Retiring on Tobacco

Should Wisconsin turn over a new leaf when it comes to investing in tobacco companies?

Illustration by Taylor Callery.
Illustration by Taylor Callery.
The Wisconsin Retirement System is the ninth-largest public pension fund in the U.S. and the 25th-largest of any kind. Managed by the State of Wisconsin Investment Board, it encompasses about $98 billion – the sum total of about 590,000 state and local government retirement accounts (including all of Milwaukee’s public school teachers, but none of its city or county employees). The WRS is often lauded as a paragon of good management, as it’s one of the few fully funded state pension funds in the country.

But buried in its $50 billion worth of stock holdings was some $621 million in tobacco company stocks, according to data released by the Investment Board in July (and dating to Dec. 31, 2014).

Shares included such heavy hitters as Philip Morris International, British American Tobacco and Lorillard Inc. (a $27 million position that has since been sold). The holdings support a who’s who of cigarette brands, from Marlboro to Camel, Lucky Strike, Parliament, Kool, and Newport, along with a few you may not have heard of, including France’s Gauloises, which have dangled from many a French film star’s lips. Other companies invested in by the board make cigars, cigar accessories, chewing tobacco and “snus,” the moist variation of snuff.

Tobacco is still big business. Since World War II, the industry has held its position as one of the most consistently profitable in the world, even as the percentage of smoking Americans has fallen from about 44 percent in 1949 to approximately 20 percent in recent years, according to Gallup. “They’re still making money hand over fist,” says Chris Bostic, deputy director of Action on Smoking and Health, a large anti-smoking group based in Washington, D.C. ASH is in the early stages of a campaign asking universities and states to fully “divest from tobacco,” divest being the opposite of “invest” and something of a catchword. While past divestment campaigns, including those against South African companies during the fight against apartheid, have tended to have little financial impact on their targets, they have a way of drawing attention to their causes. Seven states and several foreign countries (such as Norway) have divested from tobacco since the 1990s.

*Fair value as of Dec. 31, 2014.
*Fair value as of Dec. 31, 2014.

“There shouldn’t be this perverse incentive to root for the tobacco industry,” says Bostic, whose group describes cigarettes as “the only consumer product that, when used exactly as the manufacturer intends, causes death and disease.” The state Investment Board’s position in tobacco, as of Dec. 31, vastly outweighed its position in beer and liquor stocks, which only totaled about $176 million. Ideologically, you might describe its approach to tobacco investing as free-market realism. “We do consider how businesses can be impacted based on attitude and trends,” says spokeswoman Vicki Hearing, meaning if smoking declined in popularity, so might the board’s position in tobacco. Otherwise, its fund managers make decisions based on their fiduciary duty to retirees, not socially motivated divestment campaigns. “If you cut out fossil fuels and tobacco, you’re starting to pull out the types of things you can make a decision about,” she says. “Where do you draw the line?”

In recent years, Arizona, Iowa and Oregon have all passed laws barring their state pension funds from investing in Iran or countries “designated as sponsors of terror,” according to the National Association of State Retirement Administrators. Bostic says targeting tobacco stocks the same way, in Wisconsin, would have to be done gradually, since selling off the retirement system’s 12.3 million shares too quickly could lower prices “while the state still holds stock” – just the sort of decline that groups like ASH are hoping for.

‘Retiring on Tobacco’ appears in the September 2015 issue of Milwaukee Magazine.

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Matt has written for Milwaukee Magazine since 2006, when he was a lowly intern. Since then, he’s held the posts of assistant news editor and, most recently, senior editor. He’s lived in South Carolina, Tennessee, Connecticut, Iowa, and Indiana but mostly in Wisconsin. He wants to do more fishing but has a hard time finding worms. For the magazine, Matt has written about city government, schools, religion, coffee roasters and Congress.