Take Action!

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Presentation by Jenny Russell and Mark Peters of Merck Family Fund and Federal Street Advisors; at the Take Action! 2010 Impact Investing Conference in Boston.

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Take Action!

  1. 1. Take Action! September 16, 2010 Jenny Russell, Merck Family Fund Mark Peters, Federal Street Advisors
  2. 2. Who we are <ul><li>Merck Family Fund </li></ul><ul><ul><li>Founded 1954 </li></ul></ul><ul><ul><li>Family Foundation </li></ul></ul><ul><ul><ul><li>All family on Board </li></ul></ul></ul><ul><ul><li>Assets $50 million </li></ul></ul><ul><ul><li>Grants $3 million+ </li></ul></ul><ul><ul><li>Interest in environment and sustainable communities </li></ul></ul><ul><ul><li>4 employees </li></ul></ul><ul><li>Federal Street Advisors </li></ul><ul><ul><li>Founded 1991 </li></ul></ul><ul><ul><li>Assets $3.5 billion </li></ul></ul><ul><ul><li>Advises families and foundations </li></ul></ul><ul><ul><li>Foundation assets $1 billion </li></ul></ul><ul><ul><li>Independent, objective firm with 28 employees </li></ul></ul>
  3. 3. Terminology Socially Responsible Investing Mission Related Investing Mission Investing Responsible Investing Program Related Investing Market Rate Investing Screening Shareholder Advocacy Impact Investing Sustainable Investing Environmental, Social and Governance
  4. 4. Evolving relationship <ul><ul><li>Merck Family Fund hired Federal Street Advisors in 2003 </li></ul></ul><ul><ul><li>Relationship has evolved over the years with understanding of Merck Family Fund’s interests and objectives </li></ul></ul><ul><ul><li>Growth of investment options within industry have expanded </li></ul></ul><ul><ul><li>Underlying primary goal unchanged: </li></ul></ul><ul><ul><ul><li>How can the foundation best use its capital to further its mission? </li></ul></ul></ul>
  5. 5. The first year <ul><ul><li>First steps </li></ul></ul><ul><ul><ul><li>Define objectives </li></ul></ul></ul><ul><ul><ul><ul><li>Return and risk expectations </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Asset allocation and manager selection </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Mission-related focus </li></ul></ul></ul></ul><ul><ul><li>Reduce exposure to concentrated position in Merck stock </li></ul></ul><ul><ul><ul><li>Initially more than one-third of portfolio </li></ul></ul></ul><ul><ul><li>Diversify the portfolio into small cap and international equity strategies </li></ul></ul><ul><ul><ul><li>Screened for gambling, alcohol and tobacco </li></ul></ul></ul><ul><ul><ul><li>Small cap equity increased to 20% from 1% </li></ul></ul></ul><ul><ul><ul><li>International equity increased to 15% from 0% </li></ul></ul></ul>
  6. 6. The next six years – investments <ul><ul><li>2004 through 2010 </li></ul></ul><ul><ul><ul><li>Exited Merck stock in a deliberate fashion (now 1%) </li></ul></ul></ul><ul><ul><ul><li>Added and later exited a hedge fund of funds strategy </li></ul></ul></ul><ul><ul><ul><li>Moved between large cap, small cap, and international equity managers as better choices were identified </li></ul></ul></ul><ul><ul><ul><li>Researched and funded investments in six private equity strategies with a climate change focus </li></ul></ul></ul><ul><ul><ul><li>Added a sustainable global equity fund </li></ul></ul></ul><ul><ul><ul><li>Added a long/short equity hedge fund with a renewable energy opportunity set </li></ul></ul></ul><ul><ul><ul><li>Purchased a CD from a local community-oriented bank with SRI focus </li></ul></ul></ul>
  7. 7. Growth in number of investment strategies with SRI or sustainable focus
  8. 8. The next six years – broader impact through investments <ul><ul><li>2004 through 2010 </li></ul></ul><ul><ul><ul><li>Increased shareholder engagement </li></ul></ul></ul><ul><ul><ul><ul><li>Proxy voting </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Shareholder resolutions </li></ul></ul></ul></ul><ul><ul><ul><li>Heightened engagement of Finance Committee </li></ul></ul></ul><ul><ul><ul><ul><li>“ Scratch and Sniff” committee </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Evolution of Investment Policy Statement and screens </li></ul></ul></ul></ul><ul><ul><ul><li>Co-sponsored climate solutions conferences in Boston (2007) and NYC (2008) </li></ul></ul></ul><ul><ul><ul><ul><li>Resulted from a shared interest in a comprehensive discussion of climate solutions among foundations and endowments </li></ul></ul></ul></ul>
  9. 9. Shareholder activism
  10. 10. Shareholder participation on the rise
  11. 11. Resulting from a shared interest
  12. 12. The foundation and the advisor <ul><li>The Foundation </li></ul><ul><ul><li>Votes proxies </li></ul></ul><ul><ul><li>Signs resolutions </li></ul></ul><ul><ul><li>Gut checks companies </li></ul></ul><ul><ul><li>Invested in sustainable timber fund </li></ul></ul><ul><ul><li>Put cash in community bank </li></ul></ul><ul><li>The Advisor </li></ul><ul><ul><li>Provides disciplined asset allocation & “Best in Class” manager selection </li></ul></ul><ul><ul><ul><li>Large Cap, Small Cap, International Equity </li></ul></ul></ul><ul><ul><ul><li>Private Equity </li></ul></ul></ul><ul><ul><ul><li>Hedged long/short equity </li></ul></ul></ul><ul><ul><li>Pre-screens opportunities </li></ul></ul><ul><li>Together </li></ul><ul><ul><li>Share new investment ideas </li></ul></ul><ul><ul><ul><li>Identify unique strategies </li></ul></ul></ul><ul><ul><li>Co-sponsor conferences </li></ul></ul><ul><ul><li>Speak out, such as today </li></ul></ul>
  13. 13. Excerpt from the Merck Family Fund Investment Policy Statement <ul><ul><li>In awarding grants, the Merck Family Fund’s vision is to 1) maintain, restore, and protect the natural environment and sustain a healthy planet for future generations; and, 2) revitalize the social fabric and the physical landscape of the urban community. The investments should not conflict with this goal. </li></ul></ul><ul><ul><ul><li>Portfolio will seek to exclude: investing in corporations that profit (more than 10%) from </li></ul></ul></ul><ul><ul><ul><ul><li>gambling or tobacco products or services.  </li></ul></ul></ul></ul><ul><ul><ul><ul><li>producing nuclear power, or from mining or processing uranium.  </li></ul></ul></ul></ul><ul><ul><ul><ul><li>mine gold.  </li></ul></ul></ul></ul><ul><ul><ul><ul><li>In addition, a committee of the Family Fund may review portfolio holdings and exclude investments in companies involved in other areas not aligned with the Family Fund’s objectives, such as companies that manufacture or sell weaponry.  </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Whenever possible, investments will be sought in corporations that favor the protection of the environment, diminish the effects of pollution and that implement environmentally appropriate practices. </li></ul></ul></ul></ul><ul><ul><li>In order to further align the Family Fund’s investment portfolio with its vision and objectives, trustees will vote proxies of companies in the portfolio with guidance from respected investment managers, currently Boston Common, Walden, and Generation, or other organizations such as As You Sow. </li></ul></ul>
  14. 14. Challenges and opportunities <ul><ul><li>With foundations  </li></ul></ul><ul><ul><ul><li>According to FSG Social Impact the number of foundations engaged in mission investing has doubled over the past decade. Defining moment.  </li></ul></ul></ul><ul><ul><li>With benchmarks </li></ul></ul><ul><ul><ul><li>Traditional benchmarks don’t have mission-related investing in mind, and there is no complete set of alternatives </li></ul></ul></ul><ul><ul><ul><li>Comparing to conventional benchmarks and peer groups </li></ul></ul></ul><ul><ul><ul><ul><li>Mismatch over shorter time periods - apples to oranges </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Longer term expectation is outperformance, in any event </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>A different opportunity set does not necessarily equal a lower return </li></ul></ul></ul></ul></ul>
  15. 15. The range of shared interests - current Use of resources – financial and human Successful Grants and PRIs Investment Success Effective Shareholder Advocacy

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