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It's the latest step in Missouri State Treasurer Sarah Steelman's push to get state money out of companies she views as helping terrorists.
"It is still a relatively novel concept," said Andrew Karolyi, a finance
professor at Ohio State University. "The fact is that given the prevalence of
terrorism and terrorist activities out there, more and more institutional
investors like pension funds and investment trusts are conscious of these types
of risks."
For example, New York City has been evaluating its pension
fund investments for terror connections and pressuring companies to change
practices it finds objectionable, such as when General Electric Co. and
Halliburton Co. operated in Iran. Both companies later agreed to quit doing
business in that country.
The Missouri Investment Trust board, led by the Republican Steelman, recently chose Boston-based State Street Global Advisers to handle a roughly $5 million investment. The state board manages long-term investments, and the money is used by various cultural programs.
The money is a relative drop in the bucket for Missouri, but State Street could potentially market that fund to other states or larger funds that share Missouri's concerns about the indirect financing of terrorism.
"I believe if states and other institutional investors start demanding funds that are screened like this, there will be those people stepping up to the plate like State Street," Steelman said. "Hopefully other states and other institutional traders will invest" in the screened fund.
Under the plan, State Street will use an international fund it already offers and screen it, using subcontractor Conflict Securities Advisory Group, to identify companies that have financial interests in countries sanctioned by the U.S. as sponsors of terrorism, such as Iran and North Korea.
State Street then will either replace those stocks with others that perform similarly or sell the problem stock and use that money to increase shares in the remaining companies.
Steelman's office said the normal fund includes between 85 and 125 different stocks, and the screening is expected to affect about 15 percent of them.
The Missouri State Employees Retirement System board, at Steelman's urging, last year hired Conflict Securities to screen its direct investments for terror connections.
Adam Pener, Conflict Securities chief operating officer, said his company is hearing more from private investors and money managers who don't want their money helping terrorists. But he said the Missouri Investment Trust was the first public fund to take the step, defying critics who doubted any reputable investment firm could limit its investment options in this way and win solid returns.
"They can use their voice to send a message to these companies. It's a huge precedent," he said. "It is very easy and cost-effective to invest terror-free, which leaves it to a question of political will."
Pener's company also works with another firm, Roosevelt Investment Group, which offers a "terrorism-free" mutual fund available to private investors.
Several companies offer socially-conscious funds that screen for certain causes, commonly avoiding or limiting investment in tobacco or alcohol companies, for example, or scouting those with good environmental policies.
Some states and cities are ending investments tied to violence-ridden Sudan, and that stems from terrorism and human rights concerns, said Tim Smith, president of the Social Investment Forum, a trade association for social investment businesses.
For example, an Illinois law that took effect in January requires the state to divest about $1 billion in pension investments in companies that do business in Sudan and to sever all financial ties to the country.
But with the terrorism-screened fund, "the (Missouri) trust has taken a position that's not often seen in the national landscape," said Smith, who's also senior vice president at Boston-based Walden Asset Management.
But some caution it's hard to define which companies are really helping terrorists, arguing some investments in such countries could actually support U.S. interests. Others say restricting investments, by any criteria, can mean a lower return.
"How do you identify who's a terrorist and who isn't, who's connected with terrorism and who isn't?" said Russell Farnen, a political science professor at the University of Connecticut who focuses on terrorism. "When I do investments I don't confuse my ideology with my investment strategy."
Still, the Missouri treasurer's investment director, Mark Mathers, recently told the trust's board that simulations indicate the fund's performance likely wouldn't suffer from the screening -- and may even fare better.
"The impact is not as great as one might fear," he said.
Smith also said the forum has found that socially conscious investments fare as well or better than non-screened funds.
Karolyi's research has found companies hit by terrorists or with business in areas that endure terror attacks can take a long-term economic hit, so he said avoiding that volatility could be a wise financial move. He cautioned, however, that the screen could need to be narrower, as plenty of U.S.-based companies also face risks from terror attacks in developing parts of the world.
Farnen said the terror-screened fund has more to do with politics than financial prudence.
"I don't think it has anything to do with state finances. This is a patriotic gesture," he said. "Everybody's on the anti-terrorism bandwagon. ... It sounds more political to me."
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On the Net:
State Street: http://www.ssga.com/
Treasurer: http://www.treasurer.mo.gov/
