The Apple Pie Mutual Fund

Louisiana may become the first state to push its retirement savings into a self-styled 'terror-free index.' While patriotic, money managers warn the financial losses could outweigh the moral message.



When pushed for an example of Louisiana's retirement funds being invested in businesses linked to "prohibited nations" -- i.e., countries officially cut off from American trade -- Chris Holton weaves a sordid tale about the Paris-based Total S.A., one of the world's largest oil companies that once developed oil fields for Saddam Hussein and regimes in Libya. The company has a global but questionable reach, doing business in more than 130 countries, of which more than a few are sworn enemies of the U.S. By way of explanation, the company has a longstanding policy of not commenting on "political" situations.

Most recently, Total S.A.'s work in Iran has been criticized by conservative think tanks like the Washington-based Center for Security Policy, where Holton is vice-president of administration and marketing. Sanctions against Iran were established in 1996 by then-President Bill Clinton as that country pursued "weapons of mass destruction." Today, Iran remains on the prohibited nations list alongside North Korea, Sudan and Syria. Libya was removed from the list in 2004 when it agreed to abandon its own pursuit of chemical, biological and nuclear weapons.

So what does all of this foreign intrigue have to do with Louisiana's public pension funds, which are bolstered by payments from firemen, teachers, state workers and other public employees?

For starters, some of those retirement dollars are tied up in Total S.A. and similar companies, Holton says. And while the guilt-by-association argument might not carry much weight here, the managers of Louisiana's public retirement funds could right what Holton considers a wrong by dropping investments in those companies from their portfolios.

"They used to call this trading with the enemy. Now it's just called business," he says, "but it's still wrong."

Holton's moral outcry was heard by state Rep. Pete Schneider, a Slidell Republican who chairs the House Retirement Committee. His recent legislation, debated earlier this year, allows 13 of Louisiana's pension funds to pull their investments in companies connected to terrorism or linked to a prohibited nation. The measure passed unanimously in the face of no organized opposition. Gov. Kathleen Blanco recently signed it into law, and various investment strategies are now being devised in response.

On the surface, Schneider's bumper-sticker bill is a duplicate of high-profile legislation recently adopted by lawmakers in Florida and Missouri. Ohio's pension funds adopted the policy voluntarily, and similar legislative initiatives are pending in 29 other states. Holton, a Mandeville native, is involved in all those efforts.

Louisiana's version, however, goes much farther than the others. It calls for the creation of a special terror-free index -- possibly the missing link in the current divestiture trend. Other states, as well as private investors, could get in on the index, Holton says, adding that it would complement the relatively limited menu of terror-free and socially aware mutual funds already on the market.

Holton and Schneider say there are Wall Street companies willing to generate Louisiana's index free of charge -- as long as there's $200 million to $300 million in investments ready to buy in. The Louisiana Sheriffs' Pension and Relief Fund has pledged $50 million already, and others are devising ways to participate. The 13 retirement systems targeted by the bill have about $32 billion in combined assets. All but one has international investments, Schneider adds, and several portfolios have as much as 24 percent invested overseas.

Schneider told lawmakers during the recent legislative session that state governments could play a large, if indirect, role in U.S. policy. "If we own the stocks, then we can make a difference in mandating what those companies can do with their assets," he says. "We can do this as a collective group, and then go outside of Louisiana, anywhere in the country, and bring in other pension systems."

David Sobek, a political science professor at Louisiana State University with research interests in international economics, says this legislative trend has spurred a series of unanswered political questions over just how far state governments should go in trying to shape U.S. policy while managing public pension funds. "It could potentially make it hard for foreign governments to negotiate trade, especially when they don't have confidence in the U.S. controlling its states," Sobek says. "This is also very telling in that what matters globally also matters locally."

On the financial side, the legislation allows fund managers to put pressure on questionable companies directly and to weed out the bad actors. But that freedom is not necessarily welcome. "Money managers are running screaming from this," says S. Derby Gisclair, COO of the New Orleans-based Equitas Capital Advisors, a firm with extensive experience in pension funds that presently oversees $3.2 billion in public and private Louisiana assets.

Admittedly, trying to discern who does business with whom on a daily basis won't be easy. "We'll just back away from the business," Gisclair says. "We're not even replying to RFPs. Anyone who says they can do this and make it perform doesn't know what they're talking about. This puts Louisiana several steps back."

Peter F. Ricchiuti, assistant dean of the A.B. Freeman School of Business at Tulane University, says the legislation could also force some of Louisiana's best-performing investments -- energy stocks in particular -- out of public portfolios that badly need financial security. Unfortunately, this has become a "soap-box issue" that could potentially do much more harm than originally intended, Ricchiuti says. "The retirement systems are already facing so much trouble with unfunded accrued liability (read: overwhelming debt), and I don't think handcuffing them will be any help," says Ricchiuti, who formerly managed the Burkenroad Mutual Fund program and presently serves as a director at Amedisys, a publicly traded home health care company in Baton Rouge.

In response, Holton points to Missouri, where international funds have outpaced the benchmark index by 3.9 percent since the state went terror-free. He also cites a study by the Securities and Exchange Commission that outlines the losses investors are exposed to by bedding down with companies linked to prohibited nations. "What we're trying to do here is not a threat to retirement savings," Holton says. "[Opponents] have no empirical evidence to back up their arguments."

As for enforcement worries, the legislation calls for "best practices" from stock managers, investors and other sources. Some Louisiana pension funds are even considering building their own terror-free indexes in-house. But despite all of the challenges, Schneider says it's time for the state to take a stand and make an impact. "It sends a message to the rest of the country and world that what we want to do is combat terrorism right here in Louisiana," he says.

Jeremy Alford can be reached at

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