When the president of the Florida teachers union suggested the state pension fund divest itself of shares in the company that manufactures the assault rifle used in the state’s school massacre last week, the complex issue of directing pension investments to achieve social objectives once again resurfaced.
The idea of selling stocks in order to make a point — instead of a profit — has been with us for decades. Pension administrators back in the 1970s discussed divesting their portfolios of so-called “sin stocks” — liquor, tobacco and gambling. Many more have since been thrown into the mix, including petroleum stocks, fast food, soda and, most recently, guns.
Here’s the tension: Public pensions have a legal duty to maximize returns while limiting risk — and many of these stocks yield reliable returns. But on the other hand, some members want the choice of stocks to reflect their sense of social responsibility.
So in that spirit the teachers’ union requested that the pension sell its shares in Massachusetts-based American Outdoor Brands, manufacturer of the AR-15 rifle that a gunman used to massacre 17 students and staff at Marjory Stoneman Douglas High School in Parkland, Fla.
“It’s a complex exercise to achieve a social objective without creating greater risk or losing return,” said Ian Lanoff, an attorney who advises several state pension funds on their duties toward members, also known as fiduciary responsibilities.
Lanoff said the legal formula for deciding on divesting is simple and in two parts: First, is it economically prudent to invest in a stock? If not, that ends the exercise. But if the answer is yes, then the pension administrators are legally bound to replace the economically prudent investment — in this case a gun manufacturer — with a stock that has a similar risk/return profile.
“You’re not going to find any expert to tell you it’s imprudent to invest in guns,” Lanoff said. “The question that pension trustees have to ask their investment experts is, ‘Can we replace guns stocks without hurting the fund economically?’ You have to replace them with something. Can you fill the hole with something that is equivalent?”
The Florida Retirement System, whose fund has a total value of $163.1 billion, holds approximately $528,000 worth of shares in American Outdoor Brands, according to a retirement system spokesman. American Outdoor Brands was formerly known as Smith & Wesson.
A pension board spokesman indicated that the state would not be taking divestment action anytime soon, if at all.
“This is a public safety issue, not an investment issue,” said John Kuczwanski, a spokesman with the state pension fund. “With the event happening just last week, we applaud the students, teachers, governor, president and elected officials from all levels of government meeting to discuss changes that can actually prevent a future occurrence, not limitations on investments that increase plan costs, potentially lower returns and consistently fail to produce desired social changes.”
The Florida pension investment portfolio is broadly diversified into equities, corporate bonds, municipal bonds, U.S. Treasurys, currencies and mortgage-backed securities, as of a Dec. 31 securities filing.
Most pension portfolio stocks are held in broad index funds with shares of hundreds or perhaps thousands of different companies. The pension would need to ask the asset manager who runs the portfolio to pull out of the few gun stocks. That could add fees and costs.
On the other hand, a pension fund as large as Florida’s has leverage with asset managers. The asset manager may agree to do the extra work simply to keep the account or risk losing the job.
In addition to American Outdoor Brands, the Florida retirement system owns shares in other gun companies, including Olin, Sturm Ruger and Vista Outdoor.
From June 13, 2016, through Feb. 21, 2018, the shares of American Outdoor Brands (AOBC) are down 53.01 percent. Sturm Ruger (RGR) is down 14.25 percent, and Vista Outdoors (VSTO) is down 59.93 percent, according to Jon Hale, Morningstar’s director of sustainability research. By comparison, the Vanguard Small Cap Index fund is up 30.03 percent during that time.
“One could argue that given the underperformance of these companies and the risk going forward of reduced sales of weapons and ammo due to possible regulation, that it isn’t prudent to own them from a fiduciary standpoint,” Hale said. “Add to that the moral argument that teachers pension funds shouldn’t be used to invest in companies that make assault weapons used in mass shootings at schools and it’s really a pretty clear case to be made for divestment.”
The Florida Retirement System consists of state, local, school district, special district and university participants. It consists of 312,939 active, contributing members. About 49 percent of those members are employees of school districts.
One financial planner said Florida ought to sell its gun shares.
“It’s a $163 billion fund, an enormous of amount of money relative to the gun position,” said Jamie Cox of Richmond-based Harris Financial Group, which manages $500 million in savings for about 800 middle-class families. “It’s so insignificant and small relevant to the whole that it’s a non-event for them to liquidate those positions.
“The negative public relations is a lot worse than just taking the profits on the equities and be done with it,” Cox said. “It’s not going to hurt the portfolio at all.”