Should State Divest Gun Stocks?

Last week a story by Bloomberg revealed that Florida’s public school teachers pay into a retirement fund that invests in American Outdoor Brands Corp., previously known as Smith & Wesson, the company “that manufactured the semiautomatic AR-15 used in the attack at Marjory Stoneman Douglas High School” that killed 17 people.  Yes, teachers at this very school were paying into this plan.

All told, the Florida Retirement System Pension Plan holds 41,129 shares valued at $528,000 in American Outdoor Brands, and also has investments in Sturm, Ruger & Co., Vista Outdoor Inc., and Olin Corp, three other companies that make firearms, the story reported.

The story quickly created controversy in Florida. “I am sure that most of Florida’s public school employees are as sickened as I am to learn that the state has invested some of our pension fund holdings in the maker of the AR-15,” said Joanne McCall, president of the Florida Education Association. Her group has called on the fund to divest itself of gun stocks, but Florida’s State Board of Administration, which manages the pension plan, has rejected the request. So did officials at the state investment fund in Iowa , while calls to divest in New York and New Jersey met with the response that state officials have made no decision on the matter.

In New Jersey Democratic legislators have introduced a bill that would require divestment by its pension fund. And in Wisconsin Democratic Rep. Melissa Sargent of Madison is working on a bill to address gun violence that could include a number of policies, from background checks on guy buyers to divestment in gun makers’ stocks.

“It concerns me that we are profiting from fear and violence,” Sargent says. “We need to make sure we are not supporting any companies the profit from mass shootings.”

Requests for comment from Republican leaders, Assembly Robin Vos and Senate Majority Leader Scott Fitzgerald, were not answered.

Wisconsin is among a dozen states whose teacher pension fund invests in the firearms industry, Bloomberg reported, including Alaska, Arizona, California, Colorado, Florida, Kentucky, Michigan, New Jersey, New York, Oregon and Pennsylvania. States like California have a separate fund for pensions of teachers and other public employees. But the State of Wisconsin Investment Board, or SWIB, combines them, creating one fund with $117 billion in assets, seventh largest among the states and 25th largest in the world.

SWIB does not currently have individual investments in gun company stocks but does have a heavy investment in index funds, and a common U.S. index fund includes weighted averages of stocks of the Russell 2000, the top 2000 companies, which includes gun manufacturers American Outdoor, Sturm Ruger and Vista.

A 2016 analysis of 23,000 mutual funds by MSCI found that nearly three quarters “had some exposure to the weapons industry” and approximately half of those funds “had direct exposure to gun manufacturers,” the New York Times reported.

Moreover, there is nothing to prevent SWIB from investing directly in gun manufacturers in the future, and since their stocks have been in decline for years (gun sales were much higher when Barack Obama was president, because of fears he might succeed in passing a gun control law), it might be a good buy. And SWIB’s focus has always been on getting the highest return.

That is precisely what they should be doing, says Keith Brainard, director of research at the National Association of State Retirement Plan Administrators. As he told CBS News: “Those who administer trust funds have a fiduciary obligation … to make decisions that are solely in the interest of plan participants.”

Legislation could easily be written to prevent SWIB from investing in individual companies, and they are so small a part of the total international economy its impact on SWIB’s earnings would be negligible. But preventing investments in major index funds would undoubtedly reduce the fund’s return.

However, there is increasing pressure on major investment companies to create funds tailored to meet an objection to investing in certain stocks. By the end of 2015, more than $845 billion of investments by U.S. institutional investors barred investments in weapons, according to data from US SIF, the Forum for Sustainable and Responsible Investment, Fortune magazine reported. “That number soared more than 1,000% following the Sandy Hook school shooting in December 2012, from $74 billion at the start of 2012.”

The BlackRock investment company now “manages more than $200 billion of assets that are screened for weapons ownership and other value-based issues,” the story reported.

Companies like Vanguard, which continues to grow its line of index funds, might find it profitable to create a fund that excludes gun manufacturers if some of the biggest pension funds in the world, like those from New York and Wisconsin, were to request such a product. California’s massive state teachers pension has already moved to exclude gun manufacturers. And in New York City three of five public pensions have divested their gun-maker stocks, CNBC reported.

But would such a movement by states have any impact on the profits of gun manufacturers? Rommel Dionisio, managing director of equity research at Aegis Capital Corp. and a gun industry expert, offered this prediction to Bloomberg: “Given there are so many other sources of investment capital available in the global financial markets, I have not seen meaningful long-term impact on the valuations of companies in the firearms industry from such divestment actions in the past.”

In short, there will always be stock buyers driven only by the possible return, who might eagerly pick up the gun stocks you unload.

Some activist investors are deliberately keeping gun stocks and are trying “to exert pressure from within,” as Fortune notes. Shareholders have filed proposals that ask American Outdoor and Sturm Ruger “to report on steps they’re taking to improve gun safety and to mitigate the harm associated with gun products.”

Other gun control activists suggest a far more effective tactic would be a consumer boycott of gun sellers: like Walmart and Dick’s Sporting Goods Inc. A major loss of sales for these companies would be money lost that is not easily replaced.

It seems safe to say that Republican Gov. Scott Walker, who has gotten $3.6 million in campaign donations from the NRA, would not be likely to support a bill barring SWIB from investing in gun manufacturers. And one wonders if that has make officials with SWIB reluctant to speak about the issue. They did not respond to national media stories about this, and did not respond to my questions about its philosophy on such investments. That seems a surprise for an agency that was once so responsive, but since Walker and Republican legislators ended civil service protections for state employees in 2015, things have changed. State employees no longer serve the public. They serve the Republican party.

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