Once again, politicians are attempting to play politics with the two largest public pension funds in California, CalPERS and CalSTRS. They want to pass legislation telling the investment professionals who run the funds that they must sell tobacco stocks from their portfolios. Investment management by politicians, what a terrible thought. The politicians are wrong, and should desist.
They are wrong for several reasons. First, investment decisions should be left to investment professionals. That's what they're paid for. Their expertise should not be overridden by people who might not know a stock from a bond, and who are not concerned about making the best investment decision but only the best political decision.
Second, the tobacco stocks held by the two giant funds are in index funds. Index funds are supposed to track a specified index, and they are supposed to be unmanaged. Stocks should be dropped from an index fund only in extreme situations -- generally when holding the stock threatens the stability of the fund. And once again, the decision should be made only by investment professionals. If the politicians are going to decide when stocks should be dropped from an index fund, they might as well decide to actively manage the portfolio themselves.
Third, the market already has reduced the value of tobacco stocks in the index to a relatively low level. In fact, it might be the market has knocked tobacco stock prices down below a fair value. Some analysts believe the non-tobacco operations of some of the tobacco companies are worth more than the value the market places on the whole companies. The stock prices could correct upward. Selling the stocks now could simply lock in all of the losses.
And if every stock that underperformed the S&P 500 index last year were dropped, the index fund would have to be called the S&P 156.
Fourth, passing legislation telling the investment staff they must sell tobacco stocks from the index fund would set a terrible precedent. Next, the politicians would be telling them what stocks they had to sell from the actively managed portfolios; then, what stocks they couldn't buy and, finally, what stocks they had to buy. How could the politicians resist?
But because most politicians are clueless about investing, although not short on ego, this could lead to an investment disaster in the huge funds. Taxpayers would be left to pick up the pieces.
If the politicians have nothing better to do than to meddle with two of the best run public pension funds in the country, perhaps they should just go home and twiddle their thumbs. At least that way they would do no harm.
