Activist groups urging fund firms to divest from companies doing business in Sudan are finding evidence that stocks of some of the companies have delivered lower returns than some of their peers that have no connection to the country.
Activist groups urging fund firms to divest from companies doing business in Sudan are finding evidence that stocks of some of the companies have delivered lower returns than some of their peers that have no connection to the country.
The Sudan Divestment Task Force of the Genocide Intervention Network, a Washington-based activist group focused on research, recently released a study of the performance of 37 multinational companies linked to the North African nation. The group gathered data, provided by Bloomberg LP of New York, and found that the companies had significantly underperformed some of their peers.
"For years it was purely a moral argument," Adam Sterling, director of the task force, said about divesting from Sudan, where genocide is occurring in the Darfur region. "Now it's much more of a financial argument."
The study found that the companies underperformed their peer groups by an average of 45.97 percentage points for the one-year period ended May 10, 11 or 12, by 22 percentage points for the three-year period and by seven percentage points for the five-year period. The forecasted return on stocks for these companies was on average 6.06 percentage points less than the peer group mean, the group reported.
When compared with the top three performers in their peer groups, the companies on average underperformed by 141.11 percentage points for the one-year period, 52.69 percentage points for the three-year period and 27.07 percentage points for the five-year period.
The peer groups were based on industry classification, geographic region, developing or emerging market classification and market capitalization, Mr. Sterling said.
"We [are] showing that there are alternatives to investing in problematic companies in the Sudan. Our goal is to show that there is a benefit financially and socially to investing responsibly in companies," Mr. Sterling said.
The task force has targeted those firms that have rejected engagement as the "highest offenders." Only companies that have rejected engagement on the issue were included in the list of "highest offenders."
The study was released at a time when another activist group is taking the divestment message to fund companies through their shareholders.
Investors Against Genocide, a Boston-based activist group, will bring a non-binding resolution about "genocide-free investing" to shareholders of nine Fidelity Investments funds on June 18. The resolution asks the fund boards to adopt policies to screen out investments in companies that support Sudan's economy.
Fidelity is also based in Boston.
Since March, shareholders in 12 different Fidelity funds have voted on the resolution. The resolution garnered the support of between 20% and 31% of those voting, depending on the fund.
In addition, the group began a campaign May 16 and solicited letters from several hundred shareholders of TIAA-CREF funds to ask the New York-based company to put a similar resolution before shareholders at its July 15 annual meeting. Organizers hope TIAA-CREF will respond to the letter campaign, since they missed the deadline for inclusion on the proxy.
Fidelity's investment in Petro-China Co. of Beijing, a giant oil company that is helping Sudan develop its oil fields, has drastically declined in recent years, for example. According to public filings, Fidelity's investments in the company totaled just $85,000 as of March 31, down from $147,000 as of Dec. 31 and $634 million in 2006.
"None of the 12 funds that were voted on in March, April or May, nor the funds in June, hold the securities in question," said Fidelity spokesman Vin Loporchio.
TIAA-CREF owns stock in 22 companies that do business in Sudan, said Hye-Won Choi, the company's senior vice president and head of corporate governance. The investments represent less than 0.02% of the firm's assets.
"We have been engaging with these companies for more than two years. Of those companies, nine have either committed to withdraw their operations or undertake humanitarian steps in Sudan," Ms.Choi said.
"We don't think divestment is an effective tool over the long term to change the behavior of a company," she said. "If you sell your stock, you lose your ability to engage with the company."
But the activists' resolution seeks a permanent policy adoption by the fund directors.
While Investors Against Genocide has focused its case largely on the human rights issue of genocide in Darfur, it has also argued that the funds would serve their investors better by replacing stock in companies such as PetroChina with investments in other companies that don't do business in Sudan. The performance study adds to the argument.
"It's another data point with detailed reasons that supports a point we have been making for some time with these companies," said Eric Cohen, chairman of Investors Against Genocide. "There is no fiduciary requirement to stay with these companies."
Performance research is done on all stocks, Mr. Loporchio said.
"As part of our in-depth analysis of securities we look at a wide array of research regularly. We wouldn't be able to address that specific piece," Mr. Loporchio said, referring to the activists' research.
"Our investment professionals make investment decisions on a case-by-case analysis," Ms. Choi said.
Performance may add to the argument for divestment, but the idea of risk could be a broader issue, said Christopher Davis, a mutual fund analyst with Chicago-based Morningstar Inc. "Certainly there are real risks to investing in a country like that," he said.
And while individual stocks may underperform, they may make up only a small portion of a huge portfolio, Mr. Davis said.
"I think it's very hard to ferret out what impact investing in PetroChina could have on overall fund performance," he said. "It may barely move the needle as far as performance of the fund either way."
'PROXY AT THEIR FEET'
Some observers say that they hope that portfolio managers would judge all stocks by the same criteria and get rid of underperformers.
"If investors are unhappy with the way that a manager is running the fund, they have the proxy at their feet; they can redeem," said Geoff Bobroff, a Greenwich, R.I.-based mutual fund consultant.
Still, the overriding message that will effect change, Mr. Cohen said, is the moral question.
"How is connecting your customers to the ultimate crime against humanity the right thing to do?" he asked. "The most powerful argument is that their customers don't want their money there."
Mr. Cohen said that he hopes that working on the issue through shareholders will send that message.
E-mail Sue Asci at sasci@investmentnews.com.
