President Clinton's rejection of the proposed tobacco settlement triggered new calls for pension fund divestment of tobacco stocks.
Officials with oversight of pension funds in California, Pennsylvania and Washington, D.C., said President Clinton's toughened attitude toward teen smoking and federal control of nicotine have revived efforts toward pension fund divestment.
Among other actions:
A bill requiring the $18 billion Massachusetts Pension Reserves Investment Management Board, Boston, to divest about $200 million in tobacco stocks is expected to pass in state Senate, said Eric Fehrnstrom, press spokesman for Massachusetts State Treasurer Joseph Malone. Mr. Malone, who administers the pension fund, supports the bill.
The bill, which already has passed the Massachusetts House, would then go to acting Gov. Paul Cellucci, who would have 10 days to sign it.
The first of its kind in the nation, the bill would give PRIM fund managers three years to sell off tobacco stocks. Local pension boards are exempt from the bill's divestment requirements, but their holdings of tobacco stocks would be limited to current levels.
California Assemblyman Wally Knox has asked the $124 billion California Public Employees' Retirement System and $80 billion California State Teachers' Retirement System, both in Sacramento, to begin to track tobacco stock prices.
Officials for the two funds agreed to monitor prices and develop a plan to handle a potential "downhill ride" of tobacco stock prices, said Mr. Knox. Mr. Knox is chairman of the State Assembly Committee on Public Employees Retirement. The two funds hold a total of $1.73 billion in tobacco stocks, mostly in index funds.
Barbara Hafer, Pennsylvania state treasurer, will seek reconsideration of the tobacco stock divestment issue at the October board meetings of the $33.5 billion Pennsylvania Public School Employes' and $18 billion Pennsylvania State Employes' Retirement Systems, both based in Harrisburg, according to spokesman Robert Gentzel. Ms. Hafer is a board member of the systems.
Managing directors with Cornerstone Capital Management, Colorado Springs, Colo., say S&P 500 tobacco stocks have provided a relatively poor risk-adjusted return relative to the index during the past five years. They said prospects for the stocks are bleaker now in light of President Clinton's tough stand.
They presented their data at a Sept. 19 hearing in Los Angeles, held California's Assembly Committee on Public Employees Retirement. Executives of major tobacco companies were invited to attend, but declined.
Case gets stronger
The case for divestment is stronger with President Clinton's proposed revisions of the tobacco settlement that "portend an unknown, perhaps unpredictable future for the tobacco industry," said Mr. Knox.
Many pension trustees and executives that resisted divestment believed the tobacco settlement would stabilize tobacco stocks prices. Supporters of divestment believe the settlement's collapse takes away the tobacco stock price stabilization argument.
Mr. Knox said he will introduce a bill in the California Legislature next year to require state pension funds to divest tobacco stocks. Although a similar bill failed last year, Mr. Knox said he expects a bill to pass this time because of what he described as quickly changing attitudes in the Legislature toward tobacco.
U.S. Rep. Henry A. Waxman, D-Calif., said recent events have altered congressional attitudes toward tobacco stocks.
"It is my belief that pension fund trustees should make investment decisions that maximize the financial return of beneficiaries," said Mr. Waxman.
"But I also believe there is an exception to this rule - and that exception is tobacco. It is simply wrong to profit off of products that kill 3 million people each year and that are expected, within 30 years, to kill more people than any other single disease," he said.
Funds asked to kick habit
Ms. Hafer, the Pennsylvania treasurer, renewed her call for state pension funds to divest their tobacco stocks following the president's rejection of the proposed tobacco settlement.
"Like a smoker who can't quit, the pension funds have been looking for excuses to keep their tobacco holdings," said Ms. Hafer, in a statement.
"By rejecting the (tobacco) settlement, President Clinton has given me a new opportunity to argue that it is, at last, time to kick the tobacco stock habit."
A majority of board members of the two Pennsylvania funds previously argued against divestment. They said the proposed tobacco settlement would lift tobacco stock prices and quiet the tobacco issue, said her aide, Mr. Gentzel.
"We face the embarrassing prospect of having our state attorney general in court, eliciting sworn testimony on the terrible harm tobacco causes, while at the same time our state pension funds are profiting from tobacco holdings," said Ms. Hafer.
The three Pennsylvania funds had an estimated $400 million invested in tobacco stocks last spring, said Mr. Gentzel. Earlier this year, the public school fund agreed not to purchase additional tobacco stocks.
Protection from losses needed
In response to Mr. Knox's call for divestment, Patrick Mitchell, chief investment officer for the California teachers' fund, recommended Mr. Knox and other California legislators consider divestment legislation that indemnifies pension funds for losses.
If divestment of tobacco stocks led to a lower return for CalSTRS, California teachers would get lower benefits or the state and teachers would have to make higher contributions to make up the difference, said Mr. Mitchell.
Prior to President Clinton's rejection of the settlement, supporters of tobacco stock divestment had limited success this year.
In May, the $69 billion Florida State Board of Administration, Tallahassee, ordered divestment of $835 million in tobacco stocks.
Elsewhere, Vermont State Treasurer James H. Douglas urged the state's pension systems in April to sell tobacco holdings, worth more than $21 million.
Also, Oregon state Rep. Barbara Ross in April introduced a non-binding resolution calling for the treasurer and the Oregon Investment Council to stop new investments in tobacco companies, and asked the council to sell one-fourth of its tobacco holdings each year until liquidation.
An argument against divestment has been that the tobacco stocks provide a good return. Some analysts were predicting Philip Morris Cos. Inc., New York, stock could jump in price 45% or more following approval of the tobacco settlement.
But President Clinton's rejection of the tobacco settlement is expected to have a negative long-term impact on tobacco company stocks, according to Cornerstone executives.
Jason D. Huntley, a managing director with Cornerstone, said it is now unlikely the settlement will be approved. He also said tobacco stocks have failed to provide good risk-adjusted returns, even prior to President Clinton's rejection of the settlement.
For the five years ended Dec. 31, the Standard & Poor's 500 Stock Index had a Sharpe Ratio of 0.8505, while the S&P 500, minus tobacco stocks, had a Sharpe Ratio of 0.8839 and tobacco stocks in the S&P 500 had a Sharpe Ratio of 0.2633, according to Cornerstone data.
The Sharpe Ratio is a risk-adjusted measure developed by Nobel Laureate William Sharpe. The higher the ratio, the better the portfolio's risk-adjusted performance, said Mr. Huntley.
He also cited variation coefficient numbers for the S&P 500 and tobacco stocks. The variation coefficient can be used to compare two portfolios or funds directly on how much risk each had to bear to earn its respective return. The higher the variation coefficient, the higher the risk incurred.
For the five years ended Dec. 31, Cornerstone numbers showed the S&P 500's variation coefficient was 0.8496. The S&P 500 (less tobacco stocks) had a variation coefficient of 0.8219 and the variation coefficient for S&P 500 tobacco stocks was 2.3646.