Morningstar: Gun Stocks in Fund Portfolios, Revisited

Here are some steps you can take to analyze your exposure to gun manufacturers.

Jon Hale, Ph.D., CFA, Aug 8, 2019

In the aftermath of the Parkland mass shooting last year, many investors expressed concern about owning gun manufacturers in their mutual fund holdings, which led me to write this piece on finding gun stocks in fund portfolios.

Since then, we’ve had on ongoing string of mass shootings in Santa Fe, TX; Pittsburgh, PA; Thousand Oaks, CA; Aurora, IL; and Virginia Beach, VA. And then in the space of eight days: Gilroy, CA; El Paso, TX; and Dayton, Ohio.

As the epidemic of gun violence in the United States continues, pressure is building for action to be taken to address it. If you are concerned about gun violence and are a fund investor, you may want to know whether you are invested in gun stocks. Or not: It’s a reasonable position to be concerned about the issue and want to see something done to address it, but not to be worried about guns in the context of your investments. That view may depend on the extent of your exposure to guns.

Here are some steps you can take to analyze your exposure to gun makers and, if warranted, to take action to mitigate that exposure or eliminate it altogether.

What public companies in the U.S. manufacture guns?
A year ago, there were three. Today there are two: American Outdoor Brands (AOBC) and Sturm Ruger (RGR). With market capitalizations of $465 million and $765 million, respectively, the two are considered small-cap stocks. In July, Vista Outdoor (VSTO) sold off its Savage Arms gun manufacturing division to private buyers, although Vista Outdoor remains in the ammunition manufacturing business.

Do you own either gun maker in your fund portfolios?
If you have an investment in a fund that includes small U.S. companies in its portfolio, the answer is probably yes. That’s because about two out of every three dollars invested in U.S. small-cap stock funds are in indexed portfolios, which own the entire market of small-cap stocks. That includes American Outdoor Brands and Sturm Ruger. In addition to small-cap index funds, those that are “total market” or “extended market” funds also include the two gun makers.

If you get small-cap exposure via an actively managed fund, chances are you are not exposed to either stock. Out of 500 actively managed funds in the small-blend, small-growth, and small-value Morningstar Categories, only 24 have positions in American Outdoor Brands and 32 in Sturm Ruger.

Exhibit 1 shows the mutual funds that hold the largest number of shares in American Outdoor Brands and Sturm Ruger. Even though Sturm Ruger is only a 0.3% position in iShares Core S&P Small-Cap ETF (IJR), the fund is so large that a tiny position in a small company equates to the fund holding 6% of Sturm Ruger’s outstanding stock.

If you do have exposure to either gun maker, is it material to your investment returns?
Not likely. If you hold a small-cap index fund, American Outdoor and Sturm Ruger take up only about 0.05% of assets combined, hardly enough to materially affect performance one way or another.

To illustrate, let’s take a look at how these two stocks would have affected returns of the Vanguard Small-Cap Index fund over the last three years. The fund posted an 11.01% three-year annualized gain through July 2019. This was a terrible period for both AOBC and RGR, which lost 31.08% and 3.86% on an annualized basis, respectively. By my estimate, those losses reduced the index fund’s returns by barely 0.01% on an annualized basis.

Given the de minimus impact on investment returns, most small-cap index investors can rest easy knowing they are not invested in guns to a degree that it affects their investment return.

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