Shoot­ing Down Gun Stocks

Some in­vestors are de­mand­ing ac­tion on gun man­u­fac­turer and re­tailer stocks. Can fi­nan­cial ad­vi­sors de­liver?

Financial Planning - - CONTENTS - BY JAMES THORNE

Some in­vestors are de­mand­ing ac­tion on gun man­u­fac­turer and re­tailer stocks. Can fi­nan­cial ad­vi­sors de­liver?

The back­lash against gun stocks il­lus­trates a pain point for in­vestors who are un­aware of the specifics of their hold­ings.

Sev­eral weeks af­ter the mass shoot­ing at Mar­jory Stone­man Dou­glas High School in Florida, fi­nan­cial ad­vi­sor Ed Sny­der re­ceived an email. A client had searched Good­bye Gun Stocks, an on­line data­base, to see if any of her in­vest­ment funds in­cluded gun man­u­fac­tur­ing com­pa­nies. One of them did. The client had di­vested from such stocks sev­eral years ear­lier, and she was up­set to learn that a more re­cent in­vest­ment had al­lowed a par­tic­u­lar stock back into her port­fo­lio. Sny­der, pres­i­dent of Oak­tree Fi­nan­cial Ad­vi­sors in Carmel, In­di­ana, dis­cov­ered the root cause was a small-cap fund. He apol­o­gized and swapped the fund for a sim­i­lar in­vest­ment that did not con­tain the man­u­fac­turer’s stock. The ex­pe­ri­ence was un­for­tu­nate, but the client thanked Sny­der for his quick work.


Many in­vestors na­tion­wide have re­cently dis­cov­ered they own stock in gun com­pa­nies — most of­ten via small-cap in­dex funds. Of­ten, like Sny­der’s client, they have no idea they do. But peo­ple who own shares of small-cap in­dex or mu­tual funds and to­tal-mar­ket funds will of­ten own a slice of a firearms com­pany, ac­cord­ing to a re­cent Morn­ingstar anal­y­sis. For most in­dex and mu­tual fund in­vestors, “th­ese hold­ings are small,” Sny­der says, “but they still mat­ter to peo­ple.” And while find­ing a small-cap or to­tal-mar­ket fund with­out gun man­u­fac­tur­ers is rel­a­tively sim­ple, some in­vestors want to go even fur­ther by avoid­ing re­tail­ers, pay­ment com­pa­nies and other or­ga­ni­za­tions with ties to the gun in­dus­try. What they’ve found is that align­ing their in­vest­ments with their val­ues of­ten re­quires de­tailed knowl­edge of a fund’s hold­ings. In­deed, Cit­i­group an­nounced re­cently that it was set­ting re­stric­tions on gun sales by its busi­ness cus­tomers. The bank­ing giant will for­bid the sale of firearms to cus­tomers who have not passed a back­ground check and those who are un­der the age of 21. Citi is also ban­ning the sale of bump stocks and high-ca­pac­ity mag­a­zines. The back­lash against gun stocks il­lus­trates a pain point for in­vestors who may feel

dis­con­nected from, or un­aware of, the specifics of their hold­ings. How­ever, ad­vi­sors have the tools to help in­vestors nav­i­gate the di­verse menu of funds, and port­fo­lios can be crafted to match and en­gage the prin­ci­ples of in­di­vid­ual in­vestors.

Fi­nan­cial Goals and Ethics

Jon Hale, head of sus­tain­abil­ity re­search at Morn­ingstar, says a so­cially re­spon­si­ble ap­proach can help clients bet­ter re­late to their in­vest­ments and re­main com­mit­ted to both their fi­nan­cial goals and per­sonal ethics. There may also be a down­side to fail­ing to act. When events like the Florida shoot­ing “start turn­ing peo­ple off,” Hale says, “that’s not help­ing clients.” If an ad­vi­sor’s clients view their in­vest­ments neg­a­tively, they may be less will­ing to stay in the mar­kets and less com­mit­ted over the long term. In re­sponse to the tragedy, Hale re­leased a re­search re­port on how to find gun stocks in fund port­fo­lios. Since the Florida school shoot­ing, public pres­sure by in­vestors and con­sumers against gun man­u­fac­tur­ers and re­tail­ers has pushed stores, pay­ment ser­vice providers and even mul­ti­tril­lion-dol­lar as­set man­agers to re­con­sider poli­cies. Wal­mart and Dick’s Sport­ing Goods raised the min­i­mum age for buy­ing a firearm to 21. Some pay­ment ser­vices, such as Ap­ple Pay, Square and Paypal, don’t al­low for pur­chases of guns. New York Times colum­nist An­drew Ross Sorkin has sug­gested that larger fi­nan­cial firms could join them, thus help­ing to sup­press gun sales. Black­rock an­nounced that it is ex­plor­ing “in­dex-based port­fo­lios that ex­clude just firearms man­u­fac­tur­ers and re­tail­ers.” The state­ment fol­lowed CEO Larry Fink’s an­nual let­ter to busi­ness lead­ers, in which he urged com­pa­nies to con­sider how their so­ci­etal im­pact will af­fect their po­ten­tial for growth.

In­creas­ing the Pres­sure

Di­vest­ment isn’t al­ways the right strat­egy to ad­vance an in­vestor cause. But in the case of gun man­u­fac­tur­ers, Hale says it can be ef­fec­tive. The three pub­licly traded firearm man­u­fac­tur­ers — Amer­i­can Out­door Brands, Sturm Ruger and Vista Out­door — are rel­a­tively small. A con­certed di­vest­ment cam­paign could ap­ply pres­sure on the com­pa­nies’ stock prices. But there are other, much larger com­pa­nies that sup­port the gun in­dus­try. Wal­mart and Dick’s con­tinue to sell firearms and ammo. Ama­zon and Ap­ple host a tele­vi­sion chan­nel for the National Ri­fle As­so­ci­a­tion. Olin, which owns the his­toric Winch­ester brand of am­mu­ni­tion, makes most of its money sell­ing chem­i­cals. Sell­ing the stock of th­ese and other com­pa­nies is dif­fi­cult and may have a lim­ited ef­fect. Clients may also in­cur tax penal­ties by liq­ui­dat­ing their cur­rent po­si­tions. Given the lim­its of di­vest­ment, Hale says that a good place for ad­vi­sors to start is with the funds them­selves. “It’s def­i­nitely a ques­tion worth ask­ing any as­set man­ager: What are they do­ing in terms of share­holder ac­tivism?” “You can ini­ti­ate en­gage­ment in­stead of sit­ting on the side­lines,” Hale says.

A Win­ning Strat­egy

Mitchell Kraus, owner of Cap­i­tal In­tel­li­gence As­so­ci­ates, says find­ing an as­set man­ager who aligns with his clients’ val­ues is a win­ning strat­egy. Kraus re­calls one client who came to the firm with sev­eral mil­lion dol­lars in hold­ings and an in­ter­est in sus­tain­able in­vest­ing. One of the port­fo­lio man­agers who Kraus se­lected was pub­licly

If an ad­vi­sor’s clients view their in­vest­ments neg­a­tively, they may be less will­ing to stay in the mar­kets.

ac­tive in fight­ing the fos­sil fuel in­dus­try, and the client was thrilled that his in­vest­ments were part of this man­ager’s ef­forts.

‘Re­fer­able Mo­ments’

By spe­cial­iz­ing in legacy plan­ning and so­cially re­spon­si­ble in­vest­ing, Kraus says he adds value for clients. He sees his spe­cialty as an op­por­tu­nity to cre­ate “re­fer­able mo­ments” by show­ing clients how their money has made a dif­fer­ence. Ad­vi­sors can also help clients un­der­stand their op­tions for be­com­ing in­volved in share­holder ac­tivism, or en­cour­ag­ing their as­set man­ager to do so. Large in­dex fund providers like Black­rock, Van­guard and State Street have par­tic­u­lar lever­age, given the tril­lions of dol­lars they man­age. Morn­ingstar’s Hale points out that Van­guard alone owns 8% of Mas­sachusetts-based Amer­i­can Out­door Brands, for­merly Smith & Wes­son, which man­u­fac­tures the AR-15 ri­fle that was used in the Florida shoot­ing. In Kraus’ com­mu­nity of Santa Monica, Cal­i­for­nia, the chief con­cern among clients has his­tor­i­cally been en­vi­ron­men­tal im­pact. But other is­sues have caught in­vestors’ at­ten­tion over the years. Af­ter the shoot­ing at Sandy Hook Ele­men­tary School in New­town, Con­necti­cut, in 2012, “we had a lot more ques­tions from clients” about how their money was be­ing in­vested, Kraus says. Flash­points such as a mass shoot­ings are cat­a­lysts for in­vestors to seek out a so­cially re­spon­si­ble strat­egy. How­ever, once an in­vestor has ex­plored the op­tions re­gard­ing an is­sue of per­sonal sig­nif­i­cance, they typ­i­cally set­tle on an in­vest­ment ap­proach that’s broadly in line with their val­ues. “It’s un­usual for some­one to have a sin­gle is­sue fo­cus once they’ve done all the re­search,” says Paul Hil­ton, a port­fo­lio man­ager at Boston-based Tril­lium As­set Man­age­ment. The same can be true for ad­vi­sors, who re­al­ize the best-per­form­ing prod­ucts pur­sue sev­eral en­vi­ron­men­tal, so­cial and gov­er­nance goals. Hil­ton’s ad­vice to ad­vi­sors with clients fo­cused on a sin­gle is­sue is to ask them, “Are there other is­sues that you also want to in­cor­po­rate in your ap­proach?” A holis­tic ap­proach may come with cost and per­for­mance ben­e­fits. By se­lect­ing in­dex funds with ESG cri­te­ria, clients can avoid higher fees from ac­tive man­agers. ESG hold­ings may also be part of a risk re­duc­tion strat­egy — a way of avoid­ing ex­pen­sive so­cial back­lash that com­pa­nies in cer­tain in­dus­tries are ex­posed to. Ad­vi­sors of­ten as­sume that clients will bring up ESG in­vest­ing if they’re in­ter­ested. Of­ten, Hil­ton says, clients don’t even know what ques­tions to ask.

Present the Op­tions

How­ever, ev­ery ad­vi­sor has at least one client who wants to hear their op­tions. Three-quar­ters of in­vestors say they’re in­ter­ested in sus­tain­able in­vest­ing, ac­cord­ing to a 2017 sur­vey by Mor­gan Stan­ley. Among mil­len­ni­als and women, the fig­ures are even higher. Hil­ton ar­gues that as robo ad­vi­sors and over-the-counter prod­ucts of­fer more so­phis­ti­cated in­vest­ing so­lu­tions, the need for more tar­geted per­sonal ad­vice is likely to grow. To get up to speed, Hil­ton and oth­ers rec­om­mend that ad­vi­sors start with the free re­sources of­fered by US SIF and Morn­ingstar Sus­tain­abil­ity Rat­ings. US SIF also of­fers mem­ber­ships and a cre­den­tial for ad­vi­sors who want to go fur­ther.

Flash­points such as a mass shoot­ings are cat­a­lysts for in­vestors to seek out a so­cially re­spon­si­ble strat­egy.

A pro­tes­tor holds up a draw­ing of Mar­jory Stone­man Dou­glas High School shoot­ing vic­tim Meadow Pol­lack dur­ing the Enough! National School Walk­out rally in Park­land, Florida.

Many clients have been sur­prised to dis­cover they own stock in gun com­pa­nies, most of­ten via small-cap in­dex funds.

Some clients want to avoid re­tail­ers and other or­ga­ni­za­tions with ties to the gun in­dus­try.

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