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February 14, 2000
Walden Reflects on Going Global
Six months after launching the first socially responsible international index fund, Portfolio
Manager Geeta Aiyer does not take the role of pioneer woman lightly.
SocialFunds.com --
In August 1999, Walden Asset Management, a division of United States Trust Company of Boston
(USTC), introduced four new products to the growing field of socially responsible funds, but the
most ambitious was Walden/BBT International Social Index Fund. The first of it's kind, this index
fund gives investors the ability to diversify their holdings into the developed-country markets of
Europe, Australia, and the Far East without sacrificing their social principles.
Walden/BBT International Social Index Fund (WISIX)
includes such diverse holdings as Nippon, the Japanese telecommunications giant, Deutsche Telekom
of Germany, and Nokia of Finland. It is boldly indexing the performance of social investments where
other fund families have hesitated to invest.
Senior Portfolio Manager Geeta Aiyer,
formerly of USTC, founded Walden in 1994, then called Walden Capital Management. When Walden was
acquired by USTC in 1998 to combine with their existing socially responsible business, Aiyer
rejoined them. Originally from India, with an M.A. from the University of Delhi and an MBA from
Harvard, Aiyer brings uncommon international acumen to her job.
We spoke to Aiyer about
the origins of WISIX, its first half year, and where this pioneering index fund is leading social
investors.
Social Funds: What was the driving force for you to found Walden?
Geeta Aiyer: Founding Walden was an opportunity to be entrepreneurial, to offer social
investors a meaningful new product. By creating a robust international option, we were able to
offer social investors the same asset allocation options that "unscreened" investors enjoy. My
years of managing portfolios, working to preserve portfolio diversification within social
constraints, listening to clients, all came in handy as did my experience of creating Instant
India, a critically acclaimed, all natural line of curry pastes!
SF: Whatever possessed
you to launch an ambitious fund like WISIX, and what was the process?
GA: In 1995, many
were skeptical about our efforts. Our experienced, resourceful team rose to the challenge of
international social research, portfolio diversification, and shareholder activism. By 1998, we had
built the rules of operation, the information sources, the experiential knowledge and data on
corporate social conduct that enabled us to launch the index fund. And we had demonstrated our
leadership in the uncharted territory of shareholder advocacy abroad. Most important of all, we
were fortunate to have earned the confidence of our clients who were ready to invest in our fund
from the very beginning.
SF: Does WISIX track a benchmark in the international markets?
GA: Morgan Stanley Capital International's EAFE (Europe, Australia and Far East) index is
a commonly accepted financial benchmark for international developed country markets, but we also
look at other indices such as the Financial Times World Indices' EuroPacific Index. We wanted to
offer a core international choice for social investors, neutral to portfolio manager style. Our
Fund seeks to have broad country and sector diversification while maintaining social standards, to
be competitive with international equity markets, and to serve as a platform for meaningful
dialogue between committed long term investors and international corporations.
SF: How do
you describe your management strategy for WISIX?
GA: WISIX, for which we serve as Adviser,
is designed to match the international markets with a socially screened universe of stocks.
Fortunately we know from experience with other stock market index funds that it is possible to
track the market without holding every stock in the market indices. The final portfolio of
approximately 440 stocks is chosen from the Walden universe using quantitative "optimization"
techniques that maximize the portfolio's projected ability to perform in line with the
international markets.
SF: How do overseas transaction costs influence your portfolio
management?
GA: Because high overseas transaction costs make it prohibitively expensive to
hold the stocks of many smaller companies, we do not hold all the socially approved names, but
rather try to compose the portfolio with fewer names using optimization techniques. On an ongoing
basis, we set up rules to minimize transactions costs, such as a low turnover (estimated at 7
percent annually) and a 1 percent upfront fee on new investments that helps cover transaction
costs.
SF: What is WISIX's involvement in shareholder activism?
GA: WISIX uses
comprehensive social screens so that companies with egregious environmental or labor problems are
screened out. However, WISIX makes it possible to engage in dialogue on social goals at a global
level. We are often having the same discussions with both US and international competitors within
an industry, asking for the same sort of information. This makes the activism more consistent, and
strengthens our effort here and abroad.
SF: How is shareholder activism different when
acting overseas?
GA: Walden has been at the forefront of international shareholder
advocacy since 1995. We understand the shareholder rights environment in each country in which we
invest and use all strategies available to shareholders to promote social change by working with
local partners. Over the years, Walden has built up a network of contacts at non-governmental
organizations around the world who serve as an invaluable sounding board for us. In 1999, they were
our partners in selected shareholder initiatives on a global basis including representing our
concerns and questions at annual general meetings in the Netherlands and Germany.
SF: What
is the state of shareholder advocacy in Japan?
GA: Again, we understand the shareholder
rights environment in Japan and would not, for example call for diversity on boards, when they do
not even have board independence. In Japan, we are promoting increased board independence and more
transparency and accountability to shareholders. In 1999, to gain insight and baseline information
on existing corporate governance practices, Walden surveyed its top 20 Japanese holdings on
director and statutory auditor independence, board size, and remuneration and nomination
committees. We were encouraged that 80 percent of the companies responded.
SF: Can you
give us an inside look at one of your international corporate dialogues?
GA: Since 1997,
Walden has had an ongoing dialogue with BP Amoco on a range of issues from closing part of their
operations in Lima, Ohio, to their involvement in the Alaska National Wildlife Refugee (ANWR), and
most recently, their commitment to renewable energy. We have been impressed with their openness to
dialogue and discussion of difficult issues. BP Amoco representatives have visited our offices in
Boston twice to discuss their plans about ANWR and their environmental performance in Alaska. Last
Fall, we met with a member of their environmental department in London to further the dialogue on
these issues.
SF: Walden recently engaged in dialogue with European banks, such as Credit
Suisse, Deutsche Bank, and UBS. What was the nature of this international advocacy work?
GA: Social investors have traditionally regarded the financial sector as socially benign. This
is no longer the case. Walden, along with other social investors, have started looking more
carefully at what and whom financial institutions are supporting through their business activities
through corporate lending, project financing or underwriting. Walden started raising such issues in
1997 with Bank of America and their involvement in the controversial Three Gorges Dam, which has
been rife with political, environmental and social problems. In 1999, Walden engaged in a variety
of shareholder initiatives in the financial sector both here and abroad. We have found through our
dialogue with EU banks, that they are further along than their U.S. counterparts in integrating
environmental criteria into their risk assessment process and are familiar with World Bank
standards.
SF: What kind of an investor would be interested in WISIX?
GA: WISIX
is a core international portfolio, generally ideal for anyone seeking equity participation in the
rest of the world's growth: individuals and endowments making their first foray into international
investing, large multi-manager plans seeking a core international manager or plan choice, or
domestic portfolio managers wanting to add global exposure with one mutual fund. It is an easy,
cost effective way to get broad diversified exposure to non-U.S. developed country markets from the
get go. And it could be considered very tax efficient for long-term taxable investors.
SF:
What are your expectations for the future growth and influence of WISIX?
GA: I am
optimistic about global growth, economic restructuring, and growing corporate profitability. The
'90s were a great decade for the US but an awful one for most of the rest of the world. This could
change going forward, and international markets can be a good place to invest. Last year, the MSCI
EAFE had better returns than the S&P500 for the first time in many years, and this in a banner year
for the US markets. As US investors see the opportunity overseas, more investors should consider
WISIX a mainstay of their stock allocation.
On the social side, too, we feel we have the
wind at our back. More standards are being set, we are developing better contacts with global
shareholder groups, and large institutions are making a concerted push for greater transparency and
better reporting, including on issues of social concern. International companies are tapping into
world capital markets and are becoming more shareholder-oriented. Social investors can take comfort
from these trends as they contemplate diversifying their investments into international securities.
©
SRI World Group, Inc. All Rights Reserved.
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