Feb. 12, 2013 at 7:56 AM ET
Politicians aren't the only ones wrestling with firearms laws — retirement-planning professionals also are facing the law of unintended consequences in the discussion about gun violence in America.
Swearing off gun-related investments in retirement portfolios may be popular with some people, but it’s not as easy as it might seem. And while many public pensions are underfunded, some asset managers say investors shouldn’t rule out an $11.7 billion industry that pulled in $993 million in profits last year.
Shares of Smith & Wesson Holding Corp. and Sturm, Ruger & Co. fell following December’s elementary school shootings in Newtown, Conn., but both had been on a generally upward trajectory since President Barack Obama was elected in 2008.
It’s unclear how the fallout from Newtown will ultimately affect gun companies. David Kathman, a senior fund analyst at Morningstar, pointed out that anticipation of bans on certain weapons could drive up demand — a phenomenon recent anecdotal reports of sellouts and backorders would seem to support — and boost manufacturers’ bottom lines.
Most companies that make guns are privately held, but that doesn’t mean retirement funds aren’t being invested in them. As public pension funds have struggled in recent years, many have turned to private equity investments to give their returns a shot in the arm. “Historically, private equity investments have outperformed markets and other asset classes like bonds,” said Sam Hamadeh, CEO of research company PrivCo.
It’s not uncommon for big pension funds to have money in long-term investments with funds managed by private equity groups, said Paul Jacobs, chief investment officer of Palisades Hudson Asset Management. “When a private equity firm owns a firearm company, the owners are ultimately the partners in the fund,” he said.
The pension fund and its retirees are indirect owners, but even this degree of separation — especially since it gives the pension funds less of a say in how the money is allocated — left some people uncomfortable after the Newton shootings. “As passive investors, their money goes wherever the private equity firm's fund invests on behalf of its investors,” Hamadeh said.
PrivCo data counts nearly a dozen different private equity firms as investors in nine different privately-held companies that make guns, accessories and ammunition.
In recent weeks, a number of public pension funds have announced plans to review or divest their holdings. New York State’s fund froze investment in publicly-traded firearms companies, and funds in New York City and Chicago are considering divestiture or plan to do so, respectively.
After the $154 billion California State Teachers' Retirement System fund said it would unwind its investments in firearms companies, including privately-held Bushmaster manufacturer Freedom Group, the gun company’s private equity owner, Cerberus Capital Management LP, said it would sell its stake.
This isn’t the first time CalSTRS has thrown its weight behind public causes. In 2000, it was the second-largest state pension fund to divest itself of tobacco holdings. In unloading $238 million in investments, it trailed only the California Public Employees’ Retirement System (CalPERS), which dumped more than half a billion dollars worth of tobacco holdings.
“When an investor is looking to invest their portfolio in an ethical manner, it can be a very slippery slope,” Jacobs warned. Different stakeholders can have different ideas about which investments are and aren’t applicable. When it comes to guns, for instance, Jacobs pointed out that sporting-goods or outdoor retailers might also be considered tainted because they sell guns and ammunition. Even Wal-Mart, the largest retailer in the U.S. and widely held by fund managers, sells firearms.
Still, firearms are what Jacobs called a “blip” in the overall stock market — less than one percent of a diversified portfolio, he said. This might be helping fund managers make the decision; getting rid of a politically contentious investment is easier if it’s small.