US: Calstrs May Remove
Ban on Tobacco Stocks


Pension Fund Says
It Is Missing Out
On Strong Returns

by CRAIG KARMIN, The New York Times
June 5th, 2008

In a move that could reverberate throughout the fund industry, the nation's second-largest pension fund is considering lifting a nearly eight-year ban on tobacco investments.

The board of the California State Teachers' Retirement System, known as Calstrs, began deliberating on Wednesday about adding the stocks of tobacco companies to the fund's $169 billion portfolio.

Unlike some socially responsible funds that banned tobacco companies for health-related reasons, Calstrs said it divested in 2000 because numerous lawsuits against the industry and the specter of government regulation made the stocks too risky. It now says those risks have diminished.

Calstrs also indicated that missing out on a "market weighting" in tobacco stocks these past several years cost the fund more than $1 billion in lost investment returns.

Calstrs wouldn't be the first pension fund to reverse a ban on tobacco shares. The Florida Retirement System voted in 2001 to overturn a similar ban after divesting from tobacco stocks in 1997. Still, Calstrs's decision "will be watched closely," said Amy Borrus, deputy director at the Council of Institutional Investors. "At a time when pension funds are under tremendous pressure to boost returns, they are rethinking the costs of divesting from a whole class of shares."

The California Public Employees' Retirement System, the nation's largest pension fund with about $245 billion in assets, also has a ban on tobacco stocks and is "monitoring the Calstrs situation," said a spokesman. The New York City Employees' Retirement System, with $40 billion, maintains a ban on tobacco; it had no comment.

It isn't clear how much money Calstrs would invest in tobacco companies. But the fund has a $65 billion U.S. stock portfolio, and a commonly used U.S. benchmark index has a 1.7% weighting for tobacco shares.

Write to Craig Karmin at craig.karmin@wsj.com





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