How Do Guns Make The Grade In A Portfolio?

Question from a reader: Recently I’ve read reports that the both the California and Chicago teachers pension funds are either reviewing or selling investments in guns. What do you make of it?

The trustees in these cases are walking a fine line. If they decide to divest of all gun manufacturers, they are eliminating a market sector, and research shows that hurts investment returns.

Divesting in entire market sectors was the approach back with the socially responsible investment (SRI) movement started. Funds that follow the strategy are called “Excluders” because they are excluding investments based on their market sector.

The problem is that research has subsequently shown that Excluders show weaker returns. Lowering your diversification by eliminating a market segment doesn’t help your portfolio in general.

Because Excluders were the initial strategy that many socially responsible investors followed, the entire SRI movement has been labeled with not making market returns.

If the trustees decide to keep investing in gun manufacturers, but judge which gun manufacturers are the best on environmental, social and governance issues, they are following the strategy of “Includers.”

Many studies support that Includers do as well or better than the market in general.

So the current debate: First, a lot of the newspaper stories are unclear about what the trustees of different funds are actually doing. The headline might imply they are dumping the gun market sector, but buried in the story are details that really matter. In the case of California’s teachers pension fund, they are reviewing their portfolio for gun manufacturers that make guns that aren’t legal to own or sell in California. If they find investments in their portfolio that meet that criteria, then they will give the manufacturer an opportunity to change to comply with their new standards.

That approach doesn’t make for sound-bite headlines, but that approach has been successful with other SRI initiatives.

Most of the divestments are small. In the case of the Chicago teachers pensions, less than $200,000 was sold, out of a total portfolio over 9 billion.

The biggest news on the scene is that the California pension trustees, known as CalPERS, is voting on an initiative similar to the California teachers. This pension fund is the Warren Buffet of socially responsible investing. When they make moves, research shows that just following their moves improves investor returns. They wield a lot of influence in the SRI world. I’m waiting for news on what they decide.

About the author

Bridget Sullivan Mermel, CFP®, CPA

Hi. My name is Bridget Sullivan Mermel. I started a fee-only financial planning firm, Sullivan Mermel, Inc. We especially enjoy working with attorneys, small business owners, near retirees, and clients interested in socially responsible investing.

We practice in a small niche of the industry called fee-only, which focuses on giving un-biased advice. We don't take commission, get kick-backs, or sell products. We have no hidden agendas. Our focus is on giving our clients the best comprehensive advice possible.

I started out with a tax practice in 1997. I could see that clients wanted and needed help not just with their taxes, but with other areas of their personal finances, too. When I found out about fee-only advising, with its emphasis on giving bias-free advice, I was hooked! I love helping people understand and improve their fiances.

I worked as manager and district manager during the start-up phase of Starbucks. I also worked supporting high profile litigation and in the back office of a derivatives firm.

I have a BA in Accounting and Marketing from the University of Wisconsin, Madison and a Masters in Liberal Arts from DePaul University in Chicago. I am a Certified Financial Planner™ as well as a Certified Public Accountant.

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