KLD Green Returns

I just received this press release from KLD and wanted to share it. KLD's Global Climate Index has three year anniversary and posts an average annual return of 15.24%! This compares quite favorably to the S&P 500 return over the same period of just 4.4%. Another good reason to invest in companies committed to a sustainable planet. They make money!



The KLD Global Climate 100 Index
Marks Three Year Anniversary:
The First Climate Change-focused Index
Returns 53% since Launch

Boston, MA, July 17, 2008 – KLD Research & Analytics, Inc. has marked the third anniversary of its Global Climate 100SM Index (GC100) – the first global index focused on solutions to climate change. The GC100 has returned 53% (15.24% annualized) from its launch on July 1, 2005 through June 30, 2008. The index holds a diversified group of companies that are leaders in renewable energy, clean technology & efficiency, and future fuels.

“Over the past three years, we’ve witnessed formation of a scientific, public policy and business consensus on the need to combat global climate change. If our economy must depend less on fossil fuels, then our portfolios must do the same,” said Thomas Kuh, Managing Director of KLD Indexes. “Renewable energy is part of the answer, but energy conservation and pollution prevention are also essential. The GC100 looks for opportunities on all these fronts.”

The GC100 includes companies who make promising energy-saving products, such as “smart” electric meters and superconductors, as well as alternative energy stocks.


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KLD Global Climate 100: Holdings and Top Performers
The GC100 holds leading companies in the climate solutions value chain, including small, pure-play firms like Novozymes and GS Yuasa as well as large diversified companies, like Siemens and General Electric. The Index is equal weighted to ensure that investors benefit from these innovative companies regardless of their size.

“As the following chart shows, the holdings in the GC100 are positioned to profit from the trend toward de-carbonization of the economy in response to climate change,” said GC100 Index Manager Jed Sturman. “As the price of oil has soared, GC100 constituent stocks like Vestas Wind Systems of Denmark and SolarWorld of Germany have shown strong returns; smaller firms such as Conergy, Solon, and American Superconductor have also performed well.”


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KLD created the GC100 in partnership with the Global Energy Network Institute, a research organization that seeks to build connections among the world’s energy systems, with an emphasis on renewable energy resources. “In the energy sector, we get what we invest in. If we want a cleaner, more sustainable world in the future, we need to invest in climate solutions today,” said Peter Meisen of GENI.

KLD Global Climate 100: Methodology and Index Performance
The GC100 includes a mix of 100 global companies that will provide near-term solutions to global warming while offsetting the longer-term impacts of climate change. GC100 constituent companies include producers and distributors of:

Renewable Energy, such as solar and wind;
Future Fuels, such as biofuels and hydrogen; and
Clean Technology & Efficiency, such as technologies and services that help to reduce energy consumption and emissions of greenhouse gases.

The GC100’s constituent companies include large-, mid-, and small-capitalization companies representing sectors ranging from energy and utilities to industrials and consumer products. This broad focus distinguishes the GC100 from other carbon-sensitive investment strategies that include only energy and utility stocks. The GC100 is an equal weighted index, which means that KLD allocates a 1% weight to each of its 100 constituents. This increases the GC100’s exposure to small-capitalization companies and ensures that investors benefit from innovative companies who are poised for growth.

The GC100 has returned 57 percent (17.23% annualized) since index launch, as of 5/31/08. The same constituents under a market cap weight would have returned 39 percent (12.54% annualized). As explained by Peter Meisen of GC100 partner GENI: “It just makes good business sense to reduce one's dependence on fossil fuels – for investors as well as companies.”

KLD Global Climate 100: Licensees and Investment Products
The GC100 serves as the basis for an assortment of investment products including:
Institutional and Separate Accounts
Northern Trust • USA
Shinko ITM • Japan

Mutual Funds
Shinko ITM • Japan
Chikyu Ondanka Boushi Kanrenkabu Fund I (06312066:JP)
Chikyu Ondanka Boushi Kanrenkabu Fund II (06311077: JP)
Chikyu Ondanka Boushi Kanrenkabu Fund PLUS
Cominvest Asset Management • Germany
Cominvest Klima Aktien PLUS (WKN: A0MSTB)

Unit Investment Trust
Advisors Asset Management • USA
KLD Global Climate 100 Index Portfolio, Series III (ADTKFX)

_________________________
About KLD Indexes
KLD Indexes is a unit of KLD Research & Analytics, Inc., a leading provider of environmental, social and governance (ESG) research for institutional investors. KLD Indexes develops and licenses benchmark, strategy and custom indexes that investment managers use to integrate ESG criteria into their investment decisions. KLD Indexes are designed to be transparent, representative and investable.

Products based on KLD Indexes include:
Mutual Funds
ETFs
Separately Managed Accounts
Unit Investment Trusts
Variable Annuities
Structured Products

More than $10.5 billion is invested in vehicles based on KLD Indexes. For more information about KLD’s indexes visit http://www.kldindexes.com/
For information about licensing a KLD index for the creation of an investment product, please email indexes@kld.com


Contact:
Amy Blumenthal/Karen Myers
Blumenthal & Associates
617-879-1511

Peter Ellsworth
KLD Research & Analytics, Inc.
617-426-5270 x218

How to Fight a Bear

In my last newsletter I suggested a recession may have begun in the first quarter of this year. I was wrong. The economy squeezed out a 0.6% annualized growth rate in Q1 ‘08. However, according to Warren Buffet anytime that GDP is less than U.S. population growth, we are in recession. The U.S. population growth rate in 2008 is estimated at 0.88% leaving us with a real economic growth of -0.28%. I think I will go with Mr. Buffet’s definition!

Either way, it sure feels like a recession. The stock and real estate markets are both down nearly 20% from their peaks. Even bonds, which are normally a good bet going into a recession are getting hit due to inflationary fears. Recessionary times are generally accompanied by “bear” markets, a term investors refer to when the market declines by 20% or more. The last recession, which started in March of 2001 and lasted about eight months, was primarily due to a bubble in technology related stocks. That recession was accompanied by a bear market, which began in January 2000 and lasted until October 2002. Stocks lost 49% during this time period. However, the real estate market was very strong and helped to offset losses investors had in the equities markets. In addition, bonds rallied as interest rates fell and inflation remained low. This time its different. Both stock and real estate markets are in bear territory, while the credit crunch and inflation issues are causing havoc in the bond market. We may be closer to a 1970s style bear market than the 2001 bear.

The average bear market lasts about 14 months with a drop of 32%. However, averages do not tell us what to expect. One of the largest market drops was during the 70’s oil crisis when the market fell 48%.

In nearly every case, the stock market bottoms well before economic activity bottoms. This is because the stock market provides a signal for future earnings, generally at least six months out.

Fighting the Bear

Should we abandon the picnic basket and give it to the bears? Definitely not. First things first, don’t panic. I searched the web for stories written in late 2002 and early 2003 near the end of the last recession. After three straight years of declines, the US markets were off by nearly 50%. Market commentators were fueling the panic with pessimistic articles about expectations in 2003. Many were predicting 30% market sell offs, while others suggested moving entire portfolios to cash. These are the same folks that coined the term “The New Economy” and helped to fuel the tech bubble. As it turns out, 2003 was one of the best markets on record - up 28.7% including dividends and led by “old economy” stocks. The good news about today’s market is stocks are cheaper in relative terms than at the end of 2002!

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1. Invest for the Long Term
Investing in the stock market is for long-term investors only. Investment horizons should be at least seven years or longer. I cannot predict what the market will do in the next 12 months, but a well balanced equity portfolio should be up at least 9% over the next 7 to 10 years. Why? Because bear market sell offs present terrific buying opportunities for patient investors. When was the last best time to buy equities? In October of 2007 when the market reached the end of it bull market cycle, or in December of 2002 when investing in stocks felt like jumping into a bottomless pit? If you invested in the S&P500 in January of 2003, you would be up an average of 12.8% a year over the next four years. Despite the occasional sell off, the market (S&P 500) on average has increased by 11.9% per year over the last 60 years.

2. Do Not Try to Time the Market
Trying to time market swings is a classic investor mistake during bear markets. It is nearly impossible to predict when the market will rebound. Rebounds are usually swift and erratic. As I said earlier, the average bear market drop is over 30%. However one month after the market bottoms out, the average recovery is 10.6%. After three months, the average recovery is 14.7%; six months after bottom, the average recovery is 23.1%. Finally, investors who held on were rewarded with an average 34.8 percent recovery 12 months following a bear market bottom.

3. Doing Nothing Will Not Work Either
Investment portfolios need to be reviewed periodically. During bear markets, additional scrutiny must be made. Now is the best time to shed poor investments. Not every position will come back to its previous value and some will go to zero. We still have not reached the 2000 NASDAQ peak and may not for several years, and this is because many of the highest fliers never recovered.

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4. Converting to Cash May Be a Mistake
Unless you had the prescience to convert to cash in October of 2007, converting to cash now after a 20% correction may not be the best idea. How will you know when to get back into the market? Inflation rates are currently almost double what you can get in a money market, so in addition to missing a rebound, you will lose real asset value due to inflation.

5. Search for Value
It is markets like these where fortunes are made. Many investments are selling at cheap values due to overall market devaluations rather than specific investment risk. For example, nearly all banks are off 50% from their market peaks. However, not all banks are in bad shape. The current environment will make some folks very rich and others lose fortunes.

6. Rebalance
Steep market drops are the best time to rebalance your portfolio. For example, if you held TIPS or other government bonds in your portfolio, now is a great time to sell off some of your profits and re-invest in other sectors that have been hit hard. This allows you to increase your profits when the market improves.

Certainly, the best time to buy is when something is on sale. At this point, equities are now 20% off. The question is, will there be a bigger sale later? Are they about to go on clearance? The approach here is to buy some on sale, but to maintain some powder for a clearance.

The Next Tech Boom

Fossil fuels provide over 85% of the fuel used on the planet. The triple dilemmas of limited supply, controlled by unfriendly nations, and the unwanted side effects of global warming have created the perfect environment for new sources of renewable, alternative energy to take hold. If you combine oil costs at nearly $150 per barrel, gas prices over $4 per gallon, war in Iraq and possibly Iran, and global warming, we might just be seeing the perfect storm to launch the next big tech boom. Today, more money than ever is being spent on alternative energy sources as plans for the end of the fossil fuel economy are being laid. Much of the information from this article is derived from a Special Report on the Future of Energy in The Economist and sections of Value Investing by Hal and Jack Brill.

The 1990’s tech boom was lead by companies like Dell, Microsoft, Cisco, and Intel. These old “tech” companies, however have done little in the last ten years to solve the world’s primary problems. The late Richard E. Smiley, PhD compiled a list of Humanities Top Ten Problems. The first five on the list are energy, water, food, environment and poverty in that order. The New Tech companies will be industrial manufacturers that invent solutions to these world problems.

New Tech includes companies that create new sources of energy, use energy more efficiently or clean up existing sources of energy. For example, Wind Power is now the fastest growing energy source on earth. Growing at 30% per year, this renewable energy source will reach 100 gigawatts this year. In May, T. Boone Pickens, one of Texas’s most famous oil tycoons, announced a $2 billion venture with GE to build the countries largest wind farm. Today, wind represents only 1% of America’s electricity, but this figure is expected to reach 15% within the next 10 years. The cost of energy created by these turbines has come down to just 8 cents per KWH (kilowatt hour) compared to 5 cents per KWH for coal power. However, according to a study by MIT, the cost of coal power would rise to 8 cents per KWH, if coal power companies were required to capture and store their CO2 emissions underground or if a carbon tax was imposed.

Wind power is considered only an interim step in moving to a world of renewable energy sources. Solar Energy is the ultimate goal. However the costs of solar energy are still high compared to other forms of energy. According to Cambridge Energy Resource Associates, photovoltaic electricity cost 50 cents in 1995. This cost came down to 20 cents in 2005. Other sources of renewable energy such as biofuels, geothermal, and hydroelectric are dropping in cost per KWH. At some point soon, one or more of these alternative energy resources will drop below the cost of oil and change the entire energy landscape as we know it.

New Tech also includes Clean Technologies. These are companies that produce products or services that improve operation, performance, productivity or efficiency, while reducing costs, inputs, energy, consumption, waste or pollution. For example, the new tech boom will include companies in the water industry. These companies focus on water treatment, water recycling and the technology and services that are directly related to water consumption. New Tech includes companies that solve the world’s food needs with innovative new healthy products. Finally, New Tech will include companies that provide infrastructure to the developing world.

We will not find the solutions to the world’s major problems by looking at 1990’s style tech companies. They are busy producing products like Grand Theft Auto IV. The solutions to today’s problems of sky rocketing energy prices, a lack of clean water in many areas of the planet, solving basic food shortages, cleaning up our environment, and providing infrastructure for undeveloped nations may just be solved by innovative companies in the U.S. industrial manufacturing sector.

Market Summary 2Q2008

Over the past 50 years, there have been nine “bear” market cycles. A “bear” market is one with a 20% or more drop in value. This decade, we have had the misfortune of having two bear markets.

The explanations Wall Street analysts give for the current bear market cycle sound like bad breakfast foods. I can just here them saying, “Mr. Chairman, we don’t want Mortgage Meltdown, Credit Crunch or Real Estate Bubbles again this morning. Just a cup of Over Priced Oil.”

For the 2nd quarter of 2008, the S&P 500 was down 2.7% and nearly 12% for the year-to-date. International markets faired about the same with the MSCI EAFE index falling 1.9% and 10.6% year-to-date. The bond market, normally a safe haven during times of trouble, also fell 1% for the second quarter and is up just 1.1% year to date. Ok, so maybe cash was safe…not really. Money markets are currently paying about 2% and inflation is running over 4%.

So what has performed well in 2008? A portfolio of TIPS, commodities, energy and Brazilian stocks would have been a nice combination. Although the declines are unwelcome, the current market cycle is terrific for diversified long-term investors. Equities are priced lower today in relative terms than they have been in many years. However, if you have a short-term need to liquidate, you may be disappointed six months from now.

New Relief From Our Old Friend "AMT"

This interesting article was sent to me by Oren M. Chaplin, Esq. with Norris McLaughlin & Marcus, PA

With increasing frequency, taxpayers are becoming subject to the alternative minimum tax (“AMT”). It is an additional tax (i.e., it is imposed to the extent it exceeds the regular income tax liability) that can cast a wide net over many taxpayers. The AMT is a particular problem for taxpayers who exercised incentive stock options (“ISO”) since the exercise of an ISO would be taxable for AMT purposes and could create a substantial AMT liability even though the
exercise was generally not taxable for regular tax purposes.

The Tax Relief and Health Care Act of 2006 brings significant AMT relief in the form of a “refundable credit” resulting from the payment of the AMT. A brief review of how the AMT works is helpful in order to better understand the mechanics of the new tax relief.

How AMT Works

The AMT is the amount by which the “tentative minimum tax” exceeds your regular income tax liability (i.e., your tax liability as you would compute it using the IRS rate schedule). The “tentative minimum tax” is the sum of 26% of the “taxable excess” up to $175,000, and 28% of the remaining “taxable excess.” The “taxable excess” is the amount by which alternative minimum taxable income (“AMTI”) exceeds an exemption amount. AMTI is the regular taxable income increased by items of preference and adjusted for certain items known as timing items which have income deferral components (e.g., gain from exercise of incentive stock options and accelerated depreciation.) AMT (for individuals) which is attributable to such deferral adjustments generates a minimum tax credit allowable to the extent regular tax exceeds the AMT tax in a future year. If these credits are not used, they are carried forward indefinitely. Credits such as these can reduce your future income tax liability dollar for dollar.

AMT and ISOs

In the case of ISOs, the theory behind the AMT is that it results in only a tax payment timing issue since when the stock is eventually sold, the AMT credit would be available to offset the regular tax due on the sale of the stock. By way of example of how AMT strikes, consider an individual taxpayer who exercises a grant of ISOs. Although this exercise will generally not cause a regular income tax liability, the excess of the fair market value of the underlying stock at the date of exercise over the amount paid for the stock is treated as income for AMT purposes and often results in a substantial AMT liability. While such liability results in a credit that is carried forward, taxpayers often find that the value of the stock obtained from an ISO exercise decreases substantially from the date of ISO exercise to the date of sale, so that on the sale of the stock there is little or no regular income tax gain on the sale. This means that AMT is paid on “phantom gain” and the AMT credit may carry over for years without being used to any substantial extent.

The New Rules

Congress responded to this tax anomaly by creating a refundable AMT credit. Beginning in 2007 and effective through 2012, an individual who previously paid AMT that gave rise to a credit can recover a portion of the “long term unused minimum tax credit” (tax credit from years that are more than three years earlier than the applicable tax year). For example, for the 2007 tax year, individuals can recover AMT paid for any year up to and including 2003. The annual limit of recovery is generally 20% of the carry-forward AMT credit each year subject to the reduction of the refundable credit (by applicable percentages) based upon the taxpayer’s adjusted gross income. However, if the applicable AMT credit is $5,000 or less, the taxpayer may be permitted to use the entire credit amount in a single year. By way of illustration, if an individual has $50,000 of AMT credit (from an ISO exercise in 2003), he can now use $10,000 (20% of the $50,000 AMT credit) of the credit in the 2007 tax year and then use the remaining $40,000 AMT credit for the 2008-2011 tax years at the rate of $10,000 per year.

A key aspect of the new legislation is that the credit is refundable to the extent it exceeds the taxpayer’s regular tax liability. This means you can claim a refund to the extent that the AMT credit exceeds the amount of tax you previously paid through withholding or estimated tax. Under the prior AMT credit rules, you would have been able to use the AMT credit only to the extent of your regular tax for that year and would be able to carry forward any unused amounts. The new legislation results in an “acceleration” of the AMT credit that did not exist under prior law.

Planning Opportunities

Although the refundable AMT credit is not limited to ISO exercises, clients who have exercised ISOs in prior recent years should examine their current situation to determine if they can take advantage of this new provision. The mechanics of calculating the credit amount can be determined by completing IRS Form 8801. Of course, the AMT effects should be examined in light of an individual’s income levels and the other limitations of the new law.

If you have any questions about this topic, or any other tax law concerns, contact Charles A. Bruder or Melinda Fellner Bramwit to discuss.

The Tax Law Alert provides information to our clients and friends about current legal developments or general interest in the area of tax law.The information contained in this Alert should not be construed as legal advice, and readers should not act upon such without professional counsel.

Copyright © 2008 Norris McLaughlin & Marcus, P.A.
This Alert was authored by Charles A. Bruder and Melinda Fellner Bramwit.