Advisers skeptical about screening companies for terrorist links

New indexes, ETFs will move concept into the retail sphere

Apr 14, 2008 @ 12:01 am

By Andrew Coen

Screening companies for their ties to countries deemed sponsors of terror is a concept that seems to intrigue investors. But whether a company's ranking on a "terror-free" scale will influence an individual investor's portfolio decision-making is another matter entirely, say some financial advisers. "My clients have absolutely no interest in this topic," said Bedda D'Angelo, president of Durham, N.C.-based Fiduciary Solutions Inc., which manages $25 million in assets. "Socially responsible [investing] is a good way to market to financially naive consumers, and terror- free would appeal to an even more naive sector," she said.

That opinion notwithstanding, institutional investors are becoming increasingly sensitive to the terror issue. Nineteen states have proposed or enacted legislation requiring that their pension plans divest their holdings of international companies with active business ties to countries deemed sponsors of terrorism.

In fact, Conflict Securities Advisory Group Inc., a Washington-based research and consulting firm that identifies publicly traded companies with business interests in states deemed to sponsor terrorism, sees an increase in both retail and institutional interest in the issue, said chief operating officer Adam Pener.

The Washington-based firm was created two months after the terrorist attacks of 9/11 and in the last two years has certified terror-free investment retail platforms through Roosevelt Investment Group Inc. of New York, Tributary Capital Management LLC of Fort Collins, Colo., and Credit Suisse Asset Management of New York.

"We believe the biggest market [for terror-free investing] will be retail," Mr. Pener said. "There will be more and more terror-free products out there."

CSAG has identified 600 publicly traded non-U.S. companies that have business ties with countries that are on the U.S. State Department's list of countries that sponsor terrorism. Among the countries on that list are Iran, North Korea, Sudan and Syria.

With the London-based FTSE Group, CSAG launched a new Terror-Free Index Series for institutional investors March 31. A version for retail investors will be available later this spring.

The Terror-Free Index Series screens the FTSE All-World ex-U.S., the FTSE All-World Developed ex-U.S. and the FTSE All-World Emerging ex-U.S. indexes for the 600 companies CSAG has identified.

Individual investors will be able to utilize the index series this summer when Chicago-based Northern Trust Corp. intends to roll out as many as three exchange traded funds that track the index.

CSAG and FTSE also have been in contact with two mutual fund companies interested in creating open-end funds for the index series geared toward retail investors and 401(k) plans, according to FTSE Group Americas managing director Jerry Moskowitz.

Stephen Schoenfeld, chief investment officer at Northern Trust, did not give details about the planned ETF launch for the FTSE CSAG Terror-Free Index Series, as the Securities and Exchange Commission still must approve the investments.

But he said that there is great potential for demand from individual investors who want to be attentive to national security issues when constructing their portfolios.

"There is definitely potential for grass-roots interest in this concept," Mr. Schoenfeld said. "People are very aware of these issues."


Like Ms. D'Angelo, Ivory Johnson, director of financial planning at Annapolis, Md.-based Scarborough Capital Management Inc., doubts that the new products will increase demand for terror-free investing.

Mr. Johnson said he doesn't expect that the FTSE-CSAG index series will catch on with his clients because it excludes many countries that one could argue have terrorist ties or human rights abuses: Pakistan, Saudi Arabia and China, for example.

He said that given the unpopularity of the war in Iraq, the State Department, which compiles the list of terror-sponsor countries, has lost credibility in recent years.

"It's difficult to pick which countries are good and which countries are bad," said Mr. Johnson, whose firm manages about $1 billion in assets. "Where do you draw the line?"

Many planners have clients that are interested in socially conscious investing, but one of these advisers, Annie McQuilken, president of Lexington, Mass.-based Kintyre Financial Advisors LLC, said those same investors will not be interested in embracing a terror-free index series because they may not want to siphon off funding to countries in need.

"Progressively-minded people believe that improving the economic situation of people in unstable countries reduces the likelihood of terror," said Ms. McQuilken, whose firm manages $4 million in assets.

"I don't believe divestment to counter terrorism will gain much of a foothold with conservative investors, and progressive investors do not believe further impoverishing these nations will reduce terrorism," she said.

An outreach effort to financial advisers about the new index series, including seminars and meetings at conferences, is being organized by FTSE and CSAG in hopes of seeing increased retail investment demand, Mr. Moskowitz said.

There is also hope that not-for-profit organizations heavily backing the FTSE-CSAG index series, such as The Jewish Federation Inc. and The American Israel Public Affairs Committee, will help drum up more support from individual investors around the country, he said.

E-mail Andrew Coen at


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