January 23, 2013
Since the Dec. 14 shooting at Sandy Hook elementary school, public pension officials in California, New York, Connecticut, Rhode Island and Massachusetts, as well as the private equity fund, Cerberus Capital Management, have said they are either reviewing or will begin selling their firearms investments. Cerberus owned the Freedom Group, which makes the Bushmaster rifle used in the shootings.
But are such divestments likely to have any impact on the gun industry, which despite the shooting, racked up $11.7 billion in sales last year?
One historical example that may give insight into the effects of pension fund divestment is the tobacco industry in the mid-1990s.
A $35 billion industry at the time, tobacco faced a public relations nightmare after whistleblower Jeffrey Wigand, the former vice president of research and development at Brown & Williamson, exposed the company’s efforts to deceive the public of cigarette’s dangers on 60 Minutes.
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Amidst the controversy, public pension funds began pulling their money out of tobacco stocks. Between March of 1996 and October of 2000, more than 16 major public pension funds sold or put restrictions on their tobacco investments. The largest, according to the Council for Responsible Public Investment (CRPI), was the Florida State Retirement Trust Fund, which in 1997 sold $835 million of tobacco securities. The California Public Employees’ Retirement System (CalPERS) sold all of its tobacco holdings, valued at about $525 million. The California State Teachers’ Retirement System (CalSTRS) sold just its passively held tobacco investments, which amounted to about $238 million.
Others included the New York State Common Retirement Fund, the New York State Teachers’ Retirement System, The Vermont State Retirement System, the Minnesota State Board of Investment, the Maryland Retirement and Pension System, and the Massachusetts’ Public Retirement Investment Management Trust, which divested about $268 million of its holdings in 1997 as a result of state legislation. By the end, some $2.6 billion worth of tobacco stocks were divested or frozen, according to the CRPI.
Yet, the tobacco industry has since rebounded, bringing in $45 billion last year. In the end, the bigger financial threat to the industry was not divestment but the impending liability faced by the four largest tobacco companies in the U.S. -- Philip Morris Inc., R. J. Reynolds, Brown & Williamson and Lorillard -- after attorneys general in 46 states filed lawsuits claiming they suffered tobacco-related medical costs. In November 1998, the companies entered into a master settlement and agreed to pay $206 billion to various states over the next twenty-five years. In return, they were exempted from private tort liability involving harm caused by cigarette use.
Once the settlement was reached and the financial uncertainty was removed, the industry began to flourish again and some pension funds moved back in. Altria, formerly named Philip Morris USA and the biggest US tobacco company of the bunch, for instance, was number 9 on the Fortune 500, in terms of profits, just two years after the settlement. In 2001, it was number 7. That same year, over opposition from anti-smoking groups, Florida officials ended the state’s ban on tobacco investing. Pension officials saw tobacco stocks go through the roof, and reportedly said it was too lucrative a proposition for the $100 million pension fund to ignore.
Public pension divestment is likely to have even less of an impact on the $11.7 billion gun industry, where public pension funds hold far less stock because only three gun companies trade publicly.
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And unlike tobacco firms, the publicly-traded gun companies are very small. They are also very profitable. They don’t need institutional money for capital expenditures or economic stability, said James McDonald, Chief Investment Officer at Index Strategy Advisors in Houston.
“If a significant portion of the market decided they wanted to divest, and I mean a significant portion, then the stock price might go down. But how long will that persist?” said Julie Gorte, Senior Vice President for Sustainable Investing at Pax World Management LLC.
As of Jan. 17, 89 percent of the stock of Sturm, Ruger& Co., for instance, was held by 176 Funds and Institutions, few of which were public pension funds, according to Yahoo! Finance. And yet the company has flourished: its stock price was up 35 percent in 2012, outperforming the S&P, which was up just 12.6 percent during the same period. And its revenue continues to rise, hitting $443 million in 2012, up from $328 million in 2011, and $255 million in 2010.
Sturm also pays an above average 3.6 percent dividend, which represents a 34 percent payout ratio. If gun stocks are anything like tobacco stocks, the allure of profits may be hard to resist.
“The firm is rewarding its investors more than the other way around. This company can continue to operate profitably without any public pension investment,” McDonald said.
Sturm rival Smith & Wesson’s stock was also up, a whopping 88 percent in the last year.
But performance aside, the company’s capital requirements are small and could probably be financed by a small private equity firm controlled by a handful of partners without much effort, McDonald said. Their small size means they aren’t dependent on large, diverse investor bases. In a word, pension divestment won’t change the gun industry because the gun industry doesn’t need their money. And Ruger and Smith & Wesson’s main competitors, Browning Arms Company, Remington Arms Company, and Colt’s Manufacturing, are private and simply don’t bother with institutional public ownership.
“Based on my research, and if tobacco’s history is any indicator, pension divestment will have virtually zero impact on the gun industry. Public pension investments simply aren't of much importance to gun firms,” said McDonald. “There is plenty of investment capital to be found elsewhere for gun firms, and the publicly traded gun firms are too small to matter to the pension's portfolio performance. Neither will miss the other’s absence.”