Is my SMSF investing in gun related companies?
Given the recent events in the USA, a number of clients have rung to ask us what investments they may hold indirectly via Exchanged Traded Funds (ETF).
To answer this, we pro-actively asked this question of the main index providers (MSCI & S&P Dow Jones Indices) and main ETF providers Vanguard, Blackrock (iShares), and StateStreet.
“Given your firm’s ESG policy and recent events, can you do me a favour and get me your firm’s official position on including gun related companies & NRA related companies globally (but especially in the USA) in your indices / ETFs?”
We will keep you posted on their responses as we receive them. We will also keep a running tally of responses and update them as each future school massacre occurs. We hope at some stage these financial product manufacturers will do something other than offer their thoughts and prayers and other than telling us they include all companies in their investment universe, regardless of what they do.
Vanguard
Official response 27-2-18:
“At the outset, let me say that Vanguard is deeply saddened by the senseless tragedy in Florida and hope that policymakers take appropriate actions to protect Americans from gun violence.
While a handful of our international index funds have exposure to firearm manufacturers, including Vanguard Total Stock Market Index Fund, from a broader perspective, of the 388 funds that we offer to investors globally, roughly 95% are not invested in companies involved in gun manufacturing. The majority of funds that have exposure are indexed products.
Vanguard follows, whenever possible, a full replication strategy (i.e. owning all shares in the benchmark) in order to provide investment results that track the performance of the index as closely as possible. When full replication is impractical or too costly, we use an optimisation strategy in which we hold a representative sampling of the benchmark in order to mirror its returns. We will continue to adhere to these strategies.
Mutual fund firms over the years have been called upon to take actions against a wide range of companies, from food manufactures to energy producers. We believe it would be exceedingly difficult to manage our funds effectively and efficiently while seeking to address the many social, political, and environmental concerns of 20 million clients.
At the same time, we understand that investors hold a wide variety of personal beliefs that they want reflected in their investment holdings and may wish to avoid certain companies. For US investors, we offer Vanguard FTSE Social Index Fund, which screens companies for certain social, human rights, and environmental criteria. The fund excludes gun manufacturers.
In Australia, we’ve started to build out a product offering which will allow domestic investors in our funds options based on similar screen. In addition, the majority of our separately managed accounts are managed with exclusions as directed by some of our largest institutional clients. Commonly these exclude weapons and tobacco holdings.”
Quantum Financial response 27-2-18:
“I can see that Vanguard in Australia has one NRA friendly ETF – VTS – which owns civilian gun manufacturers. I will highlight this to clients and review our holdings. Are there any other Vanguard ETFs in Australia that hold US civilian gun manufacturers?”
Quantum Financial conclusion: Vanguard offers at least one NRA friendly ETF in Australia – VTS (Vanguard US Total Market Shares Index). It holds both Sturm Ruger & Co. Inc. and American Outdoor Brands Corporation (the parent company of Smith and Wesson). Both of these companies manufacture civilian firearms in the USA.
Blackrock (iShares): No response as yet.
StateStreet: No response as yet.
MSCI:
Official response 26-2-18:
“We do not consider gun related companies or NRA related companies as an eligibility criteria in our indexes except for SRI indexes which would have Values-Based eligibility criteria such as excluding issuers that related to Military Weapons or Civilian Firearms.”
MSCI also provided a link to MSCI’s SRI indexes methodology document and I reproduce an excerpt from this document below:
“Companies whose activity is inconsistent with the following values based criteria are excluded from the MSCI SRI Indexes:
Civilian Firearms
– All companies classified as a “Producer”
– All companies classified as a “Retailer” that earn 5% or more in revenue, or more than $20 million in revenue, from civilian firearms-related products”
Quantum Financial response to their response 26-2-18:
“So your SRI indexes exclude civilian firearm related companies as part of their rules – I can see that from Appendix 1 of the MSCI SRI indexes methodology document.
From my reading of the response, apart from your SRI indexes, MSCI are more than happy including civilian firearm related companies in your non SRI indexes. If that is the case, I will share that information with our clients.
IMO, that would make a great differentiating factor for a new entrant to the index market.
Or even an awesome excuse for ETF providers to start creating their gun free indexes if they were considering that option. I will follow up with them about that.”
S&P Dow Jones:
Official S&P Dow Jones response 26-2-18:
“As an independent index provider, S&P Dow Jones Indices creates a broad range of indices that reflect markets, asset classes and strategies. We offer ESG indices that integrate ESG in a variety of formats. Some of these ESG indices have standard exclusions (in addition to other ESG characteristics), some are more niche, and others are created as ‘custom’ for those clients that have their own sets of exclusions.”
Quantum Financial response to their response 26-2-18:
“So do your ESG indexes exclude gun related companies as part of their ESG rules or not? Because from that response I simply just can’t tell.
From my reading of the response, apart from your ESG indexes, S&P are more than happy including gun related companies in your non ESG indexes. If that is the case, I will share that information with our clients.
IMO, that would make a great differentiating factor for a new entrant to the index market.
Or even an awesome excuse for ETF providers to start creating their gun free indexes if they were considering that option. I will follow up with them about that.”
Official S&P Dow Jones response 26-2-18:
“Indices will include all companies and ESG indices would only exclude what is a common exclusion across a broad sets of clients – so they don’t exclude gun makers to be precise as a matter of policy. Other market cap weighted indices don’t exclude based on revenue sources.”
Quantum Financial conclusion: S&P Dow Jones Indexes don’t exclude gun related companies from any of their indexes, even from their so called ESG Indexes.
At Quantum Financial we support positive ESG (Environmental, Social, Governance) issues in companies in which we and our clients invest. We believe sustainable ESG policies lead to sustainable returns for our clients. You can view a video from my sister Claire on this topic live from Wall Street below.
