The horror of the last week, with three mass shootings in eight days in the United States, has woken many investors to wonder about what's in their portfolio. Do they own companies that manufacture or sell guns and ammunition?
"Since Parkland [Stoneman Douglas High School, where 17 people were killed in a shooting on Feb. 14, 2018], we've had more advisors asking about how to find gun stocks in portfolios, because it's not easy to ferret them out, and look for alternatives," Jon Hale, global head of sustainable research at Morningstar, told ThinkAdvisor. "[It's one reason] why environmental, social and governance funds keep building [assets] quarter after quarter."
In a recent Morningstar paper, Gun Stocks in Fund Portfolios, Revisited, Hale explained how much gun-stock exposure investors may have through index investing. He dissected small-cap indexes to determine how to "take action to mitigate that exposure or eliminate it altogether."
For example, today only two public U.S. companies, which would be considered small-cap holdings, manufacture guns, including assault weapons, in the United States. They are American Outdoor Brands (AOBC) and Sturm Ruger (RGR). RGR stock had been relatively stable around $56 until July 31, when it fell dramatically, landing at $42.78 by Aug. 9. Likewise, AOBC stock was at $9.64 on July 31, and fell to $8.28 by Aug. 9.
Chances are, said Hale, those who have investments in U.S. small-cap portfolios have some exposure to these gun manufacturers. "That's because about two out of every three dollars invested in the U.S. small-cap stock funds are in indexed portfolios, which own the entire market of small-cap stocks," he noted in his piece.
However, investors who get small-cap exposure via actively managed funds are different, and Hale says most likely not exposed to these gun stocks. He notes that of the 500 actively managed funds in the small-blend, small-growth and small-value Morningstar categories, only 24 have positions in AOBC while 32 have exposure in RGR.
Still, advisors should understand and be able to explain to clients that exposure to these companies probably won't make much of a difference to their portfolio performance. It really is whether or not the investor wants any gun manufacturers in their portfolio.
For example, mutual funds that hold the largest number of shares in these companies have very little exposure. In the iShares Core S&P Small-Cap ETF (IJR), RGR is only 0.3%, which translates into the fund holding 6% of the company's outstanding stock, Hale explains.
"To get to that [0.3% position] the fund is so large it has to buy that much of a small-cap stock," Hale said.
To illustrate any material performance impact, Hale said that the Vanguard Small-Cap Index fund, over a three-year annualized return through July 2019, gained 11.01%. The losses over the period for both AOBC and RGR reduced the funds performance by 0.01% on an annualized basis.
Funds that do hold these stocks, albeit in small amounts, include American Funds iS Growth 1, American Funds Smallcap World, DFA US Small Cap Value, iShares Core S&P Small-Cap ETF, iShares Russell 2000 ETF, Vanguard Total Stock Market Index Fund, and Vanguard Small-Cap Index Fund.
