Category: Socially Responsible Investing

How to find out if your Vanguard investments are in for-profit prisons and divest from them

If you read last weeks article about Vanguard being the largest investor in for-profit prisons through the passive funds it offers, you may be wondering if any of your Vanguard investments are in for-profit prisons. Mine were, and I had no idea. (See last weeks post here.)

Vanguard became the #1 investor in for-profit prisons by attracting lots of investors with its low fees. These investors then bought passively managed funds, like indexes, that include for-profit prison companies. While Vanguard’s low fees have helped its investors save money, they’ve done so at the expense of the human lives being moved through the prison system.

ESG is a new type of investing that seeks to align your morals with your investing strategy. ESG takes a company’s environmental, social or governance factors into consideration, and will exclude controversial companies in industries like tobacco, firearms, and for-profit prisons from its funds. Vanguard offers ESG funds that are similar to its other funds, but exclude these controversial companies. There are also entire firms that specialize in ESG investing that you can choose to open your accounts with. I’m going to show you how to apply an ESG strategy to your current portfolio with Vanguard and eliminate your investments in the for-profit prison industry.

How to find out if you’re invested in for-profit prisons

Most people have all of their investments in retirement accounts like a 401K. Chances are, you’re one of those people, so I’m going to focus on converting to ESG funds in retirement accounts. (If you aren’t familiar with retirement accounts, here is some info on them.) I have a Roth IRA account with Vanguard. If you have an IRA or Roth IRA, or any other account type with Vanguard, you will have all of their investment options at your disposal. If you have a 401K with Vanguard, your company has preselected the funds you are offered for your 401K. Basically, your company works with Vanguard to build a menu of investment options for you to choose from. Very few companies provide an ESG option to employees in their 401K offerings. If you go through these steps to find out that you are invested in for-profit prisons through your 401K, but aren’t sure how to proceed with the funds available to you, contact your company’s advisor to help you better understand your options.

Step 1. Login to your Vanguard account and select the holdings tab. You should see a list of your accounts and the funds they are invested in. In my Vanguard Roth IRA, I have chosen to use a target date fund. (For more info on target date funds, see this post.) These funds are composed of a group of other funds, so first, you will need to determine what other funds are held inside of the target date fund. Click on the symbol for the fund you’re currently using. The symbol for my account’s target date fund is VFFVX. If you aren’t using a target date fund, all of the funds in your portfolio are already listed. Find your domestic stock fund(s) and skip to step 3.

Step 2. You should now see all of the info about your transaction history with this fund. There is a section titled fund snapshot with a clickable link called fund profile. Click fund profile.

This page shows you all of the information about the fund you’ve selected. It details the risk, returns, and composition of the fund. We’re interested in the fund’s composition. Scroll to the bottom of the page and you will see a section called portfolio composition. Since the for-profit prisons are US companies traded on the NYSE, you can ignore any bond holdings or international stock holdings for now. In my case, I’m after the fund circled in pink below.

Step 3. Google search the name of your stock fund. Click on the investor.vanguard.com profile link for that fund. Scroll all the way to the bottom of the page and you will see a list of the month end 10 largest holdings. At the bottom of that section there is a clickable link called portfolio holdings. Click that link. Don’t worry. We’re almost there!

Step 4. Now you can see the full list of the stocks that are held in this portfolio. Mine totals 3,466 different companies! Click the little arrow next to the table heading “Holdings” to sort these into alphabetical order.

Now page over until you find the Cs. Look for CoreCivic Inc. on your list. If you find it, you’re invested in a for-profit prison. If you don’t find it, keep paging over until you can check for Geo Group. If you don’t find either company listed, woohoo! You aren’t invested in modern slavery. If you do find these companies, like I did, here are some options for how to remove these from your portfolio.

How to Divest from Modern Slavery

If you’ve accidentally invested in for-profit prisons through an index or target date fund, here is how you can divest these holdings.

The simplest way to do this is to search for a comparable ESG fund with Vanguard that does not include these companies. A quick Google search of Vanguard ESG funds will give you your options. When swapping your current investments into ESG funds, you’ll want to make sure the risk levels are comparable, the ESG fund is well diversified, and the fees aren’t high. You don’t want to swap a diversified index fund for an ESG that is comprised of all environmental stocks because this will decrease your portfolio’s diversification and increase your portfolio’s risk. While it may be tempting to invest your entire portfolio into companies you’re passionate about, remember that the point of investing is to make money. You can divest from companies that do not align with your morals, and still follow good investing practices like keeping a diversified portfolio.

If you have hand selected your investments, you can simply find a comparable ESG fund and swap your current holdings for the ESG fund. If you use a target date fund, like I do, this process is more complicated. A target date fund puts together an entire portfolio for you that includes domestic and foreign stocks, and bonds. It also automatically reallocates your investments to reduce your risk as you age. Since ESG investing is still in its infancy, there are very few target date funds (none through Vanguard) at your disposal. The ESG target date funds that do exist come with extremely high fees that will eat into your returns. Instead of opting for an ESG target date fund with higher fees, you can develop a low fee portfolio that mimics the holdings of your current target date fund.

The first step to do this will be to take a look at the percentages of each investment type your target date fund is comprised of. My target date fund has the following composition.

Next you will need to find comparable funds that don’t contain for-profit prison stocks and reallocate your portfolio to these funds. To do this, first find a comparable ESG fund for your domestic stocks. You can use the same search method we discussed earlier to find your options. Once you’ve selected your fund, you will need to put the same percentage of your money into that fund as is currently in your target date fund. For example, 54.2% of my target date fund is in domestic stocks, so I should move 54% of my money to the ESG fund I will now be using.

Next, you will need to buy a comparable global stock fund, domestic bond fund, and international bond fund. To find these, use the same process you used to find your ESG fund. When researching each fund, you should see the information below. Make sure your old fund and new fund are in the same investment category, carry the same risk level, and the descriptions of what they track are similar. Again, you want to make sure your new portfolio will be well diversified and mimic your target date fund. Once you’ve selected your global stock, domestic bond, and international bond funds, you will need to refer back to your original target date fund composition, and allocate your new investments at the appropriate percentages.

Following Up

Since you’re no longer using a target date fund, which automatically reallocated your investments to reduce your risk over time, you’ll now need to start doing this. Pick a time interval that you feel comfortable with. If you check your investments quarterly, maybe you will add in reallocating your investments to the correct percentages to mimic your old target date fund each quarter. If that sounds like too much for you, maybe you decide to do it annually. Just make sure that you don’t set it and forget it. The percentage allocated to each fund should also change over time to reduce risk, so you’ll also need to refer back to your old target date fund each year or every few years to check the portfolio mix.

While it was definitely more complicated to divest my holdings in for-profit prisons than I thought it would be, I learned a lot. ESG investing is on the rise, which means more options will begin to be available and the fees will continue to go down. Until those options become available, I will be taking a more active role in managing my portfolio in order to make sure I am not invested in for-profit prisons that traffic humans through their system to make money.

For research on ESG investing for this post, I spoke with Cameron Hamilton, CFP, MBA. Check him out here.

If you had asked me a few days ago who I would suggest you open a retirement account with, I would have said Vanguard. I have a Roth IRA account with them, and was super happy with their low cost investing approach. Now I’m in the midst of an ethical dilemma because I learned this week that Vanguard is the largest supporter of modern slavery, or for-profit prisons.

History of For-Profit Prisons

The first privatized prison was started in Louisiana in 1844. The company that owned the prison used it as a factory and “employed” the inmates to make cheap clothing for slaves. Seeing the Louisiana company’s success using this new labor pool, Texas followed suit and opened their own private prison. Five years later, the Texas penitentiary was the states largest factory, and they became the main southern textile supplier west of the Mississippi.

In 1860, slavery was abolished by the 13^th amendment, but there was a loophole. Slavery was no longer legal “except as punishment for a crime.” Thus, the private prison boom began in the South. The state would lease the inmates (like property) to companies. Prisoners (mostly black) were kept on these companies’ private plantations and labor camps, and forced to perform hard labor such as mining coal and laying railroads. The companies would then give a portion of their profits to the state for leasing these inmates to them.

These private companies were driven by the same thing private companies are driven by today, profits. This desire to squeeze out every bit of profit possible caused the companies to resort to extreme measures. Unlike with free labor, torture could be used to force inmates to perform. Whipping was common, and wasn’t outlawed in Arkansas until 1967. That is correct, not 1867, but 1967. Since the companies didn’t own the inmates but just leased them, they had even less incentive than they did with slaves to keep the inmates alive. This led to an annual convict death rate in the South of 16-25%.

The southern companies who used the free inmate labor became wildly successful. Average revenues were nearly 4 times higher than the cost of running the prisons, and the profits from inmate leasing made up 10% of some states’ budgets. Seeing the success of the private prisons made states jealous, and in the early 1900s, states decided to buy their own plantations and to stop leasing inmates. This led to the end of the first round of prison privatization in the US.

In the 1980s, the tough on crime era began. Incarceration rates skyrocketed and states couldn’t keep up with the rising inmate levels, so they asked private companies to step in. That is what caused Terrell Don Hutto to found CoreCivic, then the Corrections Corporation of America, in 1983. Terrell Don Hutto is a real slime ball. In 1967, he ran a cotton plantation the size of Manhattan and forced convicts to pick his cotton without pay. To make it worse, he and his family also used an unpaid convict as a “house boy” to serve them. Today, Terrel Don Hutto’s company, CoreCivic, is the largest for-profit prison provider in the country.

How For-Profit Prisons Make Money

There are 2 primary ways that private prisons make money. This first is from government stipends. If it costs the government $120 per day to incarcerate someone, the private prison will charge the government $100 per day per inmate, while it only costs the company $80 per day to house the inmate. The additional $20 above their cost of housing the inmate is profit.

To maximize their stipend profits, private prisons are constantly looking to cut costs. In order to keep costs low, for-profit prisons need to have enough inmates incarcerated to spread out their fixed costs. An example of a fixed cost would be the Warden’s salary. Let’s assume the Warden makes $100k/yr. If the prison only has 1 inmate, the cost of the Warden’s salary can only be applied to 1 inmate. So the cost of housing the inmate for a year will be $100k+their food, all of the electricity, their clothing, etc. That’s a pretty expensive inmate. If the prison has 10,000 inmates, then the Warden’s salary can be spread out over many inmates. With 10,000 inmates, the cost of the Warden’s salary per inmate is $10, or $100,000/10,000 =  $10. Now the annual cost per inmate is $10+their food, 1/10,000 of the electricity, their clothing, etc. This concept is called economies of scale. It allows a company to maximize their cost advantages by scaling their operation. This means that private prisons need a minimum number of beds filled in order to keep their fixed costs low.

Another type of cost is a variable cost. An example of a variable cost is the hourly wage that is paid to the prison cleaning staff. Instead of hiring cleaning staff for, let’s say, $8/hr, for-profit prisons will force inmates to perform the operational labor of the prison. The inmate laborers are often paid less than $1/hr. For ease, let’s assume they pay the inmate $1/hr to clean the prison. That amounts to a savings for the company of $7/hr worked. If inmates refuse to work, they lose privileges such as visiting hours, phone calls, and are sometimes put into solitary confinement. Inmate workers also don’t have any of the same protections that civilian workers do like sick days, or hourly work maximums. On top of that, private prisons have minimum reporting requirements, which don’t allow the public or the government to clearly see the inner workings of the prisons. Working without pay and no protections used to be called slavery. Now its called prison labor.

Another money saving tactic is to cut programs and services to inmates. The first advantage to cutting a program is that it is a quick save on expenses. But cutting programs that would rehabilitate inmates is in the best interest of for-profit prisons for another reason. If an inmate is rehabilitated, he/she has less of a chance of returning to prison. As we discussed previously, in order for the for-profit prisons to profit, they must have a constant flow of large numbers of inmates through their prisons. It is in their best interest to cut rehabilitation programs, so the recidivism rate (the rate people return to prison after being released) remains constant.

The second way for-profit prisons make money is by going public. Going public means that they will issue stock on an exchange like the NYSE. CoreCivic and Geo Group, the two largest providers of private prisons in the US, are both listed on the NYSE. Going public provides an influx of cash when investors buy the new stock issues, and this cash influx allows the company to make big purchases, like building a new prison. Another large expense they often use this cash influx for is lobbying. In 2016, CoreCivic gave almost $300,000 in campaign contributions, 96% of which went to Republicans.

Being a publicly traded company causes another problem. Public companies have a fiduciary responsibility to their shareholders. That means that the company has a legal obligation to make decisions that are in the best interest of their shareholders. What are the shareholders interested in? It isn’t inmate rehabilitation or well-being. It’s making money.

Private prisons house less than 10% of US inmates, but they have their eyes set on a new market for expansion, migrants. Private prison companies have been putting up detention centers along the US-Mexico border, and now detain almost 75% of the migrants coming to the US to seek asylum. The conditions in these detention centers have been inhumane. Parents and children were separated, and little documentation was kept in order to reunite families later. The families of some children haven’t been able to be located for years.

Project Defund Private Prisons

Vanguard is the largest holder of CoreCivic and Geo Group stock. They mainly hold these stocks in passive funds that track indexes, like the S&P Mid Cap 400. The good news is that you can find out if you own funds that include CoreCivic and Geo Group. Look at your portfolio and what funds you have. Then look to see what stocks these funds contain. If CoreCivic and/or Geo Group are included in your holdings, you can switch your investments to a similar fund that does not contain these stocks instead.

Money talks. If you’re against modern slavery and have an account with Vanguard, the first thing you should do is to research the companies that are included in the funds that make up your portfolio. If these stocks are included, find alternative funds to move your money to. If you are against modern slavery and don’t have any investment accounts, you should open one immediately!! Just make sure you include funds that don’t contain these stocks in your portfolio.  (here are two great intro to investing posts on retirement accounts and building your portfolio.)

Becoming a rich bitch does not mean compromising your values. Here are some links where you can see who the largest investors are in CoreCivic and Geo Group.

CoreCivic

Geo Group

If you’re interested in switching to an investment institution that specializes in socially responsible investing, or in finding socially responsible funds, below are some resources to help.

CNBC – Your Complete Guide to Investing with a Conscience

Forbes – Here’s How to Invest in a Socially Responsible Way

Investopedia – The Top 5 Impact Investing Firms

People of color are disproportionately affected by for-profit prison’s modern slavery model. By moving your money out of funds that include CoreCivic and Geo Group, you’re telling Vanguard and other providers that these funds don’t work for their customers. Money really is power, and the less money CoreCivic and Geo Group have, the better.

Citations

Time – The True History of America’s Private Prison Industry

Investopedia – The Business Model of Private Prisons

The Guardian – Why Are For-Profit US Prisons Subjecting Detainees to Forced Labor?

Earn Your Leisure Podcast – Episodes 81 and 82

MSN Money – You May Own Prison Stocks in these Giant ETFs and Mutual Funds

An Insight Into the Racial Wealth Gap and How to Bridge it

This blog was started to help bridge the wealth gap between men and women, and to empower women to take control of their finances. This week however, I am going to focus on the wealth gap between black and white Americans. In light of the recent murder of George Floyd, and all of the others who came before him, I think it is critical that as a white person, I take the responsibility to change the narrative and educate other white Americans on the systemic hardships we’ve created to oppress black Americans and control the wealth.

I could not have planned a better lead into this topic than last weeks post. While this was accidental, the topic of compound interest can be mirrored almost directly into how wealth accumulates for families over generations. I won’t discuss the basics of compounding in this post, so if you’re unfamiliar with how compound interest works, I would suggest reading that post first.

A Brief History Lesson

The transatlantic slave trade began in Europe, predominantly Portugal, in the mid 1400’s. In the early 1500s, shortly after Christopher Columbus “discovered” America, the Spanish began bringing enslaved Africans to America. From 1503-1865, slavery was legal and thriving in America, including what, in 1776, became the United States.

For 362 years, African and African American slaves were considered property. While white settlers used slaves to build America and their own wealth, black people were considered a commodity. They could not own property or grow wealth for themselves. That gave white Americans a 362 year wealth building head start on black Americans.

After slavery was abolished in 1865, the southern states began enacting laws to restrict the lives of freed black slaves. These laws were known as the black codes.  In 1867, the radical Republicans helped pass the Reconstruction Act. For the next 10 years, the US forced the southern states that had seceded to enact equality laws granting freed slaves citizenship, and the right to vote. Once the federal government stopped policing these states however, any gains toward equality that freed slaves made during this time were erased.

After reconstruction ended in 1877, the Jim Crow laws began to be enacted. These laws led to segregation, and although illegal, lynching became a wide spread practice. Just to clarify, the definition of lynch is, “(of a mob) kill (someone), especially by hanging, for an alleged offense with or without a legal trial.” (Google’s definition from Oxford Languages.) By definition, lynching is one of the many ways law enforcement has allowed for the oppression of blacks and progression of whites. This type of systematic oppression lasted until 1964 when the Civil Rights Act was signed, prompting the end of segregation. So let’s tack on these additional 99 years to the white wealth head start.

From 1964 to now, the rules for whites and blacks in America have still not been equal. The inequities are not as stark as they were with slavery and segregation, but they are alive in our society. One example is the harsher sentences that were imposed in 1986 for the drugs used in predominantly black communities. These harsh sentences led to black people, especially men, being incarcerated at higher rates and for longer periods than white people. This destroyed black families and economies. White people then began to use the destruction they caused as a tool to vilify black people. They called black people lazy and violent. They said black people don’t want to work and only want to rely on a welfare check. Then they tried to cut welfare funding, while still incarcerating black people at a higher rate. This is still a problem to this day. If you’re white, imagine how your dad, your friends’ dads, brothers, cousins, uncles going to jail would have disrupted your family. How would it have affected your community? Do you think your family and community would have seen economic prosperity through all of that? Probably not.

So here we are today, 2020. We enslaved Africans and used them to build our wealth for 362 years. Then we enacted segregation laws to prohibit them from gaining equality, let alone wealth, while we murdered them for 99 more years. And then from 1964 – 2020 we’ve still been enacting laws to perpetuate this inequity. This comes to a total of 517 years that white Americans have been able to build wealth at the hands of black Americans.

Compounding Wealth

A family’s net worth in America is almost 10x higher for white families than black families. White families have a median net worth of around $171,000, while black families only have a median net worth of $17,000. Your net worth is equal to the assets you own, minus any outstanding debts you have.

Almost 66% of an American’s net worth comes from real estate. When the New Deal was signed in 1933, it provided mortgage assistance to homeowners in danger of losing their homes during the Great Depression. The New Deal also created the Federal Housing Administration (FHA) to insure bank mortgages. However, the FHA would not insure loans for homes in areas it calculated as “risky”. The riskiness of an area was calculated by race. The areas that were risky, aka predominantly black, were colored red. This is where the term redlining comes from.

Redlining meant that black families weren’t able to get loans to buy housing. Real estate is an appreciating asset. That means that home prices, over the long term, will increase. This is the basic principle of wealth building and investing. You take the money you have now, invest it in an appreciating asset, and you can sell it for more money later. Without the opportunity to secure a loan, black Americans were not able to invest in real estate and grow their wealth using the main wealth-building tool in the US, a home.

In 1968, housing discrimination was outlawed on paper, but it was still incredibly difficult for black families to buy houses outside of redlined districts. In the 1990’s an effort was made to bridge this divide and offer more loans to black Americans. However, black borrowers were offered subprime loans twice as often as white borrowers, even if the black borrower had good credit. Subprime loans are offered to borrowers deemed more risky. Notice a trend? Because the borrowers are deemed more risky, these loans have higher interest rates. In other words, black borrowers had to pay more to borrow money than white borrowers.

For example, if a white family and a black family wanted to buy the same home, the white family could take out a mortgage at 4% interest, while the lowest interest the black family could get with a subprime mortgage was 6%. In this scenario, if the black family bought the home, it would have to appreciate 2% more than if the white family bought it, just to get the same return on their investment.

With this disparity in wealth building tools, the wealth gap has continued to widen (see graph below). You’ve probably heard the phrase, “it takes money to make money.” This is true. Since black Americans have been unable to acquire assets, they have not been able to build wealth. When you factor in generations of compounding wealth for white families, and the absence of investing opportunities for black families, it is easy to understand how the wealth gap has gotten so wide.

Money is Power

It is critical that we, white people, take it upon ourselves to start evening the score. Structural policy changes are needed to sustain long-term black wealth growth, but our government can barely get anything done. So here are some things you can do now to begin bridging the gap.

1. Buy from black owned companies.

Make a commitment to seek out black owned businesses. I love makeup and fashion. If you’re looking for the best matte lipstick around, check out Beauty Bakerie. Think about your top shopping categories and find new black owned brands to buy from in them. Look large companies that have well diversified boards and promote black people to top level positions.

2. Eat at black owned restaurants.

Segregation may not be legal, but it is still rampant. Many cities still have white areas and black areas. Go eat at the restaurants in the predominantly black areas of your city. If you live in the southern US, chances are you love southern food. Did you know that much of the food you love has its origins in Africa? Make a point to give back to the Africans who brought this delicious food to you.

3. Consume black art.

One of the greatest areas we can use to learn about the black experience while contributing to black wealth is to consume their art. We do this predominantly through rap music today, but there are so many more avenues we can pursue. Buy books written by black authors. Hire black graphic designers to create your logo or build your website. Hire a black makeup artist, DJ, and florist for your wedding. The list goes on.

4. Make a donation.

Donate to your local bail fund, Color of Change, the NAACP, or another organization working toward equality for black Americans. You can also look for organizations in your area that build after school programs in under served areas, or provide nutritious food for people living in food deserts. One organization in Miami that does this is Health in the Hood.

What this doesn’t mean is to use black diversity to further your brands. I’ve seen a lot of influencers wanting to gift their products to black influencers. This is white saviorism. Your gift to them will ultimately benefit you. Your product will be promoted to a new demographic and you will have access to new customers. When you’re looking for ways to help, think about who benefits most from the end result. If it’s you, the action you’re taking isn’t helpful to building black wealth.

This is just a small glimpse into the inequities that have existed since before this country’s inception, and still exist today. But we don’t need to continue to accept this reality. It is on white people to bridge the divide and finally make the equality this country claims to be so proud of, a reality for all Americans, black, brown, and white.

Citations

BBC History – Africa and the Transatlantic Slave Trade

History – Black History Milestones: Timeline

History – War on Drugs: Timeline

Brookings – Examining the Black-White Wealth Gap

Netflix – Explained: The Racial Wealth Gap