State Street Global Advisors (SSGA), the investment management business of State Street Corporation, has decided to exclude tobacco and controversial weapons shares from the State Street Global Index Plus Trust.
The fund, established in December 2000, has $900 million under management as of June 30, 2017. The fund invests in global companies and seeks an investment return that modestly exceeds, before expenses, the performance of the MSCI World ex-Australia Index over the long term.
“The impetus in Australia has certainly come from what we’ve seen in our institutional client base,” said Jonathan Shead, head of portfolio strategists, Asia Pacific, at SSGA. “We have a lot of very large segregated mandates where we’ve been given lists of securities to exclude and it’s been pretty clear for some time now that large asset owners in Australia have been excluding tobacco and controversial weapons routinely.”
In June 2016, SSGA launched the State Street International Equities Index Trust Ex Tobacco Ex Controversial Weapons with significant backing from health insurer Medibank Private. Since its launch, the Trust’s funds under management have risen to $229 million. However, this is different in that this decision affects and already-established, mainstream pooled fund, Shead noted.
“We took a low-risk enhanced fund and removed tobacco and controversial weapons – haven’t launched a second version, but rather just changed the headline fund to be ex-tobacco and ex-controversial weapons,” Shead said. “The decision has been partly driven by investors’ requests and feedbacks, and partly from us going out and raising the subject with investors. It was a series of two-way discussions.”
This move has stripped 12 companies from the fund’s investment universe. At July 31 the Fund still held approximately 620 companies, some 60 percent of which are US-listed companies, SSGA said.
“One of the key parts of the proposal this time was to actually leave the benchmark unchanged,” Shead said. “We were satisfied that we could run a low-risk active fund like this excluding tobacco and controversial weapons without changing the headline benchmark of the fund from an unconstrained MSCI World index.”
The excluded companies have significant business activities involving tobacco and making cluster bombs, landmines, chemical and biological weapons and depleted uranium weapons, SSGA said.
“Only really a couple of percent of the index is tobacco/controversial weapons related,” Shead said. “We don’t necessarily hold all of those names, but any that we did do, we divested. It’s a couple of percentage points. …
“For controversial weapons, you would be buying other industrial stocks. There’s no exact way to synthesise the exposure to either tobacco or controversial weapons, but there are other risk dimensions you can compensate for, like additional exposure to the US – to the extent that a number of the companies are US-listed companies, you might buy more from the US to compensate.”
SSGA clients are increasingly aware of – and responding to – ESG risk and management, Shead said. Tobacco and controversial weapons have been frequent topics of discussion, with low carbon responses as the second most frequent.
“We’ve certainly had plenty of discussion with clients about low carbon – that would be the most common conversation outside of tobacco and controversial weapons,” he said. “There are also a lot of discussions on broader ESG metrics and in fact we are now including some of our own proprietary ESG signals into our active processes, but low carbon would be the next most popular conversation with Australian clients.”