Authored by Mark Glennon via WirePoints.com,
If you’re going to claim that socially responsible investing is the right way to manage money, you might want to check the stock price before bragging about an example. Not Illinois Treasurer Michael Frerichs. He made the case against himself.
Before we get to that example, which is Facebook, here’s the background, and it’s about much more than Facebook. I wrote last week criticizing Frerichs for compromising his investment goals with political ones, which it turned out he’s doing with stock in a number of companies the state doesn’t don’t even own — stock owned by college savers in 529 programs.
Well, he took to Twitter over the weekend to defend himself, claiming “this simple and successful strategy really is about common sense and has been used for decades in the public and private sector.”
He went on to write this:
“Facebook is reversing direction and taking action to stop
#fakenews. I applaud and thank fellow investors who filed joint shareholder proposals demanding that Facebook work to stop the spread of fake news, election meddling & hate speech.”
He earlier wrote three times to Facebook publicly, implicitly threatening divestiture, as one of Facebook’s “institutional investors” (which he actually isn’t).
He was referring to Facebook’s announcement, made after the close of trading on Thursday, of a new policy to address fake news.
You guessed it: The stock got slammed upon opening the next morning and ended down 4.5%…
In fairness, maybe Facebook’s new policy will work out for shareholders in the long run. Some analysts think so. Nobody knows for sure. Frerichs certainly doesn’t. All we know for certain is the market didn’t like it and an astonishing loss resulted — over $20 billion of shareholder value was wiped out in an instant.
The losers include owners of Illinois 529 college savings accounts for which Frerichs is trustee. If they selected, for example, the large cap growth fund in that program, 4.9% of that money is in Facebook. Even if they selected the S&P 500 index fund, Facebook stock is over 1.8%. Savers in those probably think they are passive index investors, the approach many of us favor. Instead, they deputized Frerichs as social activist on their behalf.
It goes beyond Facebook. Aside from $8 billion of college savings money, Frerichs manages $16 to $20 billion of state and municipal money. He churns the daylights out of it, executing over a trillion dollars of transactions annually (that’s what he told CNBC).
And his social goals permeate his investment philosophy, at least if his website is to be believed.
So, where else are political goals, no, sorry, social goals, influencing Frerichs on the billions he manages that he hasn’t publicized? I asked, but got no answer. I also asked what legal authority he has to include social policy considerations in his investment decisions. And who determines exactly what those considerations are? No answers on those, either.
Frerichs says studies prove a good social agenda gets the best returns, but he’s referring to some studies, which are controversial, on the topic of “ESG investing” (environmental, social and governance). None that I can find encompasses Russian election meddling, fake news or opioid misuse (which is another topic Frerichs has been active on). Sure, companies with honest, transparent governance make better investments. That part of ESG seems quite plausible. But no research could possibly validate blanket authority for a politician to pursue his social issues de jeur.
Most importantly, whether social investing works just isn’t the point. Instead, the point is that nobody signed up for it, especially college savers.
One professional money manager I heard from is Robert Schmansky in Michigan, who is widely published and often criticizes 529 programs in part because they’re subject to just the kind of political games Frerichs is playing. His post on Frerichs, linked here, is particularly good. He told me:
It seems clear that the treasurer is placing social activism with your college funds as the higher priority over increasing its value. His bullying through the pretense of ESG takes political power away from the courts, legislature, executive, voters and those who disagree with him and allows him to threaten almost any company for any reason.
Mr. Frerichs has repeatedly claimed investors won’t be “harmed” by his approach that and he can provide higher returns based on “common sense” and a “simple and successful strategy used for decades.” It’s all political gibberish to provide cover for politics. It doesn’t seem to be about ESG at all. What he’s doing is simply politics to the detriment of the investors and citizens of Illinois.
In other recent news, Illinois Senator Dan Biss, also a candidate for governor, said he thinks Illinois pension funds should start investing along the same lines — by ditching investments in “dirty energy companies.”
It just never ends in Illinois. Please, make it stop.
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