Pensions and Asset Managers Blasted for Nuclear Weapon Investments

(October 15, 2013) — Banks and pension funds are investing $314 billion in companies that produce, maintain, and modernise the nuclear weapons of France, India, the UK, and US, according to a report from the Netherlands.

The Don’t Bank on the Bomb report, produced by peace movement IKV Pax Christi, the International Campaign to Abolish Nuclear Weapons, and economic consultancy Profundo, has produced a list of the 298 investors that invest in these companies, labelling them as members of a “Hall of Shame”.

Among those investors are some of the world’s biggest pension funds, including Ontario Teachers’ Pension Plan and the Netherlands’ ABP and PFZW. More than 200 asset managers are also on this list.

A spokesman for ABP told aiCIO that it does not invest in companies which are involved in the manufacture of landmines, cluster bombs, chemical, or biological weapons, or nuclear weapons made in violation of the Non-Proliferation Treaty. ABP also does not invest in government bonds by countries subject to an arms embargo by the UN Security Council.

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However, companies that manufacture nuclear weapons or parts of those—such as Boeing which is a producer of aircrafts but is also involved with the production of nuclear weapons—in accordance with the Non-Proliferation Treaty, are not excluded by ABP.

“This corresponds with the position of the Dutch government on nuclear weapons. ABP uses Dutch and international law to decide in what it can and in what it cannot invest,” the spokesman said. “ABP closely monitors nuclear disarmament developments in Dutch and international politics. If the Dutch government changes its position, ABP will reconsider its policy.”

PFZW and Ontario Teachers could not be reached for comment at the time of writing.

The 27 producers of nuclear weapon maintainers, producers, or modernisers are predominantly from the US, and include big name brands such as BAE, Babcock International, Boeing, Lockheed Martin, Serco, and EADS.

Among fund managers, the biggest investors in those 27 companies in the US are State Street ($20.4 billion), Capital Group of Companies ($19.5 billion), and Blackrock ($19.2 billion).

In Europe, the biggest investors are: Royal Bank of Scotland, which invests $5.6 billion; BNP Paribas which invests $5.4 billion; and Deutsche Bank which invests $4.8 billion.

The report also named 12 investors in its “Hall of Fame”. The accolade was awarded to those investors that publish their policy and/or a summary of it; exclude investments in nuclear weapon companies; and those that have an “all-in” comprehensive scope which allowed for no exceptions for any types of nuclear weapon companies, or any activities by said companies.

There were 12 pension funds in that group, including the Luxembourg-based Fonds de Compensation, the New Zealand Superannuation Fund, the Dutch Philips Pension Fund, a Dutch railway pension fund (Spoorwegpensioenfonds), and Sweden’s local authority pension fund the KPA.

In response to its placement, the Philips Pension Fund said in a statement that while it had a fiduciary duty to its members, it also had a duty to its participants to align with the integration of environmental, social and governance issues in its investment policy.

The Don’t Bank on the Bomb report noted that divestment from the 27 listed companies had increased in the past 10 years, and argued that exclusions by financial institutions had a stigmatising effect and could “convince directors to decide to reduce reliance on nuclear weapons contracts and expand into other areas”.

The authors claim their report could have a lasting impact on the nuclear weapon industry. Last year’s report apparently contributed to a revised Swiss War Materials Act entering into force in February this year, and financing nuclear producers is now illegal in Switzerland. Implementation is currently being discussed with the Swiss Bankers Association.

The full report can be found here.

A whitepaper argues that changes in brokers and central banks’ behaviors have reduced fixed-income market efficiency, creating opportunities for alpha returns from relative value strategies.

(October 14, 2013) — The fixed income markets have become less efficient post-2008, a Goldman Sachs Asset Management (GSAM) report has argued.

With this decline in efficiency has come added opportunities for alpha returns independent from falling interest rates and beta exposures.

The paper concluded that the global fixed income and currency markets experienced a “tangible shift” in the roles of central banks and brokers and dealers. This has granted investors the potential to gather returns from relative value and idiosyncratic risk strategies.

This shift was the result of two significant changes following the financial crisis, according to GSAM. Firstly, broker dealers have been taking fewer risks and reducing market-making activities largely due to stricter regulations. Secondly, central banks have adopted a more interventionist role.

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From these two major changes, post-crisis market activities have been driven more by policy objectives rather than profit-seeking motives, GSAM stated.

GSAM found that these changing trends also caused significant market volatility, which in turn decreased fixed income market efficiency and brought on pricing distortions.

Such market inefficiency increases opportunities for relative value and idiosyncratic risk, the authors noted. Price distortions were more frequent and larger post-2008 and the bond market has become more global while the circle of fixed-income investors has become smaller.

“These trends provide the potential to construct a broad and diversified portfolio of investment strategies focused on relative value, where the manager seeks pricing relationships that have become skewed by flows and then implements trades intended to profit from those value relationships reverting to previous norms,” the report said.

The effects of high volatility and complex and differentiated investment themes have been particularly felt in emerging market, the report found.

“The result of these shifts so far has been a broad sell-off in emerging market debt, with particular pressure on emerging countries with large current account deficits that rely on foreign inflows,” GSAM said.

In “capturing the opportunity set,” GSAM recommended investors seek alternative and unconstrained fixed income investment strategies—hedge funds, in particular—that would allow investors to take on alpha-driven trading methods dealers would normally utilize.

“Hedge funds can implement long/short positions and are not constrained by traditional boundaries between emerging and developed markets, investment-grade and non-investment grade sectors and other limitations on the types of instruments and strategies that can be employed,” the report argued.

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