Tide may be turning for tobacco as CalPERS reveals its 2001 divestment is finally making money

After years of underperformance, pension heavyweight’s tobacco exclusion has brought in $856m, according to latest review

Californian public pension giant CalPERS has made $856m through its exclusion of tobacco since 2017, amounting to about 0.2% of the $389bn fund’s current assets, according to the latest analysis by investment consultant Wilshire Associates.

Wilshire’s latest annual review of CalPERS’ exclusions found that since it last affirmed its divestments, which RI understands was in 2016, “all active CalPERS divestment programmes have delivered positive performance”, including tobacco. 

CalPERS reviews its exclusions every five years, with the next assessment due to take place in 2021. 

Despite the positive performance of its tobacco exclusion over the last several years, the decision has led to an overall underperformance of around $3.7bn since it was introduced in 2001.

The drag on performance caused by the absence of tobacco stocks means CalPERS’ divestment programme as a whole has cost the fund “$2.18bn in present value terms”, despite the other exclusions creating positive returns since they were introduced. 

CIO reported in 2018 that performance of tobacco stocks prompted CalPERS investment staff to recommend reinvesting in the sector in 2016.

Between June 2002 and September 2016, the MSCI World Tobacco Index grew by a huge 632%, versus 122% for the MSCI World Index over the same period. 

CalPERS decision to divest tobacco in 2001 was reportedly made on the belief that the sector was due to experience financial trouble, following a number of lawsuits being filed on smoking’s devastating health impacts and historical attempts to suppress this information by some tobacco firms. 

Daniel Ingram, Senior Vice-President, Responsible Investment Research & Consulting at Wilshire told RI that Wilshire’s analysis “is based on comparing the returns of the unconstrained portfolios to the divested portfolios”.

He said that most years between 2001 to 2015 (except 2009 and 2013) “tobacco outperformed, so CalPERS did not benefit from tobacco divestment”, but that from 2016 tobacco has underperformed.

Last year, research by Morningstar highlighted “regulatory risk, political pressure and falling smoker numbers” as “just some of the headwinds facing tobacco stocks as fund managers ditch the sector”.

That research was published as the UK's Nest pension scheme announced it would no longer invest in tobacco and would sell off its £40m holding in the sector – the £6bn scheme described the industry’s business model as looking “increasingly unsustainable” at the time. 

RI reported in 2018, that the investment case for tobacco appeared to be weakening.

Wilshire’s analysis also showed that CalPERS’ emerging market exclusions, which are based on its emerging market principles, have made $688m since they were introduced in 2008. 

As part of its divestment programme CalPERS also excludes thermal coal and firearms, which have made the pension plan $348m and $3m, respectively, since they were set up.