Divestment focus shifts to Iran

Plan execs fight state bills that may affect up to $18 billion

052807 priya khetarpal
NTGI’s Priya Khetarpal said about 25% of MSCI EAFE companies do business in Iran.

Public pension funds across the country are battling state legislation that would require them to divest from companies doing business in Iran — a set of securities that could comprise up to 25% of the MSCI EAFE index.

If some of the bills are passed in their broadest forms, institutions might be forced to sell nearly $18 billion in affected assets. Federal law prohibits most U.S. companies from doing business in Iran, and the bills being introduced now focus on foreign-based firms.

However, some state legislatures are paring the reach of their bills to focus solely on energy-related stocks, which greatly reduces the amount and number of stocks that would have to be sold.

Government officials generally view divestment as a way to put the squeeze on Iran’s nuclear program and protect national security, while others views divestment as a moral obligation. But some pension trustees consider divesting purely for political or moral reasons to be against their fiduciary responsibility and say they can avoid geopolitical risks while still acting on behalf of their members.

Bills have been introduced in states from California to New Jersey that would exclude some 170 international companies with ties to Iran from the funds’ portfolios.

In Washington, the House Financial Services Committee on May 23 passed legislation that would protect public pension funds and their money managers from litigation stemming from Iran-related divestiture. A week earlier, Sen. Barack Obama, D-Ill., introduced similar legislation.

Some state legislators are focusing solely on the energy sector because it’s an area they think is most likely to help curb terrorist activity. When narrowed, the number of companies drops to between 19 and 25, according to some pension executives and policy analysts.

Iran-related legislation has also been introduced in Florida, Ohio, Kansas, Illinois, Oregon and Texas.

$8 billion or $2 billion

The $245.3 billion California Public Employees’ Retirement System, Sacramento, alone would have to divest some $8 billion in holdings if a current bill, introduced by California Assemblyman Joel Anderson, is passed. If narrowed to only companies with energy interests in Iran, the fund would have to divest $2 billion in assets, confirmed Clark McKinley, CalPERS spokesman.

The bill would require CalPERS and the $165 billion California State Teachers’ Retirement System, Sacramento, to sell or transfer any investments in a company with business operations in Iran. The bill also would require the plans to provide an annual report of their investments. Trustees at both funds oppose the current version of the bill.

“Our main objection is that it covers such a broad spectrum of companies,” said Dana Dillon, chairwoman at CalSTRS. The board of trustees would support legislation that allows the fund to work with companies to drop its investments in Iran and divest only if it becomes prudent, which keeps with the fund’s fiduciary responsibility, she said.

Details of the California bill are still being worked out in committee, and CalSTRS officials believe the scope will be narrowed to about 20 oil and gas firms, said CalSTRS spokeswoman Sherry Reser. If narrowed, the fund would be required to divest $1.4 billion worth of securities, she said. These include Royal Dutch Shell PLC, Total SA, Petróleo Brasileiro SA and Lukoil.

“If the bill is not amended, then the company list could be interpreted to be between 100 (and) 140 companies and our exposure and cost would be much greater,” said Ms. Reser.

“We’re working out the kinks,” said Chip Englander, chief of staff for Mr. Anderson, declining to comment further.

More than Sudan

At least one index fund manager believes the Iran divestment initiative could have a much larger impact on pension assets than recent efforts in many states to force public funds to sell their holdings in companies with ties to Sudan. During the past two years, public funds have already moved $2.2 billion in assets away from Sudan, said Adam Sterling, director at the Sudan Divestment Task Force, Washington.

According to data from Northern Trust Global Investments, Chicago, companies doing business in Iran comprise about 25% of the Morgan Stanley (MS) Capital International Europe Australasia Far East index, compared with about 15% with ties to Sudan, said Priya Khetarpal, manager of NTGI’s quantitative index and enhanced strategies.

Most of EAFE’s energy exposure, comprising 6.85% of the entire index, would be knocked out of the index if investors eliminate companies with energy ties to Iran, she said.

NTGI has had one client, a foundation, request an Iran-screened product, with several others asking for more information, said Ms. Khetarpal. She declined to name her clients.

Selling all Iran-related securities would add substantial risk to an indexed international equity portfolio, though as the list is narrowed, the risks decrease.

Officials at State Street Global Advisors, Boston, have had preliminary conversations with clients about Iran divestments. Rough estimates by SSgA show that if all companies with ties to Iran were removed from the EAFE index and replaced with similar performing companies, it would introduce a tracking error of up to 200 basis points, said Bailey Bishop, vice president in SSgA’s global structured products group. By comparison, the tracking error on a typical index is between five and 10 basis points, he said.

Florida Legislature

Florida is the only state to have recently moved Iran divestment legislation through the House and the Senate. Legislators approved a bill that prohibits the $150 billion Florida State Board of Administration, Tallahassee, from investing in companies with more than 10% of their revenue or assets linked to oil-related activity or mineral extraction activity in Iran. It also prevents the fund from investing in companies with ties to Sudan. Gov. Charlie Crist is expected to sign the bill into law. State board spokesman Mike McCauley declined to comment on the impact of the bill.

Ohio is making similar moves. A bill originally meant to ban state pension funds from all companies with ties to Iran had been modified as of May 23 to include only companies with oil and mineral ties to Iran and companies in Sudan, a move that could knock the assets divested from the billions down to millions.

In a review of the bill in its original form, the $75 billion Ohio State Teachers’ Retirement System, Columbus, would have had to divest $4.6 billion, according to spokeswoman Laura Ecklar. That amount would shrink to $700 million if the fund only divested the oil and mineral companies in Iran, she said. The fund has not calculated the value of its Sudan-related investments.

The $77.6 billion Ohio Public Employees Retirement System, Columbus, was exposed to $4 billion worth of securities in companies with ties to Iran, according to a May 4 memo from Tom Sherman, the system’s government relations officer, to the retirement board. Michele Kowalik, spokeswoman at OPERS, could not provide updated figures.