A Message from the President Regarding U.S. Treasuries

Fellow shareholders,

You will soon receive a copy of Pax World's new prospectus, and you will note that whereas a year ago we offered investors a choice among three mutual funds, today we offer eight. In addition to the Value Fund and the Women's Equity Fund, which we added to our fund line-up last fall, Pax World now offers a Small Cap Fund, an International Fund and a Global Green Fund (investing in environmental technologies) as well. These new funds join the Balanced Fund, Growth Fund and High Yield Bond Fund in filling out Pax's offerings – providing more investment and asset allocation opportunities for Pax World investors.

I want to take a moment as well to reiterate the importance we place upon our weapons screen. We take Pax World's mission of promoting peace very seriously. That is the rationale underlying the weapons screen and the motivating force for much of our work. In launching the Global Green Fund there was some discussion of dispensing with the weapons screen and other environmental, social and governance (ESG) criteria in favor of a "pure play" environmental fund. Other SRI or "green" investing firms have taken such an approach. We decided not to. Pax means peace, and we have no intention of abandoning the weapons screen.

In the past, Pax World avoided investing in U.S. Treasuries as well. Some other SRI investment managers do the same, although others invest in U.S. Treasuries. I think it's fair to say, however, that the SRI community has never clearly articulated the basis for excluding U.S. Treasuries from SRI portfolios. The screen probably had its origins among SRI and religious investors during the Viet Nam War era as a complement to the weapons screen: no investing in weapons manufacturers and no investments in financing war. It was more a symbolic gesture than an effort to change the behavior of an issuer. (While divestment or non-investment decisions of SRI or religious investors have not made wholesale changes in corporate behavior, there are many instances where such actions have helped to change corporate behavior for the better. There can be no illusion that non-investment in Treasuries is likely to change the actions of the U.S. government.) If looked at closely, the exclusion of U.S. Treasuries as an investment policy simply doesn't bear up to scrutiny.

It is one thing to eschew military weapons contractors because you don't want to profit from war – that is core to Pax World's identity and mission. It's quite another to take the military screen so far down the line that it is extended to U.S. Treasuries – the result being that the SRI industry may be perceived as withdrawing support from the U.S. government itself. U.S. Treasuries support the military, yes, but the U.S. government does far more than provide for the common defense, and screening out Treasuries eliminates one of the world's largest enterprises for environmental protection, equal opportunity, social security, infrastructure provision, labor protections, humanitarian relief, and many of the other values we promote.

The argument that "most of the money goes to the military" is demonstrably false – these are general obligation bonds of the U.S. government that go to finance all of its obligations. In 2007, of the total outlays of the U.S. government, 60 percent were for programmatic spending (also called nondiscretionary), a category that includes Social Security, Medicare, Medicaid, income security,1 and other retirement and disability programs. The remaining 30 percent of Federal outlays were about evenly split between defense programs and domestic/international outlays, meaning that defense spending, at a time when defense outlays are high, accounted for approximately 15 percent of Federal outlays. Non-defense discretionary outlays include expenditures for environmental protection, agriculture programs, resource conservation, health and human services, housing and urban development, aeronautics research, justice, transportation, veterans programs, and education. The largest single category of non-defense discretionary outlays is education. Eliminating Treasuries on the grounds that federal spending is used for war is something like screening out grocery stores because they sell cigarettes.

Essentially, the effect of a U.S. Treasuries prohibition is to suggest not that we disagree with this or that policy (e.g., on questions of war and peace), but that we are withdrawing all support from the U.S. government because we disagree with some of its policies. In this sense, the screen is arguably less transparent than most SRI screens. There is likely a diversity of opinion among social investors on the appropriate role of the military in society, the appropriate size of the defense budget, and on various issues of U.S. foreign policy. Their ranks likely include pacifists, adherents of just war theory, and members of the military and their families. Pax World's military weapons screen respects this diversity, and in our view most SRI investors embrace this screen because they choose not to profit from war. It is doubtful, however, that most of our investors would have us exclude all general obligations of the U.S. government just because they disagree with this or that aspect of military or defense policy.

A "no general obligations" policy as applied to the U.S. government is also inconsistent with the approach we take toward investing in corporations. SRI firms generally purchase corporate equity and debt so long as the firms pass our screens, though there is no way of telling to what purpose the capital will be put. Moreover, many if not most of the firms that pass our screens are imperfect. We have never yet encountered a company that had no room for improvement. Stocks and bonds may loosely be considered "general obligations" of corporations, and we're comfortable purchasing them so long as the corporation, on balance, meets our sustainability criteria. The U.S. government, on balance, probably meets those criteria as well. In general, the U.S. government acts with far greater transparency than a corporation, as well as with greater accountability: the federal elections in which we are entitled to participate bear almost no resemblance to the so-called elections of corporate directors, where management proposes one director for each seat and shareholders can either vote for them or withhold votes. Few corporations have any mechanism to permit shareholders' director nominees on the ballot, and waging a proxy context to propose a director not backed by management requires that millions be spent to propose just one. We may not agree with all of the federal government's policies, but we have the ability to change them – just as we have the ability as activist shareholders to change the corporations we invest in.

Finally, our expertise in the SRI industry is in evaluating corporate behavior and promoting corporate accountability. As citizens, we are free to come to our own conclusions about governmental policies, but the blunt instrument of a prohibitory screen is not an effective way to engage on these issues – nor is it likely to improve the government's performance on any issue. And again, a prohibitory screen against investing in U.S. Treasuries is so blunt that it effectively removes our support for environmental protection, social programs, poverty reduction, infrastructure, support of scientific research, and natural resource stewardship, to name just a few worthy investments.

On a personal note, I would only say that I have such strong feelings about the War in Iraq that I would seriously question this decision if I believed that purchasing U.S. Treasuries advanced the war effort in any discernible manner. The fact is, however, that it does not – any more than paying taxes does – and Pax World shareholders are in no way profiting from war by owning U.S. Treasury securities.

Excluding companies that are significantly involved in the manufacture of weapons or weapons-related products – Pax World's weapons screen – is a legitimate tool for investors who choose not to profit from violence and war – not a perfect tool, perhaps, but a legitimate one. Prohibiting the purchase of U.S. Treasuries is not such a tool; it does not complement our weapons screen, nor when examined, does it bear up under scrutiny. So, while we remain committed to our mission of advancing peace, we will no longer prohibit our portfolio managers from purchasing U.S. Treasury securities.

Respectfully yours,

Joseph F. Keefe
President and CEO

1Includes unemployment compensation, Supplemental Security Income, the refundable portion of the earned income and child tax credits, Food Stamps, family support, child nutrition, and foster care.