Newtown massacre spurs wide-ranging reviews of portfolios
New York City and CalSTRS are among the big pension funds considering whether to divest their shares in gun manufacturers.
Their scrutiny follows the Dec. 14 mass shooting at a school in Newtown, Conn., that left 26 people dead, including 20 children.
The $127.8 billion New York City Retirement Systems has about $18 million invested in four weapons and ammunition manufacturers — Smith & Wesson Holding Corp.; Sturm, Ruger & Co. Inc.; Olin Corp.; and Brazilian conglomerate Forjas Taurus SA. The investments are in externally managed passive and active equity portfolios.
“We are currently conducting a review of our holdings and aggressively exploring all options, including divestment,” a spokesman for the New York City pension funds said.
Bill de Blasio, public advocate for New York City and a trustee for the $43.3 billion New York City Employees' Retirement System, is taking it a step further. In a letter to City Comptroller John Liu, who oversees the employees' fund along with the four other pension funds that comprise the city retirement system, Mr. de Blasio said he wants NYCERS to “purge” all gun investments.
“The increased liability from such exposure, and gun companies' links to the horrific Newtown tragedy, make such exposure a poor investment decision,” Mr. de Blasio said in the letter.
Increased regulation and possible litigation against these gun manufacturers could have an adverse effect on pension funds that are invested in the sector.”
The day after the shootings, the $154.8 billion California State Teachers' Retirement System, West Sacramento, initiated discussions with alternatives manager Cerberus Capital Management LP on its investment in weapons manufacturing conglomerate Freedom Group Inc.
On Dec. 18, shortly after CalSTRS announced it would review its investment with the private equity manager, Cerberus announced it would sell its investment in Freedom Group, a firearms manufacturing holding company that owns, among other companies, Bushmaster Firearms International LLC and Remington Arms Co Inc. Authorities in Newtown said the gunman, Adam Lanza, used a Bushmaster XM-15 rifle in the Newtown mass shooting.
CalSTRS has about $751 million committed to Cerberus, including $600 million to two funds that hold the Freedom Group investment.
“We concur with the action Cerberus has taken and feel they're doing the right thing,” CalSTRS spokesman Ricardo Duran said in a telephone interview.
Officials at other large pension funds, including the $150.1 billion New York State Common Retirement Fund, Albany, and the $49.5 billion Pennsylvania Public School Employees' Retirement System and $25 billion Pennsylvania State Employees' Retirement System, both in Harrisburg, all voiced support for Cerberus' quick decision to sell its stake in Freedom Group.
Eric Sumberg, spokesman for New York State Comptroller Thomas P. DiNapoli, trustee of the New York state pension fund, said staff will review the fund's investments in firearms manufacturers.
Other pension funds whose officials have said they will review weapon-related investments include the $7.5 billion Rhode Island Employees' Retirement System, Providence; $24.7 billion Connecticut Retirement Plans and Trust Funds, Hartford; and the $37.5 billion Illinois Teachers' Retirement System, Springfield.
CalSTRS in 2008 — after its Cerberus commitments — established a vetting process for potential investments that tests the social, environmental and human impacts, including threats to human well-being.
CalSTRS executives are looking at all of the fund's investments in the weapons industry and determining how appropriate it is to include weapons companies in its portfolio. The next step is a discussion of the review's finding, to be held at the pension fund's Jan. 9 investment committee meeting. That discussion will provide a “more comprehensive sense of exposure to the industry,” Mr. Duran said. The reviewwill look at passive and active exposure and create a list of companies and how much is invested in each.
“This kind of event is a watershed for a lot of different folks in the economy,” Mr. Duran said.
Stephen Nesbitt, CEO of alternatives consultant Cliffwater LLC in Marina del Rey, Calif., said it is still too early to tell what pension funds ultimately will do with their weapons-relatedinvestments.
“The first thing most plans are doing is they want to find out what their exposure is in the portfolio,” Mr. Nesbitt said.
Mr. Nesbitt said what action, if any, pension funds take will vary based on each plan's criteria such as targeting any gun manufacturers, which is a relatively small group, or including gun distributors.
The Rhode Island pension plan already has directed Cliffwater to review the pension fund's alternative investment holdings for both firearm and ammunition manufacturers and distributors. According to a release from state Treasurer Gina Raimondo, Cliffwater found the plan has a stake in United Sporting Cos., a firearm distributor, through a private equity investment with Wellspring Capital Management LLC. Wellspring said United Sporting has already said it will end the distribution of semi-automatic rifles as of Jan. 1, according to Ms. Raimondo's release. Greg Feldman, co-founder and managing partner at Wellspring, and Mark Semer, spokesman for United Sporting Cos., could not be reached for confirmation by deadline.
The Rhode Island State Investment Commission will further explore the issues related to investing in gun-related companies in the coming months as officials develop their first corporate governance policy.
Ms. Raimondo said the commission, which oversees the investments of the Rhode Island employees' fund, will need to balance its “fiduciary responsibility to maximize returns with the need to hold corporate citizens accountable.”
Denise Nappier, state treasurer and principal trustee of the Connecticut fund, said she will review the pension fund's investment exposure to all gun manufacturers and the companies that distribute the weapons.
And, Illinois Teachers' fund officials are gathering information on its exposure to gun and ammunition companies, said spokesman Dave Urbanek.
On Dec. 17, California Treasurer William Lockyer said he'll propose that CalSTRS and the $240.7 billion California Public Employees' Retirement System, Sacramento, sell off investments in firearm manufacturers that make guns prohibited under state law.
Mr. Lockyer, a board member of both CalSTRS and CalPERS, asked that both pension funds review their holdings to determine how much they've invested in gun-makers. He said he would then propose to divest those stakes.
A consultant who asked not to be identified said institutional investors are having a knee-jerk response and suggested a 30-day waiting period before analyzing their gun-industry investments.
“The issues are not investment-related at all,” the consultant said, adding guns are the most visible, politically correct target to go after, as opposed to mental health issues and violent video games. “To me, it's more about sensationalism.” He said his firm is not advising clients to do anything on the issue right now.
What to watch
When considering whether to divest, there are several things a pension fund should look at, Cliffwater's Mr. Nesbitt said. They include: the economic implications as well as the fiduciary ones. He added some public pension executives will pass the issue on to legislators to decide.
As of Sept. 30, Vanguard Group Inc. and BlackRock (BLK) Inc. (BLK) were the two largest holders of Smith & Wesson stock, as well as two of the largest investors in Sturm, Ruger, according to Bloomberg data, but almost all the holdings from the two firms are managed passively.
Vanguard sent a statement to Pensions & Investments that said the company does not believe mutual funds are “optimal agents to address social change.”
“As a fiduciary, Vanguard is required to manage our funds in the best interests of shareholders and obligated to maximize returns in order to help shareholders meet their financial goals,” the statement said. “It would be exceedingly difficult, if not impossible, to fulfill these obligations while managing portfolios that reflect the social concerns of all of our shareholders. We believe our approach of engaging with portfolio companies on issues such as this strikes the appropriate balance between corporate responsibility and our obligations as a fiduciary of our fund shareholders' assets.”
Gun manufacturer stocks have suffered since the Newtown shooting, while ammunition manufacturers have seen little change:
- Smith & Wesson shares closed Dec. 21 at $8.11, up from an intraday low of $7.67 on Dec. 18, but down 15% from the close on Dec. 13, the day before the shooting.
- Sturm, Ruger closed Dec. 21 at $43.59, down 8.7% from its Dec. 13 close. It had an intraday low of $40.09 on Dec. 18.
- Alliant Techsystems Inc., a major ammunition supplier, closed Dec. 21 at $63.44, up 2.6% from the Dec. 13 close of $61.84.
- Olin's stock had little change, closing Dec. 21 at $21.12, down 1.2% from its Dec. 13 close.
This article originally appeared in the December 24, 2012 print issue as, "Public plans mull purging gun investments".