Misdirected furor

Pension funds efforts to divest gun makers are in vain

The sorrow and anger over the killings of students and teachers in Newtown, Conn., have provoked an understandable impulse by pension fund executives and other institutional investors to do something to help stop gun violence.

The one step they can take is to divest their funds of holdings in gun manufacturers. Presumably they hope such divestment would drive down the market values of those companies and possibly force them to end gun manufacture.

However, that most likely is a vain hope, as gun sales have soared since the president and Congress began discussing stricter gun control laws, possibly increasing the companies' market values.

Pension funds from the California State Teachers' Retirement System to the New York State Common Retirement Fund are divesting or considering doing so. By their reappraisal, they suggest their holdings contribute to gun violence.

Yet there are plenty of other pension funds and institutional investors that haven't invested in gun-makers. Those investment policies did nothing to stop the shootings that killed 27 victims.

Divesting is a misguided reaction. Pension fund trustees are fiduciaries; their plans are not agents of social change. The primary purpose of pension funds is to secure the retirement of plan participants. Divestment is a distraction that takes them away from their mission. It also distracts policymakers from focusing on useful public-policy solutions to gun violence.

Pension investments, as they have broadened their reach, have sometimes become sources of controversy as a result of the latest social or political movement. Pension funds, especially public funds, have come under pressure to divest — or even invest — in response to one cause or another, and sometimes have succumbed to such pressure. In recent years, for example, private equity holdings have become wrapped up in a furor about such investments destroying jobs and companies for short-term profit. Pension funds need to step up and communicate the value of investments to their portfolios, to reaching their objectives and to the larger economy.

In December, for instance, the General Board of Pension and Health Benefits of the United Methodist Church, to its credit, addressed the challenges posed by the backlash against private equity noting the asset class' valuable contribution to the fund's portfolio and to society. In its affirmation it pointed to “Twitter and Pinterest —two privately held companies celebrated for their innovation, user connections and distinctive appeal — which have enriched a growing number of lives in the global economy.” Last year, the University of Notre Dame endowment likewise stepped up to communicate private equity's value to the endowment and student aid.

It is incumbent on pension funds to take up the challenges of explaining their exposure and maintaining their commitment to meeting their objectives. They would perform greater service by steering proponents of particular causes into more effective means of influencing policymakers. Otherwise, pension funds are doing a disservice to those committed to such causes.

Instead, some major pension funds lately have been swept up into a divestment snowball, preferring to take a politically popular, visible action likely to have no meaningful effect on gun manufacture and sales, rather than appear to do nothing.

The New York State Common Retirement Fund announced Jan. 15 it is freezing investments in publicly traded commercial firearms manufacturers, affecting its 45,325 shares, valued at $2.2 million, in Sturm, Ruger & Co.

“After the terrible events in Newtown, it is clear that the national movement toward greater regulation of firearms manufacturers will impose significant reputational, regulatory and statutory hurdles that may affect shareholder value,” New York State Comptroller Thomas DiNapoli said in a news release.

An external manager of the New York fund on Dec. 18 sold its 165,600 shares, valued at $1.3 million, in Smith & Wesson Holding Corp.

On Jan. 14, Chicago Mayor Rahm Emanuel ordered five city of Chicago pension funds to review holdings in their combined $13.5 billon in assets for any stakes in companies that manufacture or sell military-style guns. “We cannot support or invest in companies that profit from the proliferation of assault weapons and the violence these guns bring to our communities,” Mr. Emanuel said in a statement.

Four days after the Dec. 14 shootings, Cerberus Capital Management LP announced it would set a process to sell its investment in gun manufacturer Freedom Group, under apparent pressure from pension funds clients. That decision was made a day after CalSTRS commenced an examination of its $741 million in combined investments and commitments with Cerberus. CalSTRS owns 2.4% of Freedom Group through Cerberus investments.

Officials of the New York State Common Fund, Pennsylvania Public School Employees' Retirement System and Pennsylvania State Employees' Retirement System expressed support for Cerberus' decision.

CalSTRS on Jan. 9 announced plans to consider selling such holdings.

The New York City Retirement Systems plans to examine its $18 million in Smith & Wesson Holdings Corp., Sturm Ruger, Olin Corp. and Forjas Taurus SA and consider “all options, including divestment,” a spokesman said.

Their divestment activities reveal shortcomings as fiduciaries in portfolio oversight. as well as reconciling different investment objectives.

Risk of liability is a legitimate concern for any pension investment. But how has that risk been assessed? Pension funds' sudden interest in their gun-maker and related retail holdings reveals a lack comprehension in building such exposure and ill preparation for any backlash or consequences. Why haven't urban violence or other horrific crimes at Virginia Tech; Tucson, Ariz.; and Aurora, Colo.; among others, previously provoked such a concern for divestment? On what basis now are the divestment decisions being made? Where is the evidence that continuing to hold investments in such companies will harm the funds? Has anyone examined what will be lost by the divestment? What are the costs of the divestment?

Pension funds, as fiduciary assets, should not invest or divest to meet social objectives. Pension funds should avoid being drawn into a debate on the Second Amendment. Their mission is not to grapple with such constitutional issues. As fiduciaries, fund executives have to focus on investment and funding objectives, not social goals.

Firearms are just the latest flashpoint of controversy among pension investments.

Because of the span of their investments, pension funds are open to the risk their holdings might offend some sensibilities. But pension fund executives should not try to influence or supplant policymakers in coming to grips with social challenges. They must stay focused on securing the highest risk-adjusted returns possible for their funds. They must keep in mind and communicate that meeting their retirement objectives is a worthy and challenging social goal, one that is not easily met and one that has led to the demise of some sponsors, to the financial harm of pension plan participants.

This article originally appeared in the January 21, 2013 print issue as, "Misdirected furor".