The investment committee of the California Public Employees’ Retirement System (CalPERS) has rejected a proposal for the largest US retirement plan to consider reinvesting in tobacco stocks.
The plan was floated by CalPERS investment committee member Jason Perez, a police sergeant in Corona, California. Perez joined the CalPERS board in January after defeating board president Priya Mathur. CalPERS board members also serve as investment committee members.
Two other investment committee members, Margaret Brown and Dana Hollinger, supported Perez’s surprise proposal at the March 19 investment committee but the three were outvoted by the rest of the 13-member committee.
“I don’t smoke, but my charge isn’t to worry about people’s health, it’s about making sure the fund is making the returns that it is supposed to,” Perez told CIO in an April 8 interview.
The investment committee’s decision to divest from tobacco stocks had cost the largest US pension around $3.6billion in investment profits between 2001 and the end of 2016, CalPERS’s general investment consultant, Wilshire Associates, had concluded.
More recently, however, a downturn in the prices of tobacco stocks would have meant a loss of around $500 million for the pension system in 2017 and the first half of 2018, if CalPERS had remained invested in those stocks, Wilshire detailed at the March 19 meeting.
“We are currently losing money on tobacco, [if CalPERS had reinvested]. I don’t see any point in buying in at this point,” board member Theresa Taylor told the investment committee on March 19.
She said the investment committee should stick to its original plan in 2016 for the investment committee to do a “deep dive” on tobacco divestment once every five years, or in 2021.
Generally, investment committee members have been opposed to divesting of stock sectors. So much so, that investment committee members seemed poised to reinvest in tobacco stocks in early 2016 after hearing from Wilshire Associates that the pension plan had would have made several more billions of dollars if it had not divested.
Anti-smoking and health groups quickly criticized the investment committee. They also noticed that the CalPERS board purchased health care for many of its members, and was the second-largest purchaser of health care in the United States, after the federal government. They argued the irony of CalPERS‘s reinvestment in a product dangerous to its members’ health.
The investment committee backed down by the time of the vote in late 2016, not only reaffirming the 2000 divestment, but expanding it to external equity managers, who held more than $500 million in tobacco stock.
With the $354.2 billion CalPERS only around 70% funded, Perez has maintained that the investment committee decision to keep the ban on investing in tobacco stocks was wrong. “If it’s legal and it’s no way connected to terrorism and it’s profitable, we should be in it,” he had said in January.
At the March 19 meeting, at which Perez’s motion to reinvest in tobacco was rejected, the police sergeant tried to get CalPERS investment officials to offer their perspective on what the future will hold for tobacco stocks. The investment staff wasn’t biting.
“And it just speaks to the challenge around any of these things, is that we don’t know what the next one-year, three-year, five years is going to look like,” said Dan Bienvenue, interim chief operating investment officer.
Bienvenue said if CalPERS investment staff could predict when stocks would rise or dip, “we would all be billionaires.”
Perez told CIO from what he has read and heard, the future looks bright for the tobacco industry, and that “the big tobacco companies are just waiting for [President] Trump to make weed legal and they’re going to start jumping into that stuff.”
Given that, Perez said it appears obvious to him that CalPERS should reinvest in tobacco stocks, particularly in light of concerns about the pension system making its expected annual rate of return of 7%.
“If you’re just worried about the investments and just worried about your fiduciary duty, it should be a no brainer,” he said