The world's biggest asset manager has a problem on its hands.
A group of gadflies known as Gays Against Guns, which was formed after the mass shooting at a nightclub in Orlando, wants BlackRock to cut its ties to the firearms industry, as Jeff Green reported.
The fact that BlackRock is being singled out by this group -- which says it's "not afraid to shame and demonize" -- highlights an interesting side effect from the blockbuster trend of passive index-based investing that helped turn BlackRock and Vanguard into behemoths. When your investment strategy is simply to buy the entire market, as reflected by a benchmark index, you end up buying it warts and all. (Regardless of what you personally consider the warts.)
BlackRock and Vanguard are the biggest shareholders of many stocks, and two of them just happen to be Sturm Ruger & Co. and Smith & Wesson Holding.
However, tinkering with the mutual funds and ETFs that religiously track Russell and other indexes would undoubtedly cause these companies more headaches than Gays Against Guns could ever create.
There's also the fact that guns are a perfectly legal product. And shares of gunmakers, by the way, have outperformed the market during the current bull run:
(In fact, looking at the return on these stocks as well as companies like Ambev and Altria, it's amazing no one has created an Alcohol, Tobacco and Firearms Opportunities Fund yet.)
Of course, every problem is an opportunity. BlackRock has responded by pointing out that its hands are tied when it comes to index-based products because other companies, like Russell Investments, pick the stocks selected for the indexes they track. As BlackRock told Green: "We do provide clients with customized portfolios that are seeking to have their values reflected in their investments, by removing firearms, tobacco and alcohol manufacturers. Those clients have entrusted us with approximately $200 billion.”
While it's one of the world's largest managers of passive index-based products, BlackRock would most likely be thrilled if people followed their conscience out of these products -- as long as they proceeded to put their money into some of the firm's do-gooder strategies. Like much of Wall Street, BlackRock has become a big proponent of "impact" investing or "environment, social and governance" investing.
The official line on Wall Street is that these products fill a demand for people who want to invest with a clear conscience. The unofficial line, I'm guessing, is, Hey, we can capture some of those fatter active-management fees! One class of shares in BlackRock's Impact U.S. Equity Fund, for example, has an initial sales charge of as much as 5.25 percent. Here's how the costs of the Impact mutual fund compares with some of the company's passive ETFs:
To be sure, these aren't exorbitant costs for an active fund, though the comparison shows that investing with your conscience doesn't come cheap. (This fund was started in October and has only about $22 million in assets). Also, it's worth asking how much impact you're getting for your buck. As the Impact fund's prospectus states:
The Fund will screen out certain companies or industries, including companies that are classified in the tobacco and alcohol industry based on Global Industry Classification (GIC) codes and certain companies whose primary business is weapons, as determined by BlackRock.
So Smith & Wesson and Sturm Ruger won't be bought, but then again neither would they be included in an ETF tracking the S&P 500 because they aren't big enough to be included in that index. And the Impact fund doesn't shun retailers doing a brisk business in firearms like Wal-Mart, aka "America's Gun King."
None of this is meant to be an indictment of efforts by BlackRock and others to allow investors opportunities to put their money where their conscience is, which should be applauded.
Just some food for thought on the off chance you find yourself on a Gays Against Guns picket line and Larry Fink shows up passing out prospectuses.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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