Principles Newsletter Q2 2009
In the 2008 survey of participant’s SRI issue priorities and preferred SRI strategies, human trafficking ranked as one of the top concerns participants would like addressed by CBIS’ active ownership program. In 2009, CBIS joined an Interfaith Center on Corporate Responsibility (ICCR) shareholder dialogue on the issue with global tourism and hospitality giant Wyndham Worldwide. The dialogue, led by Sisters of Mercy, focuses on working with Wyndham to develop policies that help prevent use of its hotels for the commercial sexual exploitation (CSE) of children, who are some of the most vulnerable victims of human trafficking in the form of child prostitution and child sex tourism.
Human trafficking is, in many respects, a human rights issue that corporations can combat with approaches that have proven successful in related areas (such as vendor standards), including policy development, employee training, implementation, performance monitoring and reporting. Religious and other concerned SRI investors have considerable experience and expertise helping global companies in these areas. We plan to spend much of 2009 learning about the complex issue of human trafficking and evaluating ways that we can work with other concerned shareholders and companies to fight it.
Human Trafficking: Background
Forced Labor — when unscrupulous employers take advantage of gaps in law enforcement to exploit vulnerable workers in circumstances of coercion. Female victims, such as women and girls in domestic servitude, are often sexually exploited as well.
Involuntary Servitude Among Migrant Laborers — essentially its own category of debt bondage due to its prevalence, including abuse of contracts, deceptive recruitment and employment, exploitative and illegal costs assigned to laborers, and often with the complicity of employers in the destination country or state.
Involuntary Domestic Servitude — where domestic workers are trapped in servitude through the use of force and coercion. There is great demand, for example, in wealthier countries of Asia and the Middle East for domestic servants who sometimes fall victim to conditions of involuntary servitude.
Child Soldiers — a severe manifestation of trafficking that involves recruitment of children through force, fraud, or coercion to be used as combatants or combat support personnel. Child soldiers and returning child soldiers are often rejected by their home communities. The problem is most critical in Africa and Asia, but armed groups in the Americas and the Middle East also use children in conflict areas.
Children Exploited for Commercial Sex — where children are trapped in prostitution. The U.S. State Department estimates that over two million children are exploited in the global commercial sex trade. Because use of children in the commercial sex trade is prohibited under U.S. law and United Nations Protocol, there are no exceptions or cultural or socio-economic rationalizations that prevent the rescue of children from sexual servitude.
Child Sex Tourism (CST) — which involves adults who travel from their home country (where child sexual exploitation is illegal or culturally abhorrent) to another where they pay to engage in sex acts with children. CST’s consequences for minors include long-lasting physical and psychological trauma, disease (including HIV/AIDS), drug addiction, unwanted pregnancy, malnutrition, social ostracism and sometimes death.
The International Labor Organization (ILO) — a United Nations agency dedicated to promoting freedom, equality, security and human dignity in the workplace —estimates that more than 12 million people are trapped in forced labor, bonded labor, child labor, and sexual servitude worldwide, while other estimates range from 4 million to 27 million. Views of what constitutes trafficking vary across languages and cultures, which can hinder comparability of data across countries and data-collecting organizations.
Issue Focus: Child Sex Tourism (CST)
ICCR’s efforts to combat CST through shareholder activism began in 2005 in response to a conviction in a Costa Rican court of man accused of pimping minors in a child sex tourism ring that included receptionists at a Costa Rican Marriott hotel. ICCR helped persuade Marriott that, as an operator of facilities used for CST and CST-supporting activities, it not only faced considerable reputational risk but that there was more it could do to help prevent use of its hotels by CST traffickers. Marriott responded positively to ICCR’s initiative and appointed a task force composed of nine top executives to study the issue. Their work led to the revision of Marriott’s global human rights policy to include specific measures to help prevent CST, such as training employees to recognize and respond to warning signs and including anti-CST communications in welcome packages sent to guests at its facilities worldwide.
ICCR subsequently expanded its work in the area to help several other hotel chains, airlines and cruise ship lines create anti-CST policies and train employees to effectively respond to evidence of use of company facilities for trafficking.
What Companies Can Do
A group of companies operating in the tourism sector, however, have created a more constructive response. Beginning in the late 1990s, a number of Scandinavian tour operators began working with the World Tourism Organization (WTO) to create a tourism industry response to the problem of CST. By 2003, the effort had evolved into a six-point “Code of Conduct for the Protection of Children from Sexual Exploitation in Travel and Tourism” supported by the United Nations World Tourism Organization, the United Nations Children’s Fund (UNICEF) and the European Union, along with a number of national governments. Nearly 1000 companies in 23 countries are now signators of The Code (only five U.S. companies are), which offers a useful framework for guiding anti-CST policy development. The Code asks companies to:
Dialogue with Wyndham Worldwide
Wyndham recently adopted a policy called the Protection on the Rights of Children and has revised its training program and communications materials to raise awareness of anti-CSE policies with employees. Our ICCR dialogue group has asked Wyndham to become a Code signator, which it has refused to do so far, preferring (as many American companies do) to develop its own company-specific policy.
CBIS will spend 2009 lending support to the ICCR dialogue with Wyndham, learning more about the broader human trafficking issue and evaluating how we can work with corporations to combat human trafficking and CST.
II. When it Comes to CSE, Talk Isn’t Cheap
Neary grew up in rural Cambodia. Her parents died when she was a child. Her sister married her off at 17, hoping to give her a better life. Three months later she and her husband went to visit a fishing village. Her husband rented a room in what Neary thought was a guest house. When she woke the next morning, her husband was gone. The owner of the house told her she had been sold by her husband for $300 and that she was actually in a brothel. For five years, Neary was raped by five to seven men every day. In addition to brutal physical abuse, Neary was infected with HIV and contracted AIDS. The brothel threw her out when she became sick. She eventually found her way to a local shelter before she died of HIV/AIDS at the age of 23. (Source: ICCR)
Lila, a 19-year-old Romanian girl who had already endured physical and sexual abuse from her alcoholic father, was introduced by an “acquaintance” to a man who offered her a job as a housekeeper in the U.K. When she arrived in the U.K., the man sold her to a pimp and Lila was forced into prostitution. She was threatened that she would be sent home in pieces if she did not follow every order. After an attempted escape, her papers were confiscated and the beatings became more frequent and brutal. Months later, after being retrafficked several times, Lila was freed in a police raid. She was repatriated back to Romania where, after two months, she fled from the shelter where she had been staying. Her whereabouts are unknown. (Source: U.S. State Dept.)
The International Labor Organization (ILO) has estimated that as many as 1.8 million children are exploited in prostitution or pornography worldwide. One form of this exploitation is child sex tourism (CST), which the Interfaith Center on Corporate Responsibility (ICCR) describes as “an organized multi-million dollar industry with its own tour guides, websites and brothel maps.” CST is especially prevalent in Asia and Central and South America.
Religious investors can use their power as corporate shareholders to help corporations realize that anti-CST policies may be able to make a positive difference in children’s lives. It’s not easy to talk about the commercial sexual exploitation of children, but if our words can help victims like Neary and Lila, then it is hard to imagine a more valuable discussion.
III. Cash Out or Jump In?
Investors’ risk tolerances have been sorely tested, and probably broken in some cases, by the stock market’s 50% plunge since late 2007. While many signs of excess were evident at the market’s peak — such as razor-thin credit spreads, sky-high home prices relative to rents, and tales of mortgages offered to borrowers with no income, job or assets — a recommendation to move an institutional portfolio into cash at the time would have seemed preposterous advice. Markets were surging and the conventional wisdom was to hang on for the ride.
More importantly, many of the risks that finally upended markets actually appeared years ago, long before the market’s late-2007 peak. Wise investment decisions in 2005 — such as cutting back on equity exposure and paring credit risk in bond portfolios — now seem obvious, in hindsight. But the perseverance of distorted market conditions in 2006 and 2007 made these moves appear foolish for quite some time, no doubt trying the patience of investors who followed this advice and perhaps shortening the careers of some investment advisors and fiduciaries who implemented it.
Moving to Cash?
Chart I, “Missing the Upturn,” illustrates the potential pitfall of missing the equity rallies that follow downturns (please refer to the PDF version of this newsletter to view the charts). The recent market decline totaled 57% from its peak to the March 2009 trough, making it the worst since the Great Depression of the 1930s. But investors who moved to cash when selling pressure was heaviest, in early March, would have missed a 20% gain through mid-April. No one can say with assurance that a new bull market has begun. But, given the magnitude of losses since the market’s peak, being completely out of the market now is probably riskier than maintaining a prudent amount of equity exposure.
Reassessing Goals and Assumptions
Institutions with the long-term objective of meeting mission-related financing goals and operating expenses far into the future should remain invested in long-term assets. Volatility is the price of the additional returns, relative to cash, that bonds and stocks produce over time. While a decision to move to cash might provide near-term emotional comfort, we believe it would almost certainly come at a substantial cost relative to long-term financial goals.
Managing Cash Balances
The Flex Cash Fund provides security of principal, a stable net asset value and daily liquidity. But with near-zero yields in the cash markets, the RCT Short Bond Fund may offer a more attractive place for cash balances when immediate liquidity is not an issue.
The Short Bond Fund, now yielding about 4.7%, reaches a bit farther out the yield curve to capture the higher incomes available at slightly longer maturities. It also augments yield with an added degree of credit exposure, although its widely diversified holdings and AA+ average credit quality offer protection from default risk in a slowing economy. The Fund’s net asset value is not fixed at $1 and may fluctuate slightly, but the benefit is the chance to earn income on cash balances before the cash is needed. The Short Bond Fund may be a better place for cash you won’t need for at least six months.
Your CBIS Investment Advisor can help you translate these broad based themes into specific strategies tailored to match your organization’s risk tolerance and investment objectives.
Q: CBIS has advised participants to consider the RCT Short Bond Fund as a vehicle for cash not needed right away (i.e. over the next six months). What about bank certificates of deposit (CDs) as another alternative?
A: The Federal Reserve and U.S. Treasury Department have taken extraordinary measures in recent months to prevent a wholesale breakdown in the global financial system, and these measures have certainly strengthened the financial position of the U.S. banking sector. Nevertheless, banks remain under a cloud — from the smallest community banks to the largest multi-national institutions — due to the prospect of ongoing economic weakness and the resulting uncertainty about medium-term prospects for profitable residential and commercial lending. It’s true that CDs are FDIC insured and investors are therefore protected against the failure of the issuing bank. However, the prospect of navigating an FDIC reimbursement of insured deposits, if required, is an unpleasant one to contemplate and such an event may well impair a participants’ liquidity for a period of time.
The RCT_Short Bond Fund offers a number of advantages over CDs, in our view. These include ongoing daily access to invested funds, portfolio diversification, high credit quality and a current yield (at approximately 4.3%) in excess of typical CD yields for one-year maturities (which range from 1.35% to 1.5%).
CBIS anticipates that very low short-term rates will persist through 2009 and 2010 due to accommodative Fed monetary policy and U.S. Treasury intervention to secure credit market recovery. Participants should take advantage of the higher yields offered by the RCT_Short Bond Fund relative to CDs of comparable maturities while avoiding the potential liquidity risks associated with investment in a single issuing institution.
V. SRI Impact on Performance: Spring 2009 Update
Some Catholic institutions interested in socially responsible investing (SRI) are concerned that SRI inevitably produces lower returns than does non-SRI investing. We understand the worry about anything that might threaten investment performance, but based on our quarter-century of experience as an institutional investment manager we also know that concern over long-term SRI impact is refuted by the historical data.
In order to help institutions better understand the sources and measurement of SRI impact, CBIS recently updated an analysis of the impact of our SRI program on the long-term performance of the CUIT Core Equity and Value Equity portfolios through March 31, 2009. These portfolios represent our two longest-standing manager relationships, each with more than 14 years of historical performance data.
Defining SRI Impact
A Focus on Active Ownership
Measuring SRI Impact
VI. Security Brief: Ensuring Office Secur-IT-y
Criminals can search through dumpsters for information such as bank account numbers, credit card numbers and passwords that might be their key to your wallet. Churches, charities and schools that employ staffs and keep regular business hours are appealing targets — they offer numerous potential victims and a cloak of darkness during off hours for safe dumpster diving.
Participants should shred all private documents before throwing them away. Shredders are relatively inexpensive and shredding prevents identity thieves from leaving your dumpster with anything more than dirty hands.
Also, don’t ignore risks from other physical aspects of your virtual world. Log off your computer and e-mail programs when away from the office to prevent anyone from sending e-mails under your name, and don’t forget to shred any e-mails you might have printed.
VII. Reining in Portfolio Volatility
Stocks weren’t the only asset class battered in 2008. Bonds also took a brutal thumping by their own more stable return standards, with corporate credits producing a rare negative performance for the first time in decades. And the bad year seems worse given the positive return of the Barclays Capital Aggregate Index — the benchmark for long bond programs such as the RCT Intermediate Diversified Bond Fund (IDBF) — due to its relatively heavy exposure to Treasury and government-guaranteed mortgage securities, which benefitted from investor’s flight to safety in the turbulent fourth quarter. (Please refer to the PDF version of this newsletter for the charts that accompany this article).
But 2008 is history. Investors need to assimilate the events of 2008 into a portfolio strategy that offers the best chance to achieve financial goals going forward. From that perspective, CBIS believes that bonds now offer compelling value for participants concerned with principal preservation and current income.
Stocks versus Bonds
What About Inflation?
Falling Spreads versus Rising Yields
IDBF: Positioned for Recovery
Principles Now Exclusively Electronic
CBIS Office Closings