When Kathy Stearns launched her fee-only financial planning and investment management firm about six years ago, she brought her passion for community development investments with her.
Early in her career, she managed and consulted with microfinance programs worldwide at nonprofit Accion International. Also prior to starting her firm, she served as CFO of the Opportunity Finance Network (OFN), a national network of community development financial institutions.
But Stearns, head of Arc Advisers LLC in Boise, Idaho, has found it hard to get clients on board with CDFIs, which help create social impact in distressed markets in exchange for modest financial returns. It’s generally not for lack of social concern—clients tend to seek her out because of her focus on socially responsible investment management. The big challenge, she says, is there are no CDFIs in Idaho that take small investors. And many clients wish to invest locally.
“There really needs to be a personal connection,” says Stearns. “I didn’t realize in the past how strong that aspect was.” So where can clients find community investments that speak to them?
While CDFIs are one option, there are others. Banking locally with community development banks and credit unions is a good start, says Stearns, because they help support poor, local communities. She has also spoken to clients about One PacificCoast Bank, whose targeted lending sectors include affordable housing; sustainable food, fisheries and agriculture; green chemistry; and resource efficiency.
Meanwhile, individual investors can find plenty of CDFI opportunities based in other parts of the U.S. The Reinvestment Fund (TRF), which works across the Mid-Atlantic region, and the New Hampshire Community Loan Fund are two examples highlighted by Stearns.
TRF has financed neighborhood development since 1985 and invests in homes, schools, fresh food access and sustainable energy projects. The 30-year-old New Hampshire Community Loan Fund helps support affordable housing, jobs, child care facilities and community facilities. Each fund has a $1,000 minimum investment.
Food Deserts, Fish And Much More
Mark Pinsky, president and CEO of OFN, encourages investors to invest directly through CDFIs that match their geographical and social interests. OFN also offers a fund aimed primarily at institutional investors.
OFN, which has 210 CDFI members, has strict eligibility criteria. Among other things, members must have an active lending and/or investing history of two or more years and at least one completed financial audit. Half of its 2012 applicants failed to meet its standards. OFN reaches out to help organizations that do not yet qualify, says Pinsky.
Stearns is also very particular when selecting CDFIs because they are not secured. Nor does CDFI certification, a designation conferred by the federal government, say anything about the quality of an institution or its financial strength, she says. She looks for strong ratings under the CDFI Assessment and Rating System (CARS), which she helped develop and implement while at OFN. It is now an independent ratings service.
Boston-based Trillium Asset Management has used CARS as part of its community investment due diligence process for nearly 10 years, says Randy Rice, Trillium’s community impact investment manager and a director on the CARS board. It also meets with management teams, conducts site visits and looks for OFN membership.
Trillium has engaged in community investing for about 30 years and currently has $22 million of assets directly parked in these vehicles. Many clients allocate 2 percent to 5 percent of their portfolios to this space.
“It’s one of the reasons why clients come to us and stay,” says Rice, who notes that many people don’t want to manage these investments solo. Trillium’s portfolio includes approximately 30 U.S.-based community investments as well as a number of international loan funds including Shared Interest and Root Capital.
Some of its clients invest in CEI Investment Notes Inc. (CINI), part of the Maine-based CDFI Coastal Enterprises Inc. The notes help sustain small waterfront communities and also assist immigrant communities. “Two social issues at once is quite clever,” says Rice, a member of CINI’s advisory board.
Another Trillium offering, the aforementioned TRF, is helping food deserts—i.e. neighborhoods without access to fresh, affordable food. “They’ve really set the bar on supermarket financing and market financing,” says Rice, who notes that diabetes and obesity rates are higher in food deserts.
Trillium’s lineup also includes Mercy Loan Fund, which supports affordable rental housing and community services throughout the U.S., and Craft3, a CDFI that assists small businesses, sustainable agriculture and fish farms in the Pacific Northwest.
Fixed, Modest Returns
The standard return for five-year investments in Trillium’s community investment portfolio is 2.5 percent, says Rice. The firm has been making shorter-term loans (two to three years) to avoid locking clients into low interest rates if the market turns around and rates rise.
Pinsky notes that CDFI industry returns, which are fixed, range from 0 percent to 5 percent. “No one is going to get rich off CDFIs,” he says. “It’s wrong to get rich from those in poverty.”
But CDFIs portfolios have outperformed many other portfolios held by big banks, Pinsky asserts. “If the recession proved one thing it’s we can manage in tough times.”
Custodians have generally been reluctant to hold CDFIs in client accounts because much of their bookkeeping is still performed manually. Last summer, Charles Schwab, Trillium’s largest custodian, agreed to book, hold and record them as assets after years of discussions with Trillium.
“That’s a real breakthrough,” says Rice, who expects it will help make community investments more accessible.
