For trustees of the Kentucky Teachers' Retirement System, it was a strategy that went up in smoke.
The $11 billion pension fund has repurchased tobacco stock, after choosing to divest half of its stock holdings in tobacco-related firms three years ago. That earlier decision resulted in the sale of $57 million worth of stock from the fund's internally managed $3 billion S&P 500 index fund.
The original divestiture shocked the tobacco-growing state's auditor, whose office denounced the strategy in a report released last year.
Chris Tobe, investment specialist for the auditor's office, was particularly upset that divestiture worsened the fund's tracking error to -30 basis points. "The last thing I expected to find in Kentucky was a major tobacco divesture," he said.
Stuart Regan, deputy executive secretary of investments, said that earlier this year the fund resumed its full tobacco weighting in the index fund.
The fund has had an incremental return of 15% and made a little more than $1 million because of the repurchase of the stocks, Mr. Regan added. The fund has repurchased Phillip Morris Cos., Loews Corp. and UST Inc. and now has a tracking error of +2 basis points.
He contends the tobacco divesture and repurchase had nothing to do with ethics, but was purely an investment move. But with the possibility of more litigation overseas, the stocks might lose their luster.
"Sounds like they will be taking some more licks, maybe we bought back too soon," he added.
