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Advisors Wrestle Gun-Related Investment Concerns

By Miriam Rozen March 23, 2018

After the high school shooting in Parkland, Fla., last month left 17 dead, financial advisors began getting calls from clients who wanted to divest any holdings they had in gun manufacturers’ stocks.

“How do we get out of this?” Bradford Long recalls five or six clients asking him upon hearing the news that a rifle-toting shooter had barged into the high school and killed students and faculty.

Most of these callers, wanting a less violent world, had set a goal of extricating from their portfolios any holdings of gun makers’ stock, says Long, who is an advisor, principal and research director at Chicago-based DiMeo Schneider & Associates, which manages around $12 billion.

“‘Enough is enough,’” Long recalls one client saying. “‘I’m not willing to profit from these anymore.’”

Meanwhile, other clients called after the Parkland shooting to fret about gun makers’ stock prices falling in an outcry for more regulation of the firearms industry.

As it happens, however, gun-related equities tend to rally as calls for more firearms regulation get louder and more frequent boost sales as buyers react to a potential future scarcity – a fact Long shared with these clients.

Beyond that, investors who worry about the demise of small-weapons makers can take comfort in a Republican majority in the Capitol that leans heavily in favor of the pro-gun National Rifle Association, and away from more regulation of firearms.

Investors worried about equity prices of gun makers dropping might also be heartened by law professor Timothy Lytton’s warning to gun control advocates.

“Your best lever is the court system – and that’s not very good,” says Lytton, who teaches at Georgia State University College of Law. He predicts lawsuits aimed at the firearms industry are unlikely to threaten its economics much because plaintiffs pursuing gun manufacturers face an obstacle in the form of the federal Protection of Lawful Commerce in Arms Act – described by the NRA "the most significant piece of pro-gun legislation in twenty years into law" when it became law under President George Bush in 2005.

This law provides blanket protections to gun manufacturers and distributors against exposure to most of the usual liabilities, Lytton says.

In short, investors worried about bad days ahead for gun makers shouldn’t worry too much.

But for investors who want firearms-related investments gone from their portfolios, Long’s message is more nuanced.

Before supplying any answers, though, Long recommends that advisors need to first listen to such clients’ specific objectives. Then they should engage in a series of explanations about what’s possible based on the size of their clients’ assets, he says. Ultimately, advisors should help clients consider a variety of strategies, Long says.

“Start with an honest dialogue,” Long says. This begins with informing clients that ditching firearms altogether from their portfolios is a tall if not impossible order.

Why? Because guns are big business, which means they’re in pension funds and retail mutual funds and even – if at a slight remove – in the indices tracked by ETFs and the like.

Given this reality, clients can’t avoid firearms-related investments, unless they avoid investing in funds with co-mingled assets – a daunting challenge for most investors.

As a result, advisors should level with clients about what it really means “to be out of guns,” Long says. “Help them define it.”

Then make sure they don’t let their vision of perfection keep them from pursuing more realistic strategies. “Do you forgo 100 percent action because you are only accomplishing 80 percent of your mission?” Long says he asks his clients.

Once the clients have chosen their strategy and identified funds controlled by managers who state in their prospectuses that they stay away from the firearms industry, advisors need to engage in due diligence, Long says.

Often prospectuses are vague. So Long meets with the funds managers, deep dives into their data sets and compares them with his firm’s own sets of environmental-, societal- and governance-related data.

Then, after a client buys into a fund, Long follows up to ensure that the fund managers adhere to their commitments about avoiding the unwanted investments. “There have been some instances where we caught managing investors owning securities that didn’t belong with their mission,” he says.

Long says he’s had to ask them to readjust the fund’s portfolio accordingly. And, he says, they complied.

FA-IQ sister publication Ignites recently crunched the numbers on fund companies most exposed to gun investments. Ignites reporter Emily Laermer writes that while gun stocks have historically performed well after large shootings — such as Newtown, Conn., five years ago — after the recent school shooting in Parkland, Fla., values sunk. She notes that earlier this year, Franklin Templeton completely divested its $995 million Franklin K2 Alternative Strategies Fund from the owner of Winchester — a large commercial ammunition manufacturer — and that BlackRock and State Street have said they plan to start conversations with gun manufacturers. The Ignites analysis found Vanguard has 27 funds (18% of total funds), while Fidelity has 55 funds (16% of total funds) exposed to guns, equaling total shareholdings of 19.4m and 15.6m shares respectively. Other fund houses with exposure equalling more than 10m shares (as at Feb. 20, based on most recent quarterly findings) include Blackrock/iShares, Dimensional Fund Advisors and TIAA.

Marci Bair

Marci Bair has also received calls from clients since the Florida shooting. Bair is president of San Diego-based Bair Financial Planning, which focuses on impact or ESG investing and is affiliated with WCG Wealth Advisors, which has $1.2 billion under management.

She responds by pointing out she doesn’t pick individual stocks for her clients. In consequence, “We cannot 100 percent assure them that they don’t own some gun makers-related interests,” she says.

But some managers of the ESG-oriented funds that aim to steer clear of the firearms industry have become more active in making sure they are limiting their exposure to the sector – whether it’s in making or selling guns, Bair says.

Fortunately for advisors who are just starting to address the concerns of anti-gun clients, there are many ESG funds available today that aim to avoid weapons-related investments.

But Bair says such funds still have to be identified, vetted and then monitored, increasing an FA’s workload considerably.

“It’s a double-edged sword," says Bair. The growing number of ESG funds means "advisors really need to do their due diligence,” Bair says.