative impact of screens on Fund performance on a year-to-year basis tends to offset over the longer term. Our SRI impact data set for the Fund begins in July 2005. Over the six-and-a-half-year period through Q4 2011, the net SRI impact is actually a single basis point. We invite inquiries about SRI’s impact on return, and believe that our transparency and informed disclosure here is second to none in the investment industry. International SRI Engagements Fund investment supports CBIS shareholder engagements across a wide range of companies, industry and issues — including human rights, labor standards, environmental concerns and corporate governance. In 2012, CBIS is engaging with 31 domestic and international companies. Three of these are Fund holdings: Siemens (on the human rights impacts of conflict mineral mining in The Democratic Republic of The Congo); Royal Dutch Shell (on managing the environmental impact of their operations on economically disadvantaged local communities); and BP (on risks and emergency response plans at major operations). We have also conducted active ownership engagements with two previous Fund holdings: GlaxoSmithKline (on access to HIV medications in the developing world); and ABN AMRO (on its mortgage lending practices). For Additional Information CBIS participants should contact their Investment Advisor for more information about the CUIT International Equity Fund. IV. CBIS Pushes for Anti-Human-Trafficking Legislation 80 Signatories Representing $42 billion in assets call for swift action on H.R. 2759 CBIS, the Interfaith Center on Corporate Responsibility (ICCR), US SIF: The Forum for Sustainable and Responsible Investment, and Calvert Investments are among 80 signatories to a letter sent Jan. 26, 2012 to Rep. John Boehner, R-Ohio, Speaker of the House of Representatives, and Rep. Eric Cantor, R-Va., House Majority Leader, calling on them to take the steps necessary to quickly bring the Business Transparency on Trafficking and Slavery Act (H.R. 2759) before the full House for a vote. “H.R. 2759 is an opportunity for the House to seize the moment and put the full force and weight of the U.S. government behind efforts to stop what everyone agrees are the morally repugnant practices of human trafficking and slavery for business purposes,” said Julie Tanner, Assistant Director of Socially Responsible Investing at CBIS. “Investors want and need the types of disclosure H.R. 2759 requires.” Institutional investors, research and investment firms and organizations representing $42 billion dollars of investments under management signed the letter to Reps. Boehner and Cantor. CBIS and Calvert Investments are members of both ICCR, a coalition of 300 faith-based institutional investors, and US SIF, a membership association for professionals, firms, institutions and organizations engaged in sustainable and responsible investing. Rep. Carolyn Maloney, D-N.Y., who introduced H.R. 2759 on Aug. 1, 2011, said, “I thank the socially responsible investment community for their commitment to ending slavery and human trafficking around the globe. My bill, H.R. 2759, the Business Transparency on Trafficking and Slavery Act, will help raise awareness for consumers who want to know where and how their goods are being made. Human trafficking is the slavery of the 21st century. We must use every tool available to help these men, women and children around the world who are enslaved. It is my hope that more companies will address human rights abuses in their supply chains.” The letter urges “the Republican leadership to ensure that the Financial Services Committee places H.R. 2759 at the top of its agenda and moves it to the House floor in an expeditious manner.” The proposed legislation requires companies with annual worldwide global receipts in excess of $100 million to disclose in their annual reports to the Securities and Exchange Commission all measures they have taken during the year to identify and address conditions of forced labor, slavery, human trafficking and child labor within their supply chains. If passed, the law will require companies to disclose existing policies and management systems (including any auditing and verification procedures, risk assessments, trainings, remediation and accountability mechanisms) designed to address trafficking, slavery and other forms of human rights abuses within their supply chains. H.R. 2759 builds on The California Transparency in Supply Chain Act, which took effect on January 1st of this year. The California law, which is the first of its kind in the U.S., applies only to manufacturers and retailers doing business in the state. H.R. 2759, however, takes an even more comprehensive approach. If enacted, H.R. 2759 addresses a wide range of human rights problems and would apply to all publicly traded or private companies in every industry sector and have far-reaching impact outside the U.S. as well. “Because human trafficking is so egregious and pervasive, we need greater disclosure by companies, especially in global supply chains,” said Rev. David M. Schilling, Director of Human Rights at ICCR. “Individual corporate trafficking initiatives are important, but we also need timely congressional action to establish a reporting requirement that creates a level playing field for all companies.” “Modern day slavery, human trafficking and child labor are persistent and growing problems within global supply chains, which do not discriminate across sectors,” said Mike Lombardo, Senior Sustainability Analyst and Manager, Index, Calvert Investments. “We believe the proposed legislation is aligned with sound corporate transparency and the information will help investors more clearly understand how companies are managing these risks within their operations.” The House Committee on Financial Services referred H.R. 2759 to the Subcommittee on Capital Markets and Government Sponsored Enterprises on Aug. 22, 2011. No further action in Committee has been taken. If the House does not vote on the bill before the end of its current term, the bill would have to be reintroduced in the next session of Congress beginning in January 2013. For the complete text of the letter to Reps. Boehner and Cantor, a full list of signatories, and the complete text of H.R. 2759, the Business Transparency on Trafficking and Slavery Act, please visit www.cbisonline.com. V. The Evolution of Christian Brothers Services Fifty years of service to Catholic organizations by Brother Michael Quirk, FSC, Ed.D., President/CEO of Christian Brothers Services Over the past 50 years, Christian Brothers Services (CBS) has continually responded to the needs of the Catholic community by developing collaborative and cost-effective programs and services designed specifically for Catholic organizations, dioceses, and religious Orders. CBS currently administers cooperative programs in the areas of health, retirement, property/casualty, consulting and technology for more than 2,000 Catholic organizations in the United States and Canada. Humble Beginnings Christian Brothers Services began as an answer to the problem of expensive, and in some cases, unattainable insurance coverage for Catholic organizations. In October of 1960, Brother Joel Damian, FSC, sitting in the Brother’s room at Saint Patrick High School in Chicago, developed a plan for the De La Salle Christian Brothers high schools in the Chicago area. Under Brother Damian’s leadership, four schools cooperated and purchased a common insurance policy for their football teams. This was the first step for Lasallian schools to join together to provide a variety of insurance services to institutions and the people who staffed the institutions. Evolution of Services Other religious Orders and Catholic institutions gradually joined with the Christian Brothers and subsequent programs and plans developed over the next 20 years, including, employee benefit (health and retirement), religious health, institutional and congregational risk pooling, as well as unemployment and workers compensation plans. Originally called National Office Service Company, or NOSC for short, the new company was headquartered on the campus of Lewis University in Romeoville, Illinois. In 1985, NOSC officially became Christian Brothers Services. The subsequent years saw the addition of the student accident plan, prescription drug program, and the 403(b) and 401(k) retirement savings programs. In 1993, with a growing membership base and an increasing staff, CBS moved from a small office on the campus of Lewis University to its current location in Romeoville, Illinois. In recent years, CBS has added consulting and technology services to its offerings, including website services and hosting, real estate services, executive search, and fundraising/capital campaign services. Advances in Technology Over the years, CBS has seen many changes. In the late 1970’s, claims processing was a manual process. An invoice or a provider’s bill would be mailed in for payment, opened, sorted, manually calculated, and a check for payment would be typed, verified, and mailed back to the provider or vendor. Today, electronic transactions are standard practice. CBS launched its website in 1998, and with it came the ability to conduct business transactions online. Administrators are now able to do everything such as adding or deleting vehicles, changing employee information, accessing claims data, and managing defined benefit plans. During 2011, CBS successfully launched its social media presence. Social media allows Christian Brothers Services to have more of a dialog with members and further build, activate, and unite the Christian Brother Services Community through Facebook, Twitter, LinkedIn, and WordPress. Members can visit the website at cbservices.org and click on the social media icons for instant access. In addition, Christian Brothers Services strives to continue the educational mission St. John Baptist de La Salle set forth more than three centuries ago by providing members with useful and up-to-date information on health and wellness topics, retirement information, safety tips, checklists, training manuals, and programs to help reduce risk and liability for member organizations. With the advancement of modern technology, education is no longer confined to a brick and mortar building, it now allows CBS the ability to provide all this information through webinars, online newsletters, and an online training resource center. The Mission Ultimately, like its members, CBS is a Catholic, nonprofit organization. CBS’s mission to serve the Catholic church community and other faith-based organizations by responding to their managerial needs, supports the Brothers’ mission worldwide. Christian Brothers Services provides funding for the Regional Conference of Christian Brothers in North America, which provides formation and support programs to Lasallian institutions in Canada and the United States. The Future and CBS Still, some things haven’t changed in the past 50 years, such as CBS’s commitment to its members. It is the goal of every employee at CBS to exemplify the Lasallian mission by understanding the needs of members, protecting the human and financial resources of member institutions, and guiding member organizations in finding practical solutions to business needs. CBS is still a Catholic organization which continues to understand the unique dynamics of Church organizations and institutions. The only incentive remains, both now and in the future, to serve the Church and other faith-based organizations; not profit and not executive bonuses. In an era where personalized customer service seems to be a thing of the past, CBS prides itself on providing exceptional customer service with a human touch. What will the next 50 years hold? No one knows, but Christian Brothers Services guarantees the focus will remain on serving members - it has been, is, and always will be the number one priority. VI. Frequently Asked Questions Q: CBIS is receiving considerable media attention for its SRI work on News Corporation. While the hacking scandal that spurred CBIS’ involvement is serious, why is it relevant to Catholic values? A: Our resolution at News Corporation requesting separation of the chair and CEO roles addresses two areas that are crucial to Catholic social teachings: the concept of shared prosperity and the broad issue of corporate ethical behavior. The company’s compensation practices result in excessive executive pay, in the failure to share prosperity broadly throughout the firm, and in the failure to recognize management’s poor oversight as revealed in the hacking scandal. For 2011, News Corporation paid its named executive officers (NEOs) more than $109 million in total compensation, which included $29 million in cash bonuses. Chairman and CEO Rupert Murdoch received $33.3 million in total compensation, including a $12.5 million cash bonus. Murdoch’s total compensation represented an approximate 50% increase from the $22.7 million he received in 2010. According to the company’s 2011 proxy, one-third of the bonus was based on qualitative factors, yet the hacking scandal is not mentioned as a factor that was considered in determining the 2011 bonus. For 2011, Rupert Murdoch had a base salary of $8.1 million, far above the $1 million tax-deductible limit. Additionally, the 2011 base salaries for each of the other NEOs were far above tax-deductible limits. For comparison, Rupert Murdoch’s base salary is more than four times the average salary of other large media company CEOs. News Corporation’s system of executive compensation is inconsistent with values of fairness and proportionality. Excessive executive compensation has become a widespread problem that needs to be addressed through improved corporate governance. Because the contribution of workers is essential to corporate success, executives and workers should share in that success. There is a need to restore some measure of proportionality to the relative levels of compensation received by each. Our work on News Corp also raises the issue of corporate ethics. The minimum expectation we have for corporate employees is that they act ethically in their work environment and in their dealings with society. Employees at News Corp were found to be engaging in illegal and immoral activities by hacking into phones and computers, an invasion of privacy. The hacking into the phone of murdered schoolgirl Milly Dowler caused the police to believe she was still alive, hindering the investigation. There are also financial ramifications to these actions. The company lost the ability to take a controlling interest in British communications company BSkyB, paid millions of dollars to settle lawsuits filed by those who had their phones and computers hacked, and will be paying millions more in fines to the government once the investigation has been completed It is our fiduciary duty to raise these issues with companies and to take seriously our role as responsible owners. VII. Security Brief: Is Your Password an Open Secret? According to Trustwave, a data security firm, the most common password in use today is “Password1.” While it may satisfy common password requirements by including a numeral and an upper-case letter, it is also the first password hackers are likely to try. The best password is a non-word with one or more numbers inserted in the middle and at least one upper-case letter. You can use the letters from a phrase or song as a guide for easy recollection. Remember that wonderful trip to Paris two years ago? You can immortalize it in a password. “I love Paris in the spring for Sure!” becomes IlP1ts4S1, with the number “4” used instead of “for” and the number “1” used in place of the “i” in “in” and added at the end of the character string in place of “!”. It’s easy. A little creativity can make your password fun and hack-proof. Alternatives at CBIS CBIS is now offering alternative investments for qualified participants. Ask your Investment Advisor if an allocation to alternatives would be appropriate for your organization. Office Closings CBIS offices will be closed on Friday, April 6 in honor of Good Friday, on Monday, May 28 for Memorial Day and on Wednesday, July 4 for Independence Day. |
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Copyright ©2012 Christian Brothers Investment Services, Inc., |
