Solutions for Institutional Investors

A growing number of institutional investors are considering what to do about corporate involvement in Iran, Sudan, Syria, and/or North Korea. This is due to overwhelming public opinion in favor of Terror-Free investing as well as a growing recognition that involvement in terror states poses reputational and operational risks for companies.

Given more than 550 companies worldwide with varying ties to these countries, institutional investors invariably begin consideration of Terror-Free policies by asking the question: which companies should be defined as "prohibited" under a Terror-Free policy. There is now a growing consensus forming around a single definition of Terror-Free.

Whether your institution chooses to go with the standard definition or develop its own screening criteria, the next step is to decide what model you want to use. Terror-Free implementation models:

• Manager Selection
• Custom Screening
  

Manager Selection

The national synchronization of a Terror-Free definition for "prohibited companies" has been endorsed by a number of states and is resulting in a growing number of investment products based on this standard definition for Terror-Free. For institutional investors not interested in undertaking a lengthy assessment process to develop their own criteria and implementation process, this has been a welcome development. Now investing Terror-Free at the institutional level is relatively straightforward. Products such as the FTSE Terror-Free international index series allow existing and prospective managers to license a certified Terror-Free index or investment universe for management of passive portfolios. Active managers such as UMB Financial and others now offer certified Terror-Free sepearately managed accounts for institutional investors.   

Thanks to the standardization of the criteria for prohibited companies, institutions can now simply incorporate a standard set of Terror-Free criteria into their RFPs and manager selection process. They can then choose managers who offer existing products that are certified to exclude prohibited companies.

CSAG is currently offering a "road show" for institutions considering Terror-Free investment strategies. Along with leading asset managers Northern Trust (passive) and UMB Financial (active), CSAG would be pleased to present to your organization. Please contact CSAG for more information.

Custom Screening

In 2006, the Burton Bettingen Foundation and the Missouri Investment Trust (MIT) became the first two institutional investors in the country to adopt and implement Terror-Free investment policies. At the time, there were no Terror-Free products and services offered in the market. Accordingly, both entities worked with independent research provider CSAG to develop a custom list of prohibited companies and licensed that "do not buy" list to their existing asset managers. Managers would then replace prohibited companies with compliant firms and rebalance the newly Terror-Free portfolios.

This "custom screening" approach is still being used and may be preferred by those institutional investors that choose to design their own screening criteria as opposed to making use of Terror-Free products and services readily available in the market. Much has been made on Terror-Free harming performance or resulting in higher manager costs. Neither was true in the case of the Missouri Investment Trust, which employs State Street Global Advisors to manage its Terror Free portfolio. The Missouri Investment Trust reportedly has experienced higher returns on its rebalanced international Terror-Free portfolio than the non-screened benchmark—some 4 percent over the first 18 months.   

91% of Americans surveyed said public funds should not invest in countries that sponsor terrorism (Luntz, Maslansky 2006)

Uniform National Definition: A Terror-Free product or portfolio is one that excludes companies with active or current business ties that are not humanitarian in nature to Iran, Syria, Sudan and/or North Korea.