Over the past few months institutions across the globe are falling for the common financial misconception that calls itself divestment. Even one of the largest pension funds in our nation’s capital – the District of Columbia Retirement Board – caved to activists who were putting pressure on the board. Unfortunately, this unchecked burden placed on boards to divest is costing dedicated civil servants their future source of income by diminishing the pension fund’s return on investment.
In a recent Forbes column, Bernie McGinn, president/chief investment officer of McGinn Investment Management, and McCoy Penninger, a VP/portfolio manager, explain how a balanced portfolio is necessary for a growing pension fund, especially since low interests rates are already constraining returns. As a result, the ideological practice of divesting from certain industries is harmful and the impacts on returns are powerful:
“Over the past 50 years, a long-term period similar to the investment horizon of pension funds, portfolios excluding oil and gas industry investments have underperformed portfolios including them by 0.5% per year.”
Most importantly, pension funds cannot afford to be politicized. With a $1 trillion funding gap for U.S. public pensions, board members should be open to all investment opportunities since their responsibility to their benefactors is to grow the fund. And pensioners agree. According to McGinn and Penninger, “two-thirds of pension holders say they oppose divestment if it means lower returns,” which is undoubtedly the consequence of divestment.
McGinn and Penninger also pointed out another victim of divestment: taxpayers. If divestment action is taken, and the pensions’ investment return is lower, then “state and local governments will have a harder time meeting their future obligations to retirees. Filling that gap will inevitably involve raising taxes or cutting benefits.”
The ideological roots of divestment should not hold sway over the board members of public pension funds. As McGinn and Penninger mention if people want to practice divestment on their personal accounts, that’s acceptable since, “it’s their money, after all.” But investment decisions for public pension funds should be based on hard data, not social whims. It is someone’s retirement future, after all.