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Big California Pension Fund to Divest From Some Gun, Ammunition Companies

| January 9, 2013
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From AP:

SACRAMENTO, Calif. (AP) — The nation’s largest teacher pension fund is taking the first step toward divesting from companies that manufacture guns and high-capacity ammunition magazines that are illegal in California.

The investment committee of the California State Teachers’ Retirement System unanimously approved a motion by state Treasurer Bill Lockyer on Wednesday.

CalSTRS has investments in private equity firm Cerberus Capital Management LP, which owns the manufacturer of an assault weapon used in last month’s Connecticut school massacre. The pension fund also owns shares of Sturm, Ruger & Co. and Smith & Wesson Holding Corp., two publicly traded gun manufacturers.

Those investments account for $11.7 million of the system’s $155 billion portfolio.

Board member Harry Keiley says the fund has the power to change its investments. Staff will meet with the companies and return with recommendations.

Update: We talked to Ricardo Duran of CalSTRS to find out how this process works. He said the first step is “engagement” between the fund and any companies who make guns and ammunition that are not legal under California law.

“We ask them first to stop making the product. When they say no, that’s when we start getting out of it. In some cases it’s an easy process. If we own those companies because we own an index that buys into every company across the board in the Russell 3000, we  would create an exclusion for those companies –  we create a customized index without them. “And we’ve done that with tobacco. We’re in the index, but it’s the index minus tobacco. It’s just a little more work for our managers.”

CalSTRS has already had succcess in applying pressure on this issue to the private equity firm Cerberus, which it does business with. From the New York Times DealBook blog, Dec. 18:

Sitting in their offices high above Park Avenue late on Monday, the private equity executives who own the country’s largest gun company received a phone call from one of their most influential investors.

An official at the California teachers’ pension fund, which has $750 million invested with the private equity firm, Cerberus Capital Management, was on the line, raising questions about the firm’s ownership of the Freedom Group, the gun maker that made the rifle used in the Connecticut school shootings.

Hours later, at 1 a.m. on Tuesday, Cerberus said that it was putting the Freedom Group up for sale…

The move by Cerberus is a rare instance of a Wall Street firm bending to concerns about an investment’s societal impact rather than a profit-at-all-costs ethos. Public pension funds like the California one — officially, the California State Teachers’ Retirement System, or Calstrs — have hundreds of billions of dollars in private equity and hedge fund investments. While their influence is vast, it is usually exerted behind the scenes and rarely prompts snap business decisions.

“In the case of Cerberus, they’ve been very cooperative and we greatly appreciated the timeliness of which they’ve acted,” Duran said today. Was that decision a direct response to CalSTRS? we asked him.

“It looks like it’s a response to us, but I think they independently saw the writing on the wall, if you will, that it was not a good holding. It’s hard to say how much of an influence we were but I’m sure they took us under consideration.”

Duran said it’s unlikely the public companies they will now approach will agree to adhere to CalSTRS policy. “It’s a longshot that any one company would stop making a firearm simply because we asked them to,” he said.

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