'Terror-free' investing draws public pension plans

Foreign policy and funds don't mix, critics counter

Oct 15, 2007 @ 12:01 am

By Sue Asci

Across the country, states are considering plans to apply "terror-free" investing strategies to their public pensions.

Under the policy, the funds would be required to limit — or eliminate altogether — investments in companies with ties to countries such as Iran, North Korea, Sudan and Syria.

By the end of August, 16 states had enacted or were considering enacting legislation that would prohibit or curtail their public-funds investments in companies doing business with Iran, according to a report from the Center for Retirement Research at Boston College in Newton, Mass.

But critics of the terror-free movement insist that public funds aren't the place to implement foreign policy.

Missouri was among the first to introduce anti-terror investing in some of its public funds. In 2004, the Missouri State Em-ployees' Retirement System put an anti-terror policy in place. The public pension fund serves some 100,000 past and present state employees.

Last year, Missouri State Treasurer Sarah Steelman introduced a terror-free strategy to the state's cultural fund and directed some $8 million of the Missouri Investment Trust into a fund that divested assets with connections to Iran, North Korea, Sudan and Syria.

Last month, Missouri also added two new terror-free investment options to the adviser-sold portion of the Missouri Saving for Tuition Program, its $1 billion 529 college savings plan. Those options are the Roosevelt Anti-Terror Multi-Cap Fund, which claims to be one of the world's first terror-free mutual funds, and an actively managed international equity separate account run by UMB Investment Advisors of Kansas City, Mo.

"This is a way we can reach out to American citizens so they can do their part on the war on terror," Ms. Steelman said.

Missouri's 529 plan pays the Conflict Securities Advisory Group of Washington to screen investments. Interest in terror-free investing is growing, said Adam Penner, chief operating officer at the group, which has identified 200 to 350 companies with a range of ties to terror-sponsoring countries — including business links, equity ties and direct relationships with the nations' governments.

But while taking action against terrorism resonates with people, using public funds to take that action may not.

This year, the U.S. District Court for the Northern District of Illinois overturned a state law that restricted investments in financial institutions whose customers have connections to Sudan, and the investment of public pension funds in Sudan-connected entities.

The suit was filed by the National Foreign Trade Council, eight Illinois municipal pension funds and eight beneficiaries of public pension funds.

"These state foreign-policy sanctions are unconstitutional," said Dan O'Flaherty, vice president of the NFTC, a Washington-based trade association.

"We also think they don't work," he said. "It's a long putt from a pension fund divestment to the behavior of a nasty regime."

Others are concerned from an economic standpoint. According to a recent analysis published by Alicia Munnell, director of the Center for Retirement Research at Boston College, if some of the Iran divestment bills "are passed in their broadest form, institutions may be forced to sell $18 billion in investments."

State Street Global Advisors of Boston estimates that if companies with ties to Iran are removed from the MSCI Europe, Australasia and Far East Index and replaced with similarly performing companies, it would introduce a tracking error of up to 2%, according to Ms. Munnell.

"It makes it more difficult to achieve the level of risk and returns that you are trying to get," she said. "It is not done in the private sector, and that should tell you something."

The problem with using public pension funds for this type of protest is "trustees or sponsors making decisions that will affect the benefits of their constituents," Ms. Munnell said. "That's where I disagree."

Managers need to focus on maximum returns for minimum risk. Expanded screening can result in the exclusion of more companies, which might eventually hurt returns, Ms. Munnell said.

The Missouri 529 definition of terrorist regimes, Ms. Steelman pointed out, used the U.S. State Department's list of sanctioned countries.

The MOSERS strategy is more about guidelines written around the Treasury Department's list of problem countries and companies than automatic divestment.

"Our board members are being very deliberate and cautious and doing a lot of due diligence regarding what actions, if any, they should take," said Christine Rackers, manager of investment policy and communications at MOSERS.

Sue Asci can be reached at sasci@crain.com.

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