You don’t want your retirement savings invested in nuclear bombs, sure. But what about conventional defence equipment that’s also used for essential civilian purposes?
This month’s assassination of Iranian commander Qasem Soleimani and the Australian navy’s evacuation of people escaping bushfires are two very different events, but they highlight the dilemma faced by KiwiSavers wanting to invest ethically. When does putting your retirement savings into a weapons manufacturer cross the line between acceptable and unacceptable?
The US drone strike that killed Soleimani hasn’t made the world a safer place, but in contrast what would have been the fate of the bushfire evacuees if Australia did not have an effective navy? The military, the police, and more importantly the weapons they use, are essential elements for protecting civil society.
There are obvious cases where the solution is clear. The discovery that many KiwiSaver funds were invested in manufacturers of landmines, nuclear weapons and cluster bombs prompted KiwiSaver providers to re-evaluate their portfolios in 2016. These are weapons that cause disproportionate suffering to the civilian population and inflict harm long after a conflict has ended.
After ditching those investments fund managers hoped the conversation would go away. But what about handguns, assault rifles, tanks, military aircraft, cruise missiles and taser guns? Core to democracy is recognising the ability of a country to defend itself and maintain its freedom, and conventional weapons are a necessary way of achieving this.
These are not academic questions. According to mindfulmoney.nz many KiwiSaver funds are invested in weapons companies. Some KiwiSaver funds also still invest in firms that do not make the cut for a responsible investor. For example, any investment in nuclear weapons (or the maintenance of them) should be off the table.
Companies like Boeing, Airbus and Rolls-Royce which are commonly held in KiwiSaver funds are less controversial in that they manufacture conventional weapons systems and equipment which are also used for essential civilian purposes. Military aircraft can be used to transport nuclear warheads, but have also become essential for humanitarian efforts around the world, for example. But for some people even an investment in these companies is a step too far. Many would prefer not to invest in the defence sector at all, despite the obvious contribution that a well organised (and properly controlled) armed force makes to civil society.
However, it may surprise many to learn that the consequences in terms of investment returns of taking this path are surprisingly small. Over the past year returns from weapons companies have been about the same as the S&P 500, the stock market index that measures the performance of America’s top 500 listed companies. Over the long term weapons companies do perform better, but that outperformance is little more than a rounding error.
You would expect weapons companies to make up around 1% of a balanced portfolio. This means that if weapons companies outperform the wider market by 5% every year you are missing out on only 0.05% a year. It’s not zero, but it’s perilously close to zero.
This is consistent with research by legendary investor Jeremy Grantham, of the Boston-based asset management firm Grantham, Mayo, & van Otterloo (GMO), showing you can exclude an entire sector from your portfolio and it will make very little long-term difference to investment returns. Good to know you can leave out fossil fuels, banks or weapons companies and it won’t blow up your portfolio’s long-term returns.
Whether your KiwiSaver fund should hold controversial military weapons, conventional military weapons, civilian weapons or none of these is ultimately a personal choice. It’s a balance between protecting a nation’s freedom, promoting a stable world, maintaining strong civil institutions and ensuring personal safety. It’s also about feeling good with how you’re investing.
John Berry is chief executive of Pathfinder, which runs the CareSaver KiwiSaver Plan. CareSaver is not invested in weapons companies.