Mega Fund Drops Guns After Connecticut Shooting

NEW YORK ( TheStreet) - The California State Teachers' Retirement System (CalSTRS) is dropping its investment in the manufacturers of firearms that are illegal in the state of California, following through on an effort pushed by the state's treasurer in the days after a Dec. 14 shooting at Sandy Hook Elementary School in Newtown, CT, killed 26 people, including 20 schoolchildren.

In the wake of the shooting, California's State Treasurer Bill Lockyer recommended the divestiture of firearms deemed illegal in the state, however, a formal action wasn't agreed until the CalSTRS board met Wednesday afternoon.

The move reflects the first major investment decision taken against firearm manufacturers in the wake of the Connecticut shooting, and puts California pension funds once more at the head of socially directed investments.

"I think we've taken appropriate action, given the unspeakable and tragic loss of life that occurred in Connecticut last month-the latest in an ongoing line of similar incidents involving assault weapons and mass casualties," Harry Keiley, CalSTRS Investment Committee Chair, said in a Jan. 9 statement. CalSTRS, with a portfolio valued at $154.3 billion as of Nov. 30, 2012, is the largest teachers pension fund in the world.

The fund's chief investment officer will direct index fund managers to divest shares in manufacturers of firearms deemed illegal in California and companies that manufacture high-capacity ammunition cartridges, CalSTRS said in a statement.

The process of divestment will involve engagement between CalSTRS investment leaders and the management teams of the identified firearms manufacturers in which the fund is invested... CalSTRS' 2009 decision to divest from the tobacco industry followed a similar process," the fund said.

CalSTRS will also identify private equity investments that might violate its new investment policy, according to Bloomberg.

In the wake of the mid-December shooting, Treasurer Lockyer said California could reconsider its investment in private equity giant Cerberus Capital Management, given its ownership of Freedom Group, the maker of the Bushmaster assault rifles alleged to have been used in the Newtown, Ct. shooting and another rampage shooting in Denver, Co in 2012.

Assault rifles and high capacity ammunition cartridges are illegal in the state of California.

Following Lockyer's comments, Cerberus said it would divest its controlling stake in Freedom Group.

"These guns are illegal in our state and we shouldn't be investing in those kinds of firms," Lockyer said in a mid-December interview with TheStreet, of assault rifles such as the ones manufactured by Freedom Group and used in the Connecticut shooting.

According to Bloomberg data, CalSTRS has small stock investments in gun manufacturers Sturm, Ruger ( RGR) and Smith & Wesson ( SWHC), worth just over $1 million.

For now, the fund isn't making a decision in investing in national retailers of firearms that might be illegal in the state of California. Dick's Sporting Goods ( DKS) halted the sale of rifles and Wal-Mart ( WMT) removed the Bushmaster Patrolman's Carbine M4A3 Rifle alleged to have been used in the Newtown shooting, in late December.

CalSTRS stand may be just the beginning in a purging of gun-related investments by Wall Street's largest investors, which could move faster than any prospective federal ban on assault weapons or prohibition on cartridge sizes. Already a precedent exists.

CalSTRS and the California Public Employees' Retirement System (CalPERS) were early movers in banning limited partner and stock investments in corporations that did business in South Africa during the apartheid era, and more recently, in tobacco related businesses.

A CalSTRS spokesperson Ricardo Duran said in an interview in mid-December that the fund has weighed social-action based investments since the late 1970's. Economic pressures exerted by U.S. investors and corporations were one of the factors that precipitated the end of apartheid, noted former South African president F.W. de Klerk.

In the 2000s, CalSTRS and CalPERS decided to divest of assets in the tobacco industry, according to revised investment principles.

CalPERS and CalSTRS are both small investors in Smith & Wesson, Sturm, Ruger, Cabela's, Dick's Sporting Goods and they are large holders of Wal-Mart shares, according to Securities and Exchange Commission filings compiled by Bloomberg, as of Sept. 30.

Shares in Smith & Wesson and Sturm, Ruger fell over 2% and just under 1% respectively in Wednesday trading.

-- Written by Antoine Gara in New York