Short Sale: Is It Time To Suggest Dumping Your Clients’ Firearms Stocks?

Shares of Ruger and Smith & Wesson have collapsed as institutions slash their exposure to gun stocks. This may not be ultimate victory for the social funds, but it’s worth reaching out.

The firearms industry has become the center of national debate, which means gun stocks are facing both withering regulatory pressure and humanitarian shareholder concerns.

You know why and you know where you stand. But if you haven’t asked your clients how they feel about being invested in gun stocks, now is the time.

For one thing, this sector has already been hammered.

Smith & Wesson has lost 28% of its market capitalization since Friday’s tragic events. Sturm Ruger is down 16%.

And with New York and California city and state pension funds “aggressively” dumping their firearms holdings while private equity marks its holdings for sale, things will probably get worse.

Ethical questions outweigh the market impact

Odds are good your clients were only marketweight in these companies anyway, so their financial exposure here is minimal.

Smith & Wesson and Sturm Ruger together account for maybe 0.1% of the holdings in a typical small-cap equity index fund, and only a handful of active managers loaded up much heavier than that.

Even the “Vice Fund,” which invests in stocks that socially responsible investors won’t touch, was too busy buying liquor, gambling, tobacco and Pentagon contractor stocks to bother with these companies.

Unless you personally concentrated client funds in the individual stocks or -- even more unlikely -- the private equity fund that owns the Bushmaster rifle at the center of the news, your clients have probably lost very little cash here.

But given the headlines, it’s important to let them know exactly what they have at stake in the future of this industry and to ask where they want to go from here.

Do their screening for them

If your platform supports the ability to individually screen out stocks or sectors from a given portfolio, now is the time to remind clients that they have that option.

Do they want to cut their already-limited gun exposure for ethical reasons? Or would they rather let the money ride in solidarity against the gun-control lobby?

Are there any other social issues that a client may feel strongly enough to “vote the wallet” on, sector by sector?

Whatever the answers may be, there are plenty of ways to align portfolios with conscience these days, so see if you can help.

One caveat: just as the typical investor has not been at great risk here, the rewards of cutting a sector that’s falling from grace are likely to be small.

This has not exactly been a windfall for socially responsible funds that steered clear of the firearms sector anyway.

So far this year, the Calvert Social Index has outperformed the S&P 500 by about 1%, but over longer periods ethically screened portfolios have lagged the broad market by a similar margin.

If anything, gun stocks have been a gold mine for shareholders and private equity funds -- but for your clients, it’s probably better to be able to sleep at night with what’s in the portfolio, one way or another.

Scott Martin, senior editor, The Trust Advisor



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