CalSTRS warns investors on headline risk with managers

10 May, 2013

Institutional investors must do their best to mitigate the danger of headline risk in their allocations, warned an executive from the California State Teachers’ Retirement System (CalSTRS), the $161.5 billion pension fund.  

This comes as CalSTRS’ Investment Committee approved the fund’s divestment from firearms companies which manufacture weapons that are illegal in California following pressure after the Sandy Hook Elementary School shooting.

The pension fund had faced criticism for its $750 million investment in private equity firm Cerberus Capital Management, which owns Freedom Group, the weapons manufacturer which made the Bushmaster rifle used in the shooting. Cerberus Capital Management’s founder Stephen Feinberg and his partners are reportedly seeking to purchase Freedom Group from their own private equity group.

“Investors have to be sensitive to headline risk, and managers have to be sensitive to their clients in what they are invested in. However, it is very difficult to prevent headline risk but it can be mitigated by having controls on managers, particularly those in the active space,” said Aeisha Mastagni, investment officer – corporate governance at CalSTRS, speaking at the SALT Conference in Las Vegas.

She added previous shootings, such as Columbine and Aurora, while tragic, had not prompted similar levels of emotion towards firearms among the public as seen after Sandy Hook. She said the negative headlines surrounding investors’ exposures to such firearms manufacturers were not as widespread following previous shootings, making it very difficult to predict accurately instances whereby headline risk will arise.  

In April 2013, CalSTRS chief investment officer Christopher Ailman recommended divestment in accordance with the pension fund’s 21 Risk Factors, which outlines the plan’s environmental, social and governance principles, and in particular with the Human Health risk factor. In January 2013, CalSTRS divested $3 million, which is equivalent to 0.3 basis points of its Global Equity portfolio from gun manufacturers Sturm Ruger and Smith & Wesson. In 2009, the pension fund opted to divest from tobacco companies.

Divesting from hedge funds or companies which do not meet ESG standards could, however, dent performance at a time when many pension funds in particular are struggling to meet their ever-growing liabilities. Mastagni acknowledged reducing exposure to tobacco and firearms would dent performance but said the impact was negligible.

CalSTRS is not the only pension fund to pull money out of firearms manufacturers. New York’s $46.6 billion teachers’ pension fund announced it would withdraw money out of publicly traded firearms manufacturers earlier this year.

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