Charitable gift trusts are a win/win deal for both donors and charities. Donors win because the tax laws enable them to avoid capital gains taxes on appreciated assets they donate and allow a tax deduction based on the market value of their donation when it is made. Charities win by getting a larger contribution than if the donor had sold the asset, paid taxes on it, and donated the balance.

Since 1999, donors to the Heartland Charitable Trust (which is not affiliated with Pax World Funds) have been able to have their donations reinvested in the Pax World Balanced Fund, “the (portfolio’s) star in 2004,” according to Heartland. In addition to the Balanced Fund, the trust offers five other mutual funds, enabling donors to choose the investment vehicles that best meet their objectives, timeline, and risk preferences.

And here’s the part where you can be like Bill: With a donation of at least $10,000, you can establish a donor-directed gift fund within the Heartland Trust. You can make additional donations at any time in amounts of $2,500 or more, and your donations can be distributed quickly or endowed for an extended period.

To learn more about the Heartland Charitable Trust, call the DB&T Trust Dept. at 866.397.2133, visit www.atimetogive.com, or e-mail hct@htlf.com.

Please note that the information in this article does not constitute tax advice. Always consult your personal tax advisor before making any tax-related investment decision.

A month later, Gap released a comprehensive report about labor conditions in its factories. According to the San Francisco Chronicle, “the report from Gap-the largest U.S. clothing chain, operating more than 3,000 Gap, Old Navy, and Banana Republic stores-could prompt competitors to follow suit, ultimately improving the lives of millions of workers.”

“The disclosure of so much information is a watershed moment,” said Anita Green, Pax World’s Vice President of Social Research, speaking last June to shareholders at Pax World Funds’ annual meetings. She noted that Nike and Gap were Pax World portfolio holdings in the 1990s. “We engaged both companies in dialogue over abusive labor practices,” she said, but “the dialogue did not produce the results we were looking for, and we divested our shares.” Others continued to press the companies, though, and the cumulative impact has been positive, she observed.

Shareholder activism also scored a victory at Yum! Brands. On March 9, the Coalition of Immokolee Workers (CIW) called off their four-year boycott of Yum! subsidiary Taco Bell after Yum! agreed to increase the Florida tomato pickers’ piece rate by a penny a pound. “It may not sound like much,” wrote William Baue, reporting for SocialFunds.com, “but it almost doubles the price paid by tomato farms for each 32-pound bucket harvested, from about 40 cents (a rate that has not changed significantly in over a quarter century) to at least 72 cents.”

The struggle over wages and other issues began in 2001, when the Center for Reflection, Education, and Action (CREA) collaborated with the CIW, Trillium Asset Management, and the United Church of Christ in engaging Yum! in dialogue. In 2003, CREA filed a shareholder resolution asking the company to report on the social, environmental, and economic sustainability of its business and supply chain. The resolution received 39% support from voting shareholders (first-year resolutions need to receive just 3% of the vote to qualify for re-filing the second year).

Yum!, whose subsidiaries also include KFC, Pizza Hut, Long John Silver’s, and A&W, buys less than 1% of the annual Florida tomato crop. To extend the victory with Yum!, CREA is trying to convince at least 12 companies to participate in creating an agricultural supply chain code of conduct and suggested compliance system, both domestically and internationally. CREA has offered to withdraw its shareholder resolution if Yum! agrees to join such a working group to address industry-wide reform.

In Megatrends 2010: The Rise of Conscious Capitalism, Patricia Aburdene argues that “we are becoming aware of the unbearable price of an unconscious (not to mention illogical) philosophy that would embrace Œprofit at any cost.’” She cites examples of recent corporate scandals that have led to wide-scale disillusionment, mistrust, and eventually more reflection by consumers when they purchase goods and services. “If values, more than income, demographics, geography, or other factors, profoundly influence your choices at the cash register,” she says, “whether you purchase fair-trade coffee, solar panels, or that new Honda hybrid, you’re a Conscious Consumer.”

Aburdene identifies eight characteristics of the “emerging megatrend of Conscious Capitalism.” It is, she says,
1) bottom up: a broad-based, grassroots movement pressing for
greater accountability and integrity in business;
2) top down: espoused in hundreds of the world’s leading corporations;
3) prosperity oriented: an engine of superior financial performance;
4) investor driven: attracting trillions into socially responsible funds;
5) activist: a hotbed of advocacy from shareholder to environmental;
6) demographic: reflecting the changing human profile of business;
7) consumerist: winning growing public support in the marketplace; and
8) spiritual: the real world manifestation of the quest for transcendent
values in business.

Aburdene argues that “two complementary trends in leadership-the decline and fall of the celebrity CEO and the emergence of grassroots corporate leaders…lay the groundwork for a massive power shift” in the corporate world. She thinks it is “upon the lines of this new managerial grid that Conscious Capitalism will flourish.”

Aburdene’s reputation as a “futurist” was built through the best-selling books Megatrends and Megatrends 2000, which she co-authored with her former husband, John Naisbitt. This latest, solo effort led to a spot as a plenary speaker at the upcoming “SRI in the Rockies” conference, the annual gathering of the socially responsible investment industry in the United States. As Bob Helmuth, Pax World Vice President for Advisor/Institutional Markets, says, the book is “great for our industry, since it brings the virtues of SRI to the mainstream public and quantifies our growth and performance.”

But is Aburdene right? Has SRI reached its tipping point? We’ll know in retrospect. In the meantime, Megatrends 2010 makes for an engaging, provocative, and hopeful read.

At Avon* (which represented 1.42% of the assets of the Balanced Fund, as of 7/31/04), a resolution asking for the annual election of directors drew so much support that a vote was unnecessary. “After the ballots are printed and the proxies go out,” Green explains, “the company doesn’t usually do anything until the annual meeting, but Avon saw that there was overwhelming support for the resolution. Three days before the annual meeting, Avon held a board meeting and decided to approve the annual election of directors. We were very pleased and were able to withdraw our resolution.”

Pax World’s other resolutions addressed the economic impact of HIV, AIDS, and other diseases. “More than 42 million people, 95% of whom live in the developing world, are living with HIV and AIDS worldwide,” Green says. “Only 4% of those who need treatment have access to treatment. Last June, the World Bank warned that a complete economic collapse will occur in Africa unless there is a response to this pandemic.”

Although the humanitarian crisis caused by such a collapse would be enormous and could have serious, long-term consequences, the reality is that the U.S. economy could probably withstand Africa’s collapse, Green says. However, China, India, and Russia are also beginning to report that HIV is becoming widespread in their countries. “As the disease spreads and its impact grows,” Green says, “the risks to our economy and investment markets rise.”

This concern drove Pax World to co-file resolutions at Abbott Labs* (0.63% of the Balanced Fund’s portfolio, as of 7/31/04) and Johnson & Johnson* (0.97% of the portfolio), asking the companies to assess the financial and reputational risks posed by HIV, AIDS, tuberculosis, and malaria. “The resolution at Abbott received 6.72% of the vote,” Green says, “quite good for such an underreported issue. Dialogue with management is continuing at Johnson & Johnson, so we were able to withdraw our resolution for the time being.”

*This story does not constitute a recommendation of this company’s financial attractiveness as an investment.

The Balanced Fund’s rating comes just six months after the Social Investment Forum (the national trade association for the social investment industry) announced that over two-thirds (71%) of the 21 largest socially and environmentally responsible mutual funds in the United States earned top ratings from Morningstar and Lipper through the end of 2003. A total of 12 earned an “A” or “B” ranking from Lipper, based on one- and/or three-year total returns in their investment categories. Nine received either four- or five-star ratings from Morningstar for three-year risk-adjusted performance.

Within the broader universe of the 53 socially screened funds tracked by Lipper and Morningstar, 62% (33 funds) received top marks from one or both of the firms. According to the Forum, 26 of the funds tracked received an “A” or “B” ranking from Lipper based on one- and/or three-year total returns within their investment categories, and 20 screened funds earned either four or five stars from Morningstar for at least three-year risk-adjusted performance. A number of the funds earned top rankings from both organizations. Both the Lipper and Morningstar analyses are based on time periods ending December 31, 2003.

In another indicator of competitiveness, the Forum’s 2003 survey of socially responsible funds found that average expenses are similar to those charged for unscreened funds, and, in some cases, are lower.

Comparing all share classes of SRI (socially responsible investing) funds by investment type to all share classes for the total market, and including only those investment categories with five or more SRI funds, the Forum found that SRI funds are neither more nor less costly than other funds of similar type.** According to the Forum, 50% of SRI funds by investment category are less costly than the whole market, even though 60% of SRI investment categories have lower average net assets than the market. This fact further underscores the competitiveness of SRI mutual funds’ expenses, the Forum noted, as funds with lower asset levels often have higher annual fees and expenses per shareholder.

*The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. Morningstar 3-, 5-, and 10-year ratings are based on risk-adjusted returns. Ratings are as of 6/30/04 and are subject to change every month. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)

**Your actual investment costs may be higher or lower than those cited here.

“It’s hard to find companies in the pulp and paper industry that could pass any of our social and environmental screens,” says Balanced Fund Portfolio Manager Chris Brown, “but Aracruz’s environmental standards make them a true leader. Many of their practices have become industry standards, and they’ve been publishing an environmental report for the last six years, something unheard of in their industry.”

Aracruz owns the largest native Atlantic Forest reserves in the states of Bahia and Espirito Santo and sources its wood solely through its renewable eucalyptus plantations. Brazilian law requires that at least 20% of a forestry company’s land holdings be preserved uncultivated or planted with indigenous species. At its last report in January 2003, Aracruz exceeded this requirement, with approximately 29.4% of its land accounting for such holdings.

SustainAbility, an international consultancy specializing in business strategy and sustainable development, notes that Aracruz’s Forestry Partners Program, developed in 1990, “works with local farmers to develop new, sustainable timber plantations that provide both planted sources of timber for the company’s pulp mill, and a new source of income for the local communities. Seedlings of native tree species are also provided for use in protected reserves. Participating farmers are given seedlings and technical assistance, as well as the option of keeping 3% of the eucalyptus harvest for their own use, along with the residues (bark, branches, etc.) that are left over from the harvest process. These residues can be sold to bakeries, brick manufacturers, charcoal makers, schools, and others and serve as yet another source of income.”

Aracruz practices integrated pest management on its plantations, relying on biological control of pests and diseases. The company also derives over 90% of its electricity from biomass, by burning by-products of the pulp production process.

All Aracruz employees participate in collective bargaining agreements renegotiated annually with their unions. Although no women serve yet on its board or in executive-line positions, Aracruz was the first company in its industry to hire women for positions in its operational units. The company offers bonuses based on operating results, contributes to an employee pension fund, and provides funds to operate a school and an in-house educational program which has eliminated illiteracy among employees.

As a shareholder of each company in which its portfolios own stock, Pax World usually votes by proxy, as well. And even though the companies in our funds have passed screens for corporate governance, we often find ourselves voting against management. In this regard, two statistics from last year’s proxy season are worth noting: we voted against a company’s choice of “independent auditor” 45% of the time and withheld votes from director nominees 18% of the time.

Anita Green, Pax World’s Vice President of Social Research & Corporate Activity, explains: “In general we vote against the auditors if more than 25% of the company’s fees paid out to them are for non-audit-related activities. We feel that if more than a quarter of the auditor’s revenue from Company X is for non-audit services, then the auditors are not truly independent and their audits can be compromised by the other fees that are being generated.

“When we withhold votes for directors,” Green says, “it’s primarily due to insiders sitting on key board committees, including the audit, compensation, and nominating committees.”

This year, we are participating in shareholder resolutions at three companies, all of which are holdings of the Pax World Balanced Fund.

At Avon* (which represented 1.20% of the assets of the Balanced Fund, as of 3/31/04) we have co-filed a resolution asking for annual elections of directors. “Last year,” Green says, “this item received 80.5% of the vote. Avon said they would ‘take it under advisement.’ Now, there’s an issue before the SEC regarding shareholder access to the proxy ballot for nominating directors, and Avon wants to continue to postpone action. So this year we joined the resolution as co-filers.”

The other resolutions are before two pharmaceutical companiesÐAbbott Laboratories* (0.65% of the Balanced Fund’s portfolio) and Johnson & Johnson* (0.90% of the Balanced Fund’s portfolio)Ðand address one issue: assessing the financial and reputational risks posed by HIV, AIDS, tuberculosis, and malaria, which are sweeping across the globe, particularly in Africa. “We’ve been talking with both companies,” Green reports, “but we expect the resolutions to proceed to a vote.”

*This story does not constitute a recommendation by Pax World of this company’s financial attractiveness as an investment.

“In light of the historic changes underway in South Africa… the Pax World Fund Board of Directors voted unanimously on December 9, 1993, to reverse its long-standing policy of noninvestment in companies doing business in South Africa.”

As recounted in Investing with Your Values (Brill, Brill, and Feigenbaum, 1999), “South Africa was the catalyst that propelled SRI (socially responsible investing) into the national spotlight. For the first time, a large, influential group of Americans applied their economic power to demand positive change: the creation of a democracy in South Africa.”

The U.S. campaign against apartheid had begun in the 1960s, with students pressuring universities to divest from companies doing business in South Africa. Later, cities and states passed laws to prohibit contracts with firms operating in the country. Eventually, even the U.S. government took steps to ban new investments in South Africa.

In 1989, staggering under the weight of economic sanctions, South Africa began the process of reform that culminated in April 1994, when the country held its first democratic elections. The success of the past ten years of South African democracy has paralleled the country’s economic development, supported now by the same socially responsible investors who used to shun investments there.

Working in harmony with social investors such as Pax World, but on a more grassroots level, are groups such as Shared Interest. Established in 1994 by the Fund for a Free South Africa, an organization established by black South Africans living in exile in the U.S., Shared Interest raises funds used to guarantee loans to help low-income South Africans.

In its first ten years, Shared Interest has helped more than 350,000 people in South Africa build and move into houses, find jobs, and start small businesses. Its guarantee fund is focused particularly on black townships and rural communities. Some eighty percent of the people who benefit from Shared Interest’s programs are women.

Much of the money for Shared Interest’s guarantee fund comes from individual investors, who, in return, receive a semiannual interest payment from their accounts. Shared Interest covers the cost of its programs by investors’ returning a portion of their earned interest and by donations from individuals, foundations, and corporations.

Every two years, Shared Interest takes a group of people to visit the businesses and communities built by Shared Interest’s investors and donors. To learn more about Shared Interest’s upcoming trips and ongoing programs,

Call: 212.337.8547
Write: 121 W. 27th Street, Suite 905
New York, NY 10001
E-mail: info@sharedinterest.org.

Connection: Not much changed in the markets last year. What changed in your portfolios?

Chris Brown (Balanced Fund): I’m still favoring stocks over bonds. I think economic growth will be a little more tempered this year than last, but I still think that will translate into positive operating earnings growth for the S&P 500.

I think some areas will benefit more than others. I’m underweighting consumer-discretionary companies and financials. I continue to like technology, which I think will be a beneficiary of capital spending, as should industrial companies.

Long term, I’m still very positive on energy and, in particular, on the energy services companies. In the short term, however, I think we’re going to see a correction in energy. I’m maintaining my exposure, but I’ve been shifting into the service sector and out of companies with a high exposure to natural gas, which has probably had the biggest correction in the energy sector. I still like materials companies; Cemex*, one of the world’s largest cement companies, remains one of our top holdings.

Connection: You’ve increased your bond allocation by a couple of percentage points since last year.

Brown: Yes. The yield curve is pretty much inverted, so we’re not getting paid to take a big step out on the maturity schedule. We’ve been sticking with shorter-term bonds and have found some very attractive government agency issues ranging from six months to a year and have ramped up our allocation.

Connection: What about the balance of domestic and international companies in your portfolio?

Brown: About 19% of the Fund’s assets are invested overseas. We think one of the best ways to benefit from the trend toward globalization is by owning foreign equities, and our largest holding is a foreign company: America Movil*, which is one of Latin America’s largest wireless companies. Cemex, which I mentioned, is a Mexican company.

Diane Keefe: (High Yield Fund): In the High Yield Fund, we have about 29% of the portfolio in companies domiciled outside the U.S. A lot of our holdings are in Europe, which hurt us a bit last year, as the Euro and the British pound declined against the U.S. dollar. We didn’t hedge our currency exposure, because we think the debt position of the U.S. will eventually come home to roost.

Mary Austin (High Yield Fund): I think the overseas exposure is good for us; it’s a place we’re finding growth, especially in Brazil and China. Also, we should start to feel the effects of the 14 consecutive Fed rate hikes towards the second half of the year. The anticipated slowdown is another reason for investing abroad.

Keefe: We don’t buy investments as a currency play, but we don’t avoid the opportunity associated with a currency play either. We own companies all over the world looking for the best yield for the associated risk, as well as positive catalysts that could make the prices of the securities improve.

Connection: Default rates among high-yield companies are expected to increase this year. How are you approaching this?

Keefe: That goes back to our expectations for economic growth, and growth seems to be steaming along stronger than people expected. We’re near historic lows in default rates, so even if they increase somewhat from here, the high-yield market could still outperform other types of bond investments. We should mention that General Motors and Ford are now part of the high-yield market. We don’t own those companies, because they don’t pass our social screens, but they impact the high-yield index, because they and their finance subsidiaries comprise over 10% of the index.

Connection: Paul, what are your thoughts about the markets?

Paul Gulden (Growth Fund): You know, I think this year is going to be better for the equity markets than last year, but I think it’s going to be more volatile. I think we’re going to see lots of movement up and down until probably the end of the year.

It’s going to be caused mainly by the fact that nobody knows when the new chairman of the Federal Reserve (Ben Bernanke) is going to stop raising interest rates. That is the key. If you believe that it’s money that makes America go, as I do, and that the availability and cost of money are the most important influences on equity prices, then you understand that this uncertainty is going to penalize the market until we know how high rates are going.

My own view is that we’re in a sort of “mid-cycle slowdown,” we’re not going into a recession, and corporate profits will continue to advance. So far, I think, analysts’ estimates are too high, and they’ve got to come down. So you’ve got these negatives ahead: short-term interest rates going up, corporate profits coming down, and, of course, we don’t know what oil prices and so forth are going to do. My guess is that, toward the end of the year, the Fed will start to signal some sort of easing of interest rates, when consumers are hurting a lot more than they are now.

At that point, when you factor in what Diane and Mary said about currencies (and I agree with them), it’s going to be a big boon to exports from the United States, and corporate profits should begin to pick up toward the end of the year and into ‘07. Or at least the perception could be that the recovery is a sustainable one.

So in general I expect it to be a choppy year, with most of the action toward the end of the year into traditionally what has been a very good pre-presidential-election year. I’m quite bullish on ‘07.

* This story does not constitute an endorsement of the company’s attractiveness as an investment.

“Moving your retirement plan when you leave a job can seem overwhelmingly complex,” says Pax World’s Vice President of Shareholder Services Maureen Conley, “but it’s really a fairly simple process once you understand the steps you need to take.”

As its title suggests, the new guide helps you understand not only the process of retirement account rollovers but also the potential impact of the choices you make. For example, should you do a rollover or a transfer? Should it be direct or indirect? Should you use a traditional or Roth IRA? Should you cash out any of your plan’s assets? How you answer these and other questions will vary depending on your situation, and each answer can have different tax and financial consequences now and in the future.

For investors not facing retirement or a job change but just wanting to go in a different direction with their retirement planning, the new guide explains how to roll over an existing IRA from another financial institution to Pax World.

To get a copy of the IRA Rollover Guide, call us at (800) 767-1729 anytime or e-mail your request to info@paxworld.com.

You can access the entire rollover guide on a special page at Pax World’s Web site: www.paxworld.com/rollover. Elsewhere on the site, you’ll find links to additional information about the specific retirement and education savings plans offered by Pax World. Of course, you can also get information about these plans by calling (800) 767-1729 between 9:00 A.M. and 8:00 P.M. ET, Monday through Friday.

Please note that information in this article does not constitute tax advice. Always consult your tax advisor before making any tax-related investment decision.