Treasurer Bill Lockyer has asked the state's two largest public pension funds to purge their portfolios of gun manufacturers that make firearms that are illegal in California.
Lockyer, a board member of both the public employees' and teachers' retirement systems, made the request Monday afternoon following revelations that CalSTRS has a stake in the company that makes rifles like the one used in last week's Newtown, Conn., school shooting.
CalSTRS has put a combined $600 million into investments set up by a hedge fund firm that in turn put some of the money into a global firearms conglomerate, Freedom Group. Freedom Group's holdings include Bushmaster Firearms International.
On Friday, 20-year-old Adam Lanza used a .223 Bushmaster semi-automatic rifle to kill 20 children and six adults during a rampage at Sandy Hook Elementary School.
It is illegal to sell semi-automatic guns that are considered assault weapons in California, which has some of the toughest gun laws in the nation.
"Events that occurred in Connecticut are a wake-up call to re-examine our investments," CalSTRS spokesman Ricardo Duran said Monday.
Like many public pension funds, CalSTRS over the years has dumped investments it deemed socially or politically irresponsible. It divested holdings in tobacco companies, for example, and pulled back from funds that pumped money into South Africa, the Sudan and, more recently, Iran.
With an asset portfolio of $155.5 billion last year provides retirement benefits to approximately 856,000 members, the stakes are huge.
CalSTRS investments with Cerberus Capital Management LP that took on a piece of Freedom Group included a $100 million commitment in 2003 and a $500 million commitment in 2007. In all, CalSTRS indirectly owns at least a 6 percent stake in the company, according to a report by CNN Money.
CalSTRS' statement on investment responsibility says it considers "non-economic factors," such as whether an investment might "promote, condone or facilitate social injury." Since 2008 after the Cerberus investments it has consulted a list of 21 "risk factors," including whether an industry or company makes a product "highly detrimental to human health."
Pension fund staff members make recommendations and experts testify before the board makes a final policy decision.
Socially and politically irresponsible investments, according to CalSTRS criteria, often carry extra risk of product-liability lawsuits, government regulation or other factors that might cause investors to flee.
"It's kind of a balancing act," Duran said Monday.
Tobacco, for example, was still a financially sound investment when CalSTRS divested several years ago, he noted, but the product's impact on human health tipped the scales.
Large hedge fund investments can be difficult to analyze, however, because they spread their money around.
"It can be hard to know what a specific fund will be invested in," Duran said, although CalSTRS lays down ground rules for what it deems acceptable.
Like other investors, CalSTRS receives a statement of a hedge fund's asset allocation, and "as a large investor, we can call them," Duran said. "From time to time events will impinge on our investment activities."
Duran said he didn't know whether CalSTRS had reviewed investments in the $7.5 billion Cerberus/Freedom Group funds in the past.
Bushmaster has been in the news before. Snipers used a .223 Bushmaster in a series of Washington, D.C.-area killings in 2002. A gunman shot up an Aurora, Co., theater last summer with a Bushmaster AR-15, killing 12 people and wounding 58.
If the Sandy Hook school massacre prompts CalSTRS to divest itself of its hedge fund holdings in guns, it could take time to sell them off. Buyers, knowing the fund wants to ditch the investment, won't be as generous with their purchase offers.
"So we have to look for opportunities," Duran said, "that won't be too detrimental to the fund."
Editor's Note: This post has been updated from print and online versions to clarify that not all semi-automatic weapons are banned in California, just those the state considers assault weapons.