USNF Divestment Policy Update - August 2016
In May 2014, the Congregation approved a resolution to immediately divest our Legacy Fund of directly held investments in fossil fuel companies and to completely divest all investments in fossil fuels over 5 years. The USNF investment portfolio did not hold any direct investments, which are defined as individual securities, i.e. stocks or bonds, in fossil fuel companies, so no immediate action was needed.
Since that time, the Finance Committee has begun a thorough review of steps needed to divest of fossil fuel companies and replace those investments with a risk managed, balanced portfolio that will meet our commitment to responsible, sustainable, fossil fuel free investing.
This summarizes what has been undertaken thus far:
- As an overview, in 2009, the Board of Trustees approved an investment policy for our Legacy Fund. The policy states that investments will seek a reasonable return above inflation; will be diversified with broad allocation between domestic stock, fixed income, international stock and cash; will use Vanguard funds to control expenses and allow easy management. A suggested asset allocation target between these broad categories is maintained by using Vanguard index funds. The portfolio is rebalanced twice each year, in April and October, unless it is deemed unnecessary by the Finance Committee.
- One step in the divestment process will necessitate the review and redesign of this investment policy to reflect the new focus. Because Vanguard does not currently have a fossil fuel free fund, it will also necessitate dropping the requirement of using Vanguard as the asset manager. In addition, it has been suggested that newer risk management techniques include the use of alternative investments such as real estate, emerging markets, TIPS, natural resources, commodities, etc. in a portfolio in addition to the general stock, bond, and cash allocations. This redesign is currently in discussion and a meeting between the Board and finance committee will be held by year end 2016 for this discussion.
- In any redesign, attention must be paid to factors such as risk management, expenses, complexity and ability of future Finance Committee members to manage the Legacy Fund.
- Since the vast majority of the Legacy Fund (with a small exception of about $13,000 in the UUA Common Endowment Fund) is invested in index funds that contain fossil fuel companies, the entire investment will need to be liquidated. Factors such as timing, market conditions, and suitable replacements are important considerations.
- The Finance Committee has looked at alternative types of investments to replace the Vanguard Funds. These include: mutual funds (both index and actively managed mutual funds); individual stocks and bonds; exchange traded funds (ETFs), and separately managed or professionally managed accounts. After the new investment policy is approved by the Board, the use of one or more of these types will be implemented.
- The Finance Committee has explored other mutual funds. We have used the 350.org links to examine suggestions on alternative investments. For example, we examined The Forum for Sustainable and Responsible Investments’ Sustainable & Responsible Mutual Fund Chart & Separate Account Managers list. The mutual fund chart consists of 207 mutual funds of different share classes or 86 unique mutual funds which are socially responsible. Of these 86, approximately 13 actually are fossil fuel free. We used these 13 funds as a starting point to build several hypothetical portfolios to watch over time as possible alternatives to our current portfolio. We have cross referenced this group of 13 funds with Green America’s list of fossil fuel free funds to ensure we have a good starting list to watch. Please note, that we focused on those funds that have a longer track record and sufficient assets although we recognize that new funds are being developed all the time.
- We have begun looking at exchange traded funds (ETFs) which have the benefit of being relatively low cost and can specialize in certain types of investing. Beginning November 2015, several fossil fuel free ETFs have specifically been established to meet the growing divestment concerns of investors. Since many of these ETFs have a very short track record, we have also looked at their turnover ratio, asset size in dollars and current holdings. As stated above, these are important considerations for our investments.
- We have compared the expenses of the new portfolios as well as the overall asset allocation breakdown to ensure we are following diversification, balance and risk management strategies.
Summary: The Finance Committee has begun the process of reviewing and implementing steps needed to divest our Legacy Fund within 5 years of the 2014 Congregational resolution. We have established a framework to change the Congregation’s investment policy; set up hypothetical investment portfolios using publicly traded mutual funds and tracked their fees, performance, holdings, turnover, etc. for comparison with our current holdings; we have narrowed down the list of 86 potential sustainable mutual funds to about 13 for a starting point for fossil fuel free investing; we have set up a list of ETFs to monitor and we have discussed the assortment of other investment options such as individual securities and professionally managed separate accounts. We invite anyone who has suggestions on fossil fuel free investments to provide those to us so we can review them. We also welcome anyone interested to join us at any time.