AMA Calls on Investors to Dump Tobacco Stocks
The American Medical Assn., elevating its anti-smoking drive to a new level, called Tuesday for all investors to sell their shares in 13 tobacco companies and 1,474 mutual funds that hold tobacco securities.
The step was the most sweeping call yet by a major public health organization for divestiture of tobacco stocks. It follows the AMA’s own divestiture of tobacco holdings in 1986 and a rising tide of investment restrictions and outright divestitures of tobacco-company securities by large public pension funds and other institutional investors.
The divestiture campaign is starting to resemble the one waged in the 1970s and 1980s against companies associated with South Africa. That campaign is given considerable credit for pressuring the Pretoria regime to end apartheid and move toward representative government.
The Washington-based Tobacco Institute, the industry’s lobbying arm, said it would have no comment on the AMA’s call for divestiture.
But the AMA’s move is certain to add to the burgeoning woes of the $45-billion tobacco industry, which include potentially costly lawsuits, smoking bans in public places, public attacks on the marketing of cigarettes to minors and young adults, and the specter of federal regulation of nicotine as a drug.
“All people interested in the health and welfare of our children should review their investments and divest of tobacco,” said Dr. Randolph Smoak Jr., the AMA’s secretary-treasurer, at a news briefing here announcing the call. People with mutual fund accounts, he said, “should inform their fund managers that tobacco stocks should be sold.”
Smoak said the AMA plans to update annually its list of mutual funds that invest in tobacco securities. In addition, the association has written to all 7,000 mutual funds traded in the United States asking them to join a “coalition of tobacco-free investments” by pledging not to invest in tobacco in the future, he said.
In the AMA’s view, tobacco is “a ruinous and enslaving product that has brought misery, disease, anguish and death,” Smoak said.
“When tobacco is no longer profitable, when children no longer are exposed or succumb to cartoon tobacco enticements and when this country’s investors refuse to take dividends from an industry whose product causes suffering and addiction, then these American companies will join the realm of responsible corporate citizens,” he said.
Scott D. Ballin, a representative of the American Heart Assn. and a leader of the Coalition on Smoking or Health, said of the action: “It’s the appropriate thing to do, and long overdue. I think a lot of the American public don’t know they’re investing in tobacco stocks and would be concerned to find out. We should not be supporting companies that continue to sell disease and death in this country and overseas.”
For all that, the call met with considerable skepticism among professional investors, including portfolio managers of large mutual funds with tobacco holdings.
Some of the 13 stocks cited by the AMA, including those of Philip Morris, RJR Nabisco Holdings, American Brands and Sara Lee, are among the most widely held securities in America. Of the 10 largest equity mutual funds, for instance, six have had a major tobacco stock, generally Philip Morris, among its top five holdings at some point in the last year.
Many professional investors argue that their responsibility to clients requires that they shun all but economic judgments about companies in which they invest. Tobacco stocks are legal investments, they note, and the products that the companies manufacture are still legal.
“I’m not convinced that making social, moral and political judgments should have any bearing on someone’s spectrum of investment, unless they’re going to have a financial impact reflected in the stock price,” said Arthur Cecil, tobacco analyst and portfolio consultant to two large mutual funds at Baltimore-based T. Rowe Price. Both funds are large holders of Philip Morris.
Still, other experts argue that the tobacco industry’s social, ethical and political liabilities may justify viewing its stocks and bonds as higher-risk and thus less suitable investments than they have been in the past.
In fact, tobacco stocks have lately tumbled from their recent highs as government and judicial pressures take their toll. Some have fallen as much as 20% from their peaks in early March, although many investment analysts believe this makes them potential bargain purchases.
The AMA’s position may be a milestone in converting divestiture from “an ethical question to an economic question,” said Douglas Cogan, deputy director of the social issues service at the Washington-based Investor Responsibility Research Center, which helped identify the 13 stocks and 1,474 mutual funds cited by the AMA.
“Someone had to be the first to go for outright divestiture,” Cogan said.
He compared the growing sentiment against tobacco investments to the campaign against South Africa, which also began among small institutional investors. State and local governments also began enacting sanctions barring investment in South Africa, he observed, a movement that culminated in congressional sanctions in 1986.
As it happens, several large institutional investors have already moved to pare or eliminate tobacco holdings from their portfolios. The trend began with institutions concerned with public health: After the AMA’s move in 1986, the American Heart and Lung associations also dropped tobacco stocks.
In the early 1990s they were followed by the endowment funds of several large universities, including Harvard and Johns Hopkins, which have prominent medical schools.
But divestiture has recently been expanding. On April 16, the state of Maryland announced that it had completed a full divestiture of its $75.5-million holding of tobacco-related securities in its public pension accounts, realizing a $35.6-million gain.
Sources say that the New York State Teachers Retirement Fund, one of the largest public pension funds in the nation, may announce today that it will “underweight” tobacco stocks in its indexed investment accounts. The fund’s officials could not be reached for comment.
Indexed funds are those designed to replicate the makeup and performance of a major stock index, such as the Standard & Poor’s 500. “Underweighting” certain stocks means holding less of them than would be warranted by their prominence in the index.
For many other investors, however, divesting tobacco stocks may pose delicate legal and fiduciary questions.
The California Public Employee Retirement System, whose $98 billion in assets makes it the nation’s biggest public pension fund, says it is prohibited by a 1992 constitutional amendment from using any yardstick other than investment return in making investment decisions.
Although the state Legislature is considering a bill to bar CalPERS from investing in tobacco-related companies, the pension fund has opposed the bill on grounds that it would violate the amendment.
At least one other large institutional investor, the College Retirement Equities Fund, faced so much pressure to divest tobacco stocks that it created a separate investment fund, the Social Choice Account, as a tobacco-free vehicle for retirement investors.
Other investment managers noted that similar “socially responsible” funds are offered by many companies. The AMA’s campaign, however, is aimed at broad-based mutual funds that treat tobacco stocks as conventional investments.
“Tobacco is a big business that flourishes because investors put their money into it,” said George Lundberg, editor of the Journal of the American Medical Assn., which is devoting its current issue to the campaign.
“If you value the health of the public . . . don’t invest in heroin, cocaine or tobacco stocks,” Lundberg said.
The AMA’s call for divestiture covered the following 13 publicly traded companies making and distributing tobacco products:
Philip Morris Cos. Inc, RJR Nabisco Holdings Corp., Brooke Group Ltd., American Brands, Culbro Corp., DiMon Inc., Loews Corp., Mafco Consolidated Group Inc., Sara Lee Corp., Schweitzer-Maudit International, Standard Commercial Corp., UST Inc. and Universal Corp.
Hiltzik reported from Los Angeles and Jackson from Washington.
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