A complex debate simplified by money

By | December 18th, 2012 06:12 PM EST | posted in CIO Letters, Spotlight

My son Jace is a happy 6-year old  first grader. Last Friday evening when his after-care van dropped him home  I looked at him and felt something I had never felt before.  Perhaps like millions of other parents, I viewed my little boy for the first time through a lens of profound and deep emotional appreciation – simply because he was alive.  My solemn perspective at that moment was based on the events earlier that day that have shaken the nation and resulted in me and millions of other investors reconsidering our ‘filter’ for investment selection criteria.

CIO LETTER: A complex debate simplified by money


Last Friday’s unimaginable tragedy at Sandy Hook elementary school and the sadness that gripped the nation in its aftermath has begun to spark yet another debate about the controversial presence of guns in American society.  Personally, I’ve never been interested in guns; however, several people in my life who I love and deeply respect are very proud gun owners, and unwavering supporters of the 2nd amendment.  I’ve heard valid points from several sides of the gun debate and like many others, I simply ‘opted out’ of the discussion because of the issue’s complexity (and divisiveness) in terms of identifying viable solutions. But this time it might be different: Unlike previous gun tragedies, meaningful change is in the air, and investors this week are stepping up to take action.


If you knew that a portion of the money withheld from your paycheck for retirement was being invested in the manufacture and sale of weapons that would be used to slaughter 6 and 7 year-olds would you continue that investment?  If not, would you know how to stop it?

Guns in America are a $34 billion industry.  As a result, and without even knowing it, many ‘anti-gun’ investors through their unmonitored investments perpetuate the industry that they wholeheartedly want to stop.


2012 will conclude with an all-time record for gun sales.  As of November, the FBI recorded 16,808,538 instant background checks for gun purchases for 2012, eclipsing the previous record by 21.7%  (Even without counting December, which has historically been the busiest month). In terms of ease of accessibility, there are more than 2.5 times the number of U.S. gun dealers than grocery stores and McDonald’s restaurants combined (Exhibit 1). 

Evidently, guns are even more popular than people. In 2010, more new guns were manufactured and sold in the U.S. (5,186,278) than babies were born (4,000,279). An additional 3,252,404 guns were imported.  This means that for every baby born there were 2.1 guns added to American’s hands. Altogether, it is estimated that there are as many non-military firearms in the U.S. (estimated 310 million guns in 2009) as there are people (estimated population of 311 million in 2011).

Gun Accessibility - Index Strategy Advisors, Inc.


The number of people killed by firearms in the United States is vastly disproportionate to other causes of homicide. According to the FBI Uniform Crime Report, between 2006 and 2010, 47,856 people were murdered in the U.S. with firearms, more than double the number killed by all other means combined.

Paradoxically, the stock prices of gun manufacturers and gun retailers have soared during recent years in spite of the relative damage guns have inflicted on U.S. society during the same period.  Since the stock market recovery from the 2008 financial crisis in March of 2009, shares of popular gun retailer Cabela’s  are up 411%, and shares of  firearms manufacturer Sturm, Ruger & Co. are up 341%, whereas the Dow and S&P 500 have gained 106% and 98%, respectively (Exhbit 2).

Exhibit 2: Recovery of U.S. Stock Market vs. Gun Equities


The weapon recovered in last week’s tragic event was a Bushmaster .223 rifle. Bushmaster Firearms is a privately held manufacturer owned by private investment firm Cerberus. Just 3 days following the Sandy Hook tragedy a Forbes article revealed that up to $500 million had been invested by the The California State Teachers’ Retirement System (CalSTRS) in Cerberus.  Based on this investment, it could be stated that millions of California educators unknowingly financed the terror wrought upon their peers in last week’s tragedy through their retirement plan contributions.  Less than 24 hours after this investment was exposed, Cerebus announced that it plans to sell its investment in Bushmaster.

Other popular mutual fund companies are significant investors in gun manufacturers as well.  For example, two of the largest fund companies, BlackRock and Vanguard hold most of the outstanding shares of both Smith & Wesson and Sturm Ruger (Exhibit 3). Both funds also are among the top 5 institutional holders of gun retailer Cabela’s.

Exhibit 3: Major institutional holders of public U.S. gun companies


Prior to last week’s tragedy, sales of firearms soared with double-digit growth since 2006, making any investment firm’s backing of the industry very justified in purely financial terms.  Today, as investors and investment managers we are rethinking (perhaps as parents) the implications of our investments in weapons.

We are asking ourselves new questions. To what extent do our investments in these firms make us complicit?  Certainly investors are not to blame for the irresponsible (or illegal) use of firearms, but does that separation of cause/effect mitigate our guilt for having any influence/connection whatsoever to the slaughter of innocent children?  Do enough of us feel guilt in enough numbers to pull out of these investments?   So far the tide seems to be turning.

With today’s Cerbus announcement and other major firms like Wal-Mart and Dick’s reconsidering their sale of firearms, there just may be enough momentum to shift the thinking and rationale from a debate of politics to direct moral intervention through our investment choices.

I’ll be watching the choices of fund companies closely, and to the fullest extent possible, direct my client’s portfolios to those investments which minimize or if possible eliminate weapon makers from investment consideration.  It’s the least I can do to show my gratitude for being able to hug my son and watch him grow up safely.

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Sources: Index Strategy Advisors, Inc.. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of its stamped publication date, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Index Strategy Advisors to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.