Software Nerd

Tuesday, October 10, 2006

An activist fund

Suppose you are a billionaire who wants to contribute about $500,000 a year to fight against environmentalism. Also suppose that you have many millions invested in safe index funds (apart from your other more active investments).

Here's an idea for activism (not mine):

1) Instead of giving $500,000 every year, donate $10 million to an anti-environmentalism organization. The entire amount will be returned to you after a certain number of years, or whenever you decide to stop your activism.

2) The organization invests the money in an extremely diversified portfolio of S&P500 companies. The idea here is not to use any special financial expertise. The idea is not to try to do better than your S&P500 index fund. The idea is simply to replicate the results of an S&P500 fund, mechanically. So, for instance, $10 million across 500 companies would be $20,000 in each. That's enough to buy about 400 shares in most S&P500 companies.

3) Assuming that the S&P500 (including dividends) goes up 5% a year, the organization can withdraw about $500,000 out of the corpus each year.

Now comes the part that's different from other endowments:

4) The couple of guys employed by this anti-environmentalist organization are not really fund managers. They are activist/campaigners against the environmentalism-friendly policies of S&P500 companies. They can do this more effectively now, because they are shareholders!!

So, they might:

  • ask PG&E to "disclose their involvement in state efforts to establish Kyoto Protocol-like, mandatory greenhouse gas (GHG) reductions for electric power plants".
  • question GE for siding with global-warming advocates
  • ask Citigroup to diversify its "environment partners" program
  • urge insurance companies to conduct their own independent analysis of the connection between warming and weather-related losses
  • ask Goldman Sachs to review its environment policy
  • ask Microsoft to reverse its policy of phasing out PVC plastic
  • ask Pepsi to disclose the business rationale behind certain charitable contributions
  • lobby other JPMorgan Chase shareholders to have the company's lobbying efforts directed away from global-warming and toward litigation reform

Of course, a few shares in each company aren't sufficient to force any type of change (to say the least). However, it buys one a platform, and a hearing. With some managements, it could raise a question about the universality of the environmentalist ethic. It can put a damper on managers who want to use company funds for their pet environmentalist charity. It could get other owners -- like major fund managers -- asking questions about some company policy that is costly and only makes sense if one accepts environmentalist propaganda.

An effort like this does not need to be funded by one, single $10 million corpus. Instead, it can be funded as a mutual fund. So, a person investing (say) $2,000 in the fund, is giving up (at, say, 5%) $100 per year in foregone income. If 5,000 people invest $2,000 each, one has enough.

The above is my description of how the "Free Enterprise Action Fund" works. It is run by Steve Milloy, who started . It has a little over $5 million and has been in operation for a few months now. I am a small but happy "donor/investor".


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