What Happened to Socially Responsible Funds?

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1 NEWSLETTER December 2014 What Happened to Socially Responsible Funds? Most of our clients are familiar with socially responsible investing, an approach to investment management that focuses on investing in companies that meet certain social and ethical criteria. What makes this option particularly unique is that, while it still aims to grow assets, it emphasizes social responsibility over high returns. When managing these types of accounts, we use socially responsible mutual funds. In the roughly 30 years since socially responsible investing became a broad movement, there have been three general phases, each dictating a different approach to how fund managers build socially responsible funds. As a firm offering socially responsible investment portfolios, we have strong feelings about the state of the movement and its effect on our clients. For the first half of its existence, socially responsible fund managers would develop a set of criteria to define what made a company socially responsible and then seek out stocks of companies that fit that definition to include in their fund. For instance, a socially responsible company could be one that only used sustainable resources, directly supported its local community, or had high standards for consumer and human rights. Once a fund manager found a company that met these criteria and fully researched it, it could be added to the list of acceptable companies in which to invest. This inclusionary approach made sure that only the most socially responsible companies made it into funds. This method was good for maintaining social responsibility, but it was difficult to build balanced portfolios one company at a time and could significantly compromise portfolio diversity and growth. In response to this problem, roughly 15 years ago the socially responsible mutual fund industry shifted into a second phase, which moved away from inclusion and focused instead on exclusion. With this model, fund managers built funds as they normally would and then weeded out stocks of companies that didn t meet certain criteria. The general benefit to this approach was that it allowed managers to draws from a much larger pool of companies, which often led to more balanced portfolios with higher growth potential.

2 A significant downside to this second phase, the exclusionary approach, was that it was difficult and expensive to implement. All investments in a fund still needed to be exhaustively researched, which took considerable time and skill. The other drawback was that most of the recent, large-scale growth in the financial markets, as a whole, was in the oil and gas industry, which was almost completely excluded from all socially responsible investment models. In the past few years, socially responsible fund managers watched others managing nonsocially responsible funds reap large gains, while their own portfolios had much more modest returns. This led to the current, third phase of socially responsible investing, which we call the bestof-breed approach. In the current environment, most fund managers seek to remain socially responsible while also tapping into the growth potential of all industries, including ones like oil and gas. This current method involves drawing investments from a broad range of industries. Then, all possible investments are ranked within their industry by how socially responsible they are based on similar criteria to the prior approaches. The difference is that the best companies from each industry (or the least terrible companies) get included in the portfolio regardless of their objective social responsibility. By using this method, socially responsible funds now hold stocks from industries like oil and gas or defense and benefit from their growth potential. This is because they are investing in companies that are subjectively more socially responsible (or not quite as irresponsible) compared to others in the same industry, rather than judging the companies against established objective standards for social responsibility. At Robasciotti & Associates, Inc., we strongly disagree with how most funds are now approaching socially responsible investing and believe the best-ofbreed approach is greenwashing in its highest form. We fail to see how it is possible to have a socially responsible fund if it includes companies that are socially irresponsible. We believe that socially responsible investing is about building the right portfolio based on the social and ethical principles of our clients, rather than building a portfolio that includes the least irresponsible companies in a particular industry. Therefore, when building our client portfolios, we continue to use more stringent definitions of social responsibility than the industry as whole. We keep a close watch on the socially responsible investment world and are actively engaged in efforts to reform the best-of-breed approach. At the same time, we offer and continue to find solutions for investors still committed to the exclusionary model. As always, we approach investment strategies from a holistic view of your needs and your goals, whether that s socially responsible, conventional, or somewhere in between. Quarterly Tax Payments: A Primer If you re self-employed, you should be paying your estimated taxes four times a year. We have found that there is some general confusion about this concept among our clients and hope this article provides some clarity. But, we also strongly recommend talking to a tax advisor before developing a tax payment plan. We are not tax advisors and are therefore specifically disallowed from giving tax advice, however, we can discuss the basic mechanics of how taxes work and what the government expects of you. One frequently misunderstood aspect of how Americans pay taxes is that everyone pays federal and state taxes progressively as they earn income. If your company issues a W-2 at the end of the year, they are withholding your taxes and making tax payments on your employment income on your behalf each time they issue your paycheck. If you are selfemployed or have income from

3 any other source, such as your taxable investments, you do not get a W-2 at the end of the year and no one is automatically withholding and making tax payments on that income for you. That is when quarterly estimated tax payments come into play. Since it isn t practical for selfemployed people to send the government a check each time they earn income, they instead pay all of the taxes due on income earned in a particular quarter each quarter. Self-employment income generally varies from quarter to quarter and since the tax payments are estimated, at the end of the year, payments may end up a bit above or below the actual amount owed. But as long as the payments were made as correctly as possible based on reasonable estimates, there is no penalty and you may simply pay the outstanding difference or receive a tax refund for any overpayment. So how do you estimate your payments? Many tax advisors base your estimated taxes for this year are on your actual taxes from last year. If you paid a 25% tax rate last year, then you would generally send the IRS 25% of what you make each quarter of this year. Another common method for making estimated tax payments is to take the actual tax bill from the previous year, divide by four, and pay that amount each quarter. This is considered a safe harbor approach and can work well if your income is relatively stable. Both of these methods are generally safe and perfectly acceptable as far as the tax collectors are concerned. But, what if you re making a lot more or less in income than the previous year? Perhaps you had one great, unusually high paying contract position last year or this year you sell some valuable stocks. If you base your payments off of the previous year you ll be way off the mark. In this case, work with your tax advisor to make the most educated guess. You ll likely end up paying 110% of what you guess your tax bill will be to satisfy the tax collectors that you are making estimates in good faith. When making estimated quarterly tax payments, it s important to know that the Internal Revenue Service has set up a timetable, calling for estimated tax payments four times a year. There is no reminder system or bill sent to you for these tax payments, so you need to remember to make these payments on your own. Although the payments are commonly called "quarterly", they don't actually coincide with calendar quarters. The schedule is generally as follows, but the dates may change from year to year based on weekends and holidays. Estimated Tax Filing Schedule: June 15: for income received April 1 through May 31 September 15: for income received June 1 through August 31 January 15: for income received September 1 through December 31 To summarize, if you don t have all of your income reported on a W-2 and your taxes withheld and payments sent on your behalf, be sure to avoid potential tax penalties by putting together an estimated quarterly tax payment plan with your tax advisor.

4 Rent, Don t Buy Your Vacation When you go on vacation, there are an increasing number of options on how and where to stay. Since we re wealth managers, we d like to approach the question from a financial perspective. When you go on vacation, what makes the most financial sense, a hotel, a time-share, or a vacation home? The answer will be different for everyone of course, depending on differing values, objectives, and preferences. But there are some financial constants. Time-shares, for instance, are almost always a very bad idea. Don t do it. The sales pitch for a time-share usually involves a break down on how much it costs to rent a hotel for a week vs. buying into a time-share for a year, which can look good up front, but it s misleading. There are high fees in addition to your purchase price and, once you buy, you are stuck with your time-share. You own a piece of a property with ongoing maintenance and repair costs and you can t just walk away from these. You also are likely to want a bit of variety on vacation rather than going to the same place every time. You may be offered the freedom to take time at another property within the time-share network but you will also be heavily incentivized not to. Ultimately, time-shares have the potential to take all your vacation money, whether you use it or not, and give you very little back in return. You can also simply buy a vacation home and even rent it out Important Dates December 17, 2014 January 2, 2015 Office Closed for Year End Processing & Holidays February 2, 2015 February 3, 2015 Office closed for Annual Company Retreat February 27, 2015 Rachel and Maya present at the San Francisco Lesbians Who Tech Summit to others when you re not using it. This has its benefits but is very expensive. First you have to buy the house, but you can t deduct the mortgage interest since it is not your primary residence. You also have to maintain the house, even if you re not there. If you choose to rent it out you have to maintain the house to an even higher standard, go through the effort of managing the property and the vacationers who stay there, and deal with the consequences when they damage your property. You can hire a company to manage the property for you, but they will take a percentage of the income. You may also find that if you want to use your house on popular vacation times, you have to choose between using your vacation house or earning income that will

5 help offset the onerous price of owning that home. If you have the disposable income, buying a vacation home is an option, but often not worth the trouble and expense. Lastly, there is the traditional method of renting a hotel room or even a more modern method like Airbnb or house swapping. The benefits to a hotel or bed and breakfast are mostly their convenience. They exist Airbnb offer spaces in private homes at rates usually lower than a hotel. This has lots of charm, but you are also in someone else s home. House swapping is also frequently arranged online and may not involve much cost at all. With house swapping, it s possible to go on vacation and stay in someone s house for a period of time without having to pay them. Of course, while you re in their you always go to the same place and don t think that s going to change, you might consider a time-share, but look at the secondary market. Time-shares often lose 40% of their value soon after direct purchase from a developer, which makes them a terrible investment. But, sometimes you can buy one used at a more reasonable price from someone who bought a timeshare directly and wants out. Of course, specifically for you to stay there for a short period of time, in relative comfort, in the location you have chosen. They may not be cheap, but the obligation to pay for them ends as soon as you check out. This gives you the freedom of movement and variety without locking you into a year-round financial commitment and one location. Online services such as home, someone will be staying in your house. If you are comfortable with this kind of trade, it might be the best combination of flexibility and affordability. Of course, all arrangements will vary. So, our general advice is to rent your vacation, don t buy it. It will likely be the most cost effective solution and won t lock you into any place or property. If you still have to pay all the fees associated with it until you sell it yourself. Vacation homes are generally only a good idea if money is not a limiting factor. For the best value and flexibility, rent!