When Missouri mom Andrea Waner heard about the Parkland, Fla. school shooting that claimed 17 lives, she felt broken. But she also felt more motivated than ever to take action against gun violence, so at 11:30 p.m. Tuesday, she emailed her financial adviser with a question she was almost afraid to ask: Could she take her $25,000 in retirement savings out of mutual funds that hold gun company stocks and move it elsewhere?
“It felt powerful,” she told MarketWatch. “As a 30-year-old mom, mutual funds aren’t something that are even on my radar. But I thought, I have the power. I can move this money. I’ve never done anything like that before, but it felt good.”
There are probably guns in your 401(k)
Even if you’ve never personally bought a share in Smith & Wesson AOBC, -1.19% there’s a good chance you’re invested in gun stocks, especially if you’re a “set it and forget it” investor with retirement accounts in passively managed index funds. The same goes for pensions — including the one for Florida teachers. Three of the publicly-traded gun companies — American Outdoor Brands, Sturm, Ruger RGR, +1.84% and Vista Outdoors VSTO, -1.47% — are in several major stock indexes. Vanguard is the largest institutional shareholder of American Outdoor Brands, the maker of the AR-15 assault rifle, and a 2016 analysis of 23,000 mutual funds by MSCI found that nearly three quarters “had some exposure to the weapons industry” and approximately half of those funds “had direct exposure to gun manufacturers.
So what can individual investors do?
If you have a financial adviser, talk to them to find out exactly where your money is invested. If you’re managing your own investment portfolio and want to see if you’re an unwitting gun company shareholder, be prepared to do some homework. “It’s harder if you’re on your own and don’t have a lot of time. It’s easier if you have an adviser,” said Adam Bernstein, lead analyst on sustainable investing at Gitterman Wealth Management, a New Jersey-based investment advisory firm that offers advice on sustainable investing to individuals and financial advisers.
Some suggestions:
• Use the tool Goodbye Gun Stocks to quickly see if investments are linked to guns, but proceed with caution: The site hasn’t been updated since 2016. (Representatives for the site did not respond to requests for comment.)
• Call customer service at your mutual fund company to ask if it owns a particular stock. If you’re a Vanguard customer, you can do a holding search to see whether a fund owns shares in a specific company.
• Move your money to a “socially responsible” mutual fund that chooses investments to advance causes such as climate change — many exclude companies involved in weapons manufacturing. Funds based on religious beliefs such as Shariah-compliant funds usually don’t have weapons holdings.
• Use a “values-based” robo advisor like OpenInvest, whose customers can quickly divest from all companies that derive more than 5% of their revenue from the sales of weapons or ammunition.
But first decide how far you want to go
But before investors take any of the above steps, they have to decide what they mean when they say they don’t want their money to fund gun violence. Does that include makers of both handguns and assault rifles? What about bullet manufacturers or military contractors? And what about stores that sell firearms like Walmart WMT, +0.13% or Dick’s Sporting Goods DKS, -0.09% ?
“It’s a values-based question,” Bernstein said. “It’s hard to have a blanket solution because everyone comes at it with a different lens.” One example of the trickiness: Many ethical investing funds screen out companies tied to “controversial weapons.” But would that include a company that derives 3% of its revenue from servicing U.S. Navy vessels?
Another approach: If you can’t beat ’em, join ’em
An ongoing debate in the ethical investing world goes like this: Is it more effective to divest from companies to try to hurt them financially, or to hold on to shares to have a seat at the table and influence companies from within?
Morningstar’s director of sustainable investing research, Jon Hale, recently recommended that mutual funds with large gun holdings deploy an “engagement” strategy. “Mutual-fund companies have a responsibility to their investors, to themselves and to society to help address the problem of gun violence,” he wrote in a post that was highly critical of Vanguard and Blackrock.
A Vanguard spokeswoman did not respond directly to a question on whether the company would pursue an engagement strategy, but noted that Vanguard offers a social index fund that excludes weapons makers. “We at Vanguard, like the rest of the world, are shocked and deeply saddened by the senseless tragedy in Florida,” spokesman Carolyn Weggeman said.
“Of the 388 funds we offer investors globally, about 95% are not invested in companies involved in gun manufacturing,” she added. “The majority of funds that do have exposure are indexed products which are, of course, obligated to track their benchmarks. Additionally, these holdings make up less than 1% of these funds’ portfolios.”
A spokesman for Blackrock BLK, +1.89% said the company “will be engaging with weapons manufacturers and distributors to understand their response to recent events,” and added, “We are working with clients who want to exclude from their portfolios weapons manufacturers or other companies that don’t align with their values.”
Though mutual fund investors typically forfeit their individual shareholder voting rights, the robo advisor OpenInvest has developed a tool for individuals to quickly vote on issues, said co-founder Josh Levin. While many of the votes are on mundane issues like which accountant to use, some are on meaty questions, like should Procter & Gamble PG, +0.26% protect LGBTQ employees?
“You can unlock this whole world of shareholder democracy and make it easy and accessible for normal people,” Levin said. “If they wake up tomorrow and decide they want to act on this issue, they can just swipe on their smartphone.”
But does divestment work?
The most well-known example of a successful divestment campaign was the 1980s effort that helped end apartheid in South Africa. More recently, investors looking to solve climate change have pledged to pull some $6 trillion from the fossil fuel industries, according to DivestInvest, but that hasn’t exactly crippled the industry. California’s public pension fund dropped tobacco stocks in the early 2000s, only to decide years later that it may have hurt the fund’s balance too much.
Though the California teachers’ pension fund and New York City’s police pension fund are both studying weapons divestment, no broad-based movement has emerged around gun divestment similar to the anti-apartheid effort. A 2015 public service campaign featuring Snoop Dogg urged consumers to divest from guns and “unload your 401(k)s” but the group’s website is no longer functional. A representative for Snoop Dogg didn’t respond to a request for comment.
Will dropping gun stocks hurt my returns?
That’s an open question, said Bernstein. Gun stocks were popular when sales hit record highs in 2016 under the looming, but ultimately doomed, possibility of Hillary Clinton becoming the Democratic president, and portfolio managers flocked to them. People rushed to gun stores in the belief that their right to bear arms would be severely restricted. But share prices plummeted when Trump took office.
Sustainable funds in general fared well during the recent market correction, and overall, ethical investing doesn’t hurt returns, according to a Deutsche Bank analysis of more than 2,000 studies on the question.
While it’s hard to predict the immediate impact of dropping gun stocks, Bernstein questioned the long-term value of owning stakes in those companies. “Over time, if your business model is selling something that hurts people, I don’t think over a long period of time you can be a successful business,” he said.
Waner, the Missouri mom, said she worried a bit about whether her retirement savings would take a hit by dropping gun stocks, but that didn’t stop her. “I’m not looking to retire anytime soon, so that money that I’m investing isn’t money I’m touching right now,” Waner said. “For me, this was also a move to protect and invest in my child’s safety, so it’s a price I’m willing to pay.”