Several weeks after the mass shooting at Marjory Stoneman Douglas High School in Florida, financial advisor Ed Snyder got an email.
A client had searched
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 across the country 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. 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,” says Snyder, “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 on Thursday that it is setting restrictions on gun sales by its business customers. The banking giant will forbid the sale of firearms to customers that have not passed a background check and those that 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.
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 their 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 client views 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
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
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 put 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, 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.
Mitchell Kraus, owner of Capital Intelligence Associates, says that 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 active in fighting the fossil fuel industry, and the client was thrilled that his investments were part of this manager’s efforts.
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 and 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 2012, “we had a lot more questions from clients coming up,” 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 their options regarding an issue of personal significance, they typically settle on an investment approach that’s broadly in line with their values.
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“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 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, says Hilton, clients don’t even know what questions to ask.
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
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
