Divestiture Law Altering Pension Fund Investments

SACRAMENTO —  State government’s three major public pension funds have altered investment strategies as they prepare for major changes under California’s new South African divestiture law.

The historic measure, signed by Gov. George Deukmejian last September, requires divestiture as a protest of South Africa’s racial policies.

Under the law, as of Jan. 1, 1988, the funds must begin a three-year sell-off of stock in companies that do business in South Africa.

It also sets Jan. 1, 1987, as the first day of a prohibition against making any new investments or deposits in companies or financial corporations involved in South Africa.

Exception to the Rule

There is one exemption to the rule: The funds can continue to purchase shares in companies that have adopted resolutions promising not to expand operations in South Africa. The Public Employees Retirement System has 13 companies that have adopted such resolutions.

The traditional investment strategies of the funds varied, which led to different interpretations of the law’s applications.

But all three funds have already altered their investment strategies and are planning major procedural changes for next year, when they must sell one-third of their holdings in firms involved in South Africa.

The retirement system, which has a $43-billion portfolio and which actively trades stocks, has made the most significant changes in its strategy.

Can’t Be Bought

“There are companies we would be purchasing that we are unable to purchase because of the (legal) constraint,” said Basil Schwan, assistant executive officer of the retirement system.

“We’re talking about 140 companies that are essentially off-limits to us, and we cannot take advantage of what we would consider some good investments.”

The system’s list of off-limits firms includes such big names as AT&T;, Boeing, Bristol-Myers Co., Hewlett-Packard Co., 3M, Mobil Corp., and RJR Nabisco Inc., each of which accounted for more than $60 million worth of the fund’s holdings as of March 31.

In all, the retirement system holds a portfolio of stock in about 1,000 companies. Schwan estimates that most of the 140 off-limits firms are included, accounting for about $4 billion of the $18.5-billion stock portfolio. In addition, about $1.5 billion worth of the commercial paper held by the system is issued by companies involved in South Africa.

Less Effect on Teacher Fund

At the State Teachers Retirement System, divestiture is having less of an immediate effect because the $23-billion fund--including $14 billion in equities--has cut down on its stock buying in 1987.

“We made a decision about two years ago to get more involved in the stock market, and we began to increase our portfolio share of equities in the third quarter of 1985,” said Larry Kurmel740320104fund. “We concluded the bulk of that program prior to the beginning of this year.”

He added, however, that 70% of the teacher fund’s stock holdings are in index funds, which seek to mirror market indexes such as the S&P; 500 by buying all the stocks it includes. Divestiture means the index funds must be restructured.

“The problem for us is that these funds are populated by some of the South African stocks,” Kurmel said. “We have to reconstitute our funds. We’ve been working on that for six months, and we are having to extricate ourselves into a separate device. Our (fund administrators) are helping us.”

‘Tainted’ Stocks

Tom Flanigan, STRS chief investment officer, said that teacher fund will seek to create a South Africa-free index fund by eliminating “tainted” stocks and buying larger percentages of acceptable stocks.

Flanigan noted that the teacher fund is already prohibited, by the first step in the divestiture law, from accumulating more S&P; 500 index funds or from reinvesting its index fund dividends. But he said that is acceptable “on a tactical basis because right now you can buy long-term Treasury bonds in the 9% range, and we think 9% is a pretty attractive rate.”

Meanwhile, the University of California Retirement and Endowment Fund faces a different sort of problem than the public employee and teacher funds because its portfolio includes large holdings in fewer stocks. Equities represent about $8.5 billion of the $12.8-billion portfolio. About $2 billion is invested in 20 companies involved in South Africa.

Linda Fried, assistant investment officer, said the fund has slightly different guidelines than the state employee funds. It could continue to buy stock as long as it has a letter from companies, rather than a resolution, stating their intent not to expand in South Africa.

The letters are easier to provide than resolutions, which require votes by corporate boards, Fried said, and all 20 companies in question furnished them. Now the retirement fund is going back to the same companies, asking if their boards adopted appropriate resolutions at their 1987 annual meetings.