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Institutions Pare Back on Talisman in Wake of Human-Rights Allegations

As they gain more influence, funds will face greater pressure to invest for nonmarket motives.

The words "Canadian" and "evil multinational" don't often appear in the same sentence, yet somehow that moniker has landed recently on the Calgary-based oil company

Talisman Energy


. It is an unlikely candidate for international pariah.

Talisman has found itself the cause du jour for human-rights activists as a result of its operations in Sudan, a nation with one of the worst human-rights records around. Talisman has a 25% stake in a Sudanese government-owned pipeline that delivers 160,000 barrels of oil a day and generates millions of dollars for the government.

Opponents charge that Talisman is indirectly (and sometimes directly) supporting a terrorist government and have painted Talisman as a greedy multinational that puts profits ahead of people. Secretary of State

Madeleine Albright

has objected to the pipeline. The Canadian government is investigating the issue and is expected to release a report in the next few days that may lead to sanctions against the company, or even require it to leave Sudan.


American Anti-Slavery Group

, which has worked to bring to the world's attention the horrific conditions in Sudan, including enslavement, last year began a campaign urging institutional investors to divest their Talisman holdings. Its campaign is succeeding. Over the last few months, New Jersey's pension funds quietly sold 780,000 shares. That action followed other large institutional investors that dumped their shares, including


, the

Texas Teachers Retirement Fund



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, the California state employees pension program. New York City and the state of New York are most likely next. Those divestments have helped to push Talisman shares down from 33 at the end of last summer to 26 1/2 on Thursday, a 20% drop.

Smaller funds have followed suit. "We have pared back our holdings," says Ed Dunn of

American Century's

(BGRIX) - Get Baron Growth Institutional Report

Global Natural Resources fund. "But that was more for performance," he adds, rather than the Sudan situation.

Indeed, all of the institutional investors claimed they sold the stock out of financial interest, not moral indignation. They have to, because their managers are required to make investments for the good of their pensioners, not with a social or political agenda in mind. However, institutional managers are certainly getting out because of the bad publicity, and the cascade of bad news affects mutual fund managers.

In fact, if judged solely on the economic merits, Talisman appears to be a good buy. After all, the Sudan project is only a small part of its business and the company would not be affected too much if forced to leave Sudan. Last quarter, it posted record gains for earnings and cash flow. Shawn Reynolds, an analyst at

Lehman Brothers

, calls it "one of the best global oil companies out there" and admires its "turbo-charged production growth." Lehman has no investment banking relationship with Talisman.

True, Talisman faces a general market indifference to any nontech company, and the potential that oil prices may go down in the months ahead if the U.S. sells part of its Strategic Petroleum Reserve. However, all the brokers that look at Talisman rate it either a strong or moderate buy.

Is the case against Talisman justified? Some of the most serious charges -- that Talisman displaced indigenous people for the pipeline, for example -- are not true. Reynolds defends Talisman, saying "CEO Jim Buckee is not a cold, capitalist pig." Talisman built a hospital, a school and water wells in Sudan and convinced the Sudanese government not to use any revenue from the pipeline on the military. It argues that if it leaves, another company without such sensibilities will simply take its place.

Of course, cynics will rightly wonder how much of that is a result of the controversy. In any case, it seems that Talisman was in the wrong place at the wrong time. As one of the rare Western companies in Sudan, Talisman makes for an easy target and a convenient way for activists to bring attention to Sudan.

Whatever its merits, the Talisman case speaks to two bigger issues. First is the importance of institutional investors, especially pension and mutual funds, to the markets as the number of retirees grows and they put more and more money into those funds. Second, there is the likelihood that managers of those funds will be increasingly pressured to make investments for nonmarket motives.

For example, California Treasurer Phil Angelides, an elected official who is also a Calpers board member, has suggested divesting the fund's holdings from countries with poor democratic or environmental records. That could include countries that are nothing like Sudan -- India or Turkey, for example -- and could have a significant impact on emerging markets. No doubt Angelides is watching the Talisman case and taking note of how effective divestment campaigns can be.

David Kurapka's Trade Winds column appears Wednesdays and Fridays on TSC. In keeping with TSC's editorial policy, he does not own shares in any companies or mutual funds mentioned in this column. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at