CalSTRS wavers on its ban on tobacco investments

Tobacco is still out – for now.

The board of the California State Teachers' Retirement System on Wednesday grappled with whether to change a long-standing decision that prevents the pension fund from investing in tobacco companies.

After nearly 90 minutes, the board decided to continue the discussion for a future meeting – probably in September – and asked CalSTRS staff to bring back more research on the tobacco industry's investment risks.

"Nobody wants to be seen as kicking the can down the road," said CalSTRS investment committee Chairman Roger Kozberg, "but we want to do this in an informed, thoughtful way."

The board's move delays a final decision on whether the $172 billion fund should get back into tobacco company stocks. Prodded by then-state treasurer and board member Phil Angelides, it dumped the stocks eight years ago after adopting a policy to sell off all shares in an industry that showed at least three of four signs of trouble:

• The industry has high exposure to legal judgments with "overwhelming punitive damage awards."

• There is a significant threat of industrywide bankruptcies.

• The industry faces government regulation that could substantially hurt earnings.

• Industry investor decisions could collectively damage share prices.

Tobacco, the CalSTRS trustees concluded, faced risk in all four categories. They directed fund managers to sell off the $238 million invested in tobacco company stocks.

Around that time, Angelides also successfully pushed the California State Employees' Retirement System to sell its tobacco stocks. Neither fund has bet on tobacco since.

Anti-tobacco groups hailed both decisions, although Angelides and the pension funds said the moves were strictly business, given all the threats to tobacco's bottom line. The industry, they said, was a bad bet.

But now CalSTRS, the nation's second-largest public pension fund, estimates it would be up to $1 billion richer if it had held on to tobacco. The industry hasn't succumbed to legal, government or financial pressure. Instead, it has thrived.

"Tobacco from the day that we adopted our policy started acting very differently," CalSTRS Chief Investment Officer Christopher Ailman told the board.

The number of tobacco lawsuits are half what they were three years ago. Nearly three of every four lawsuits have gone the industry's way. Even higher taxes, government anti-smoking campaigns and fewer smokers haven't hurt earnings – the tobacco companies just raise their price.

Since the first half of 2003, the Dow Jones U.S. Tobacco Index has more than tripled.

Wednesday's debate followed along two tracks: The social ills of tobacco and whether the industry is now a good investment.

Bill Lockyer, state treasurer and CalSTRS trustee, called tobacco a "corrupt industry" that markets its products to children.

"(Tobacco) creates very substantial cost to our members who pay billions in health costs," Lockyer said. "I think we ought to divest from tobacco."

Los Angeles teacher Ernest Kettenring, however, told the board that he worried that personal dislikes would trump good business sense if the board continued to exclude tobacco.

"I think it's a clear decision (to allow tobacco investments), but the board is struggling with the politics of it," Kettenring said during a meeting break.

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