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Smoke and mirrors

5 April 2016 By Kevin Allison

CalPERS is learning that social responsibility can be a drag. The $290 billion California pension manager may reinvest in tobacco stocks after a report found that exiting the sector cost it $3 billion of potential investment gains over 15 years. There’s more to the idea than higher returns, though. Engaging financially with controversial firms can be a better way to effect change.

Stubbing out any stake in the tobacco industry looked like the right thing to do back in 2001. It also seemed a savvy investment move: The share prices of cigarette manufacturers were listless, and the sector’s prospects looked grim. A wave of health-related litigation was cresting, and it would ultimately cost the industry billions of dollars.

Tobacco groups have been adept at managing decline, however. Aggressive cost cutting, overseas growth and higher prices have helped the likes of Altria and Reynolds American increase their stock prices some 400 percent – including reinvested dividends – since CalPERS kicked the habit, according to Thomson Reuters data. The S&P 500 Index returned just 60 percent over the same period.

The cost of lost opportunity is all the more painful, given the pension fund’s recent lackluster performance. CalPERS generated a mere 2.4 percent return in the fiscal year ended last June, far short of its 7.5 percent target.

That highlights how hard it can be to square the desire to do good with the duty to serve clients’ best interests. There are other reasons, however, for fund managers to rethink policies banning investments in tobacco makers, gun manufacturers, fossil-fuel companies and the like.

Divestment just isn’t very effective. For every socially minded seller, there’s usually a buyer willing to put aside scruples and gain the influence that can come with a financial stake. As a result, companies in suspect industries may feel free to resist calls for reform.

CalPERS is considering changes to its divestment policies across the board, and has not yet made any final decisions. It seems, though, to have realized that staying invested is often a good way to maximize both social and financial gains.


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