Research: Can you tell us a little about CSAG?
Pener: Conflict Securities Advisory Group (conflictsecurities.com) is a private, impartial information provider that maintains the world’s only comprehensive database of U.S. and foreign publicly traded firms that have current or recent business ties to Iran, Sudan, Syria and North Korea: all countries that have been designated by the U.S. State Department as state sponsors of terrorism. This Global Security Risk Monitor is an online subscription database. Clients include the Securities and Exchange Commission, the State Department, dozens of leading asset management firms, the states of Missouri and Arizona, the Comptroller of New York City (who is the sole fiduciary for the city’s $85 billion public pension systems) — and Roosevelt Investment Group, the first firm in the country to offer “terror-free” separate accounts as well as the world’s first “terror-free” mutual fund, the Roosevelt Anti-Terror Multi-Cap Fund (BULLX).
What is “terror-free” investing, anyway?
Like other categories of values-based or socially responsible investing, “terror-free” investing is a screening strategy whereby the investor excludes companies that engage in business activities with which the investor disagrees — in this case, companies whose activities benefit governments such as those in Tehran and Pyongyang. Some people choose not to invest in so-called “sin stocks” (e.g., gambling, alcohol, etc.). With “terror-free” investing, the investor is avoiding companies that he, she or the institution feel are engaged in business activities that are inimical to U.S. security interests.
Put simply, “terror-free” investing is when an investor chooses not to invest in some or all of the roughly 450 companies that CSAG identifies as having business in or with terrorist-sponsoring states.
How did the idea emerge and how did CSAG get involved?
It is difficult to pinpoint the exact genesis of “terror-free” investing. In 2004, investors began approaching CSAG in the hopes of excluding companies with ties to terrorist-sponsoring states from their portfolios. Prior to that, our clients were primarily using the Monitor as a risk-assessment tool. Following a 60 Minutes segment in 2004 entitled “Doing Business with the Enemy,” in which CSAG was featured, there was an uptick in inquiries concerning the use of our data as a screen.
While CSAG is an impartial data provider (and as such does not take a position concerning the use of our data), it became clear that our clients were increasingly seeking to excise and exclude some or all of the companies we identify from their investment portfolios for personal, ethical or moral reasons. Our board decided to respond to this demand by “productizing” our data — that is, we began to pursue strategic partnerships that now allow both institutional and individual investors to use our data as a screen, should they so choose. These are the so-called “terror-free” products and services.
The Roosevelt Investment Group approached us during this period with the idea of screening their mutual fund and being certified by CSAG as “terror-free.” The concept picked up steam from there.
Which countries and companies are screened out?
That is a question best directed to each fiduciary implementing a “terror-free” screen. The Roosevelt Anti-Terror fund screens out companies with any business tie in any of the countries. Other investors have focused on Sudan due to the genocide in that country. Missouri Treasurer Sarah Steelman developed a more nuanced screen [see profile on page 47]. Currently, “terror-free” investing is trending toward screening out companies with active business ties to these countries which are non-humanitarian in nature.
To answer your question another way, we primarily service clients and their managers by helping implement the screen as opposed to designing the policy.
How do these portfolios stack up on a performance basis?
So far, so good. Last year, the Missouri Investment Trust (MIT) became the first public fund in the country to establish a “terror-free” policy. Working with CSAG and its manager, State Street Global Advisors, MIT undertook a rigorous back-testing exercise in which it found that the impact on performance of a “terror-free” overlay from 2001-2005 was de minimis. In fact, over that period, the screened portfolio would have outperformed the index against which the screen was run.