We were recently contacted by a magazine about our July article on ‘terror-free” investing.
The first question was how can you distinguish between companies providing “real” aid to the enemy as defined by the U.S. State Department list of terror sponsoring nations, versus companies that just get caught in a “key word search” of SEC filings that name a country on the terror list?
The second question was how can you quantify the degree of involvement with a terror sponsoring state, including what constitutes indirect aid by knowingly working with nations or companies that in fact do provide aid to nations on the terror list?
Two great questions — and we have no idea how to answer either of them. Apparently nobody else does either.
The problem is that Congress continues to mull ways to draft legislation that will define who is on the right side and the wrong side of the issue, and how to define penalties for being on the wrong side of whatever rules they develop.
Our idea is to try something entirely different and, by the way, more democratic than relying on our federal legislators.
Legislators are unfortunately too often burdened by conflicts of interest and more concerned with re-election than on what really makes sense for the country – not because they don’t care, but because they are so busy managing their careers that they do a less than optimal job of managing the country.
Here’s something the government might try if they are going to legislate on terror-free investing. Pass a law that requires every significant investment pool (large corporate, government and union pension plans, university endowments, mutual funds, hedge funds and the like) to develop and PUBLISH their definition of terror-free investing, so that any investor or member of the public can access and read it. Require those pools to manage their investments consistent with their published policy, and provide annual certification to the SEC that they have done so.
The result would be a wide variety of approaches in the beginning, but in this world of the internet and blogs, the dialogue around the published policies would be vigorous. There would be active choices made by all sorts of constituents and stakeholders to the published polices. As a result, the policies would begin to change and over time they would probably converge to some kind of general consensus based on what the American people believe is correct, and not what our hurried, harried and conflicted elected officials think is best.
Unintended Consequences:
Unintended consequences of laws is always a concern. Unfortunately the legislative system is very slow to change and adapt to discovered unintended consequences. Regulation of investing would result in many untoward and unanticipated outcomes. We think a public dialogue resulting in free-market choices relating to terror-free investing is a more sensible and workable approach.
The net public wisdom would deal with unintended consequences as they became apparent in the dialogue or in practice and would adjust accordingly.
Let’s look at a simple hypothetical example of an unintended consequence.
Assume the law says no U.S. company or company doing business in the U.S. can have business relations with any country on the State Department list of terror sponsoring nations, and if they do they will lose their right to do business in the U.S.
With that law, consider two companies. The first company is an Indian IT outsourcing company with substantial operations in or relating to the U.S. The other is a U.S. pharmaceutical distributor with domestic and international sales.
Now assume that the Indian company has no operations in Syria (one of the countries on the terror list), but it operates a Bangalor based computer operations center for Russian construction company building highways in Syria that would be helpful moving military personnel and equipment more efficiently. They might be OK under the law. And now assume the U.S. pharmaceutical distributor has offices in Damascus where they sell insulin for diabetics, AIDS medications, and childhood vaccines. They would not be OK with the law.
We ask you which company in this hypothetical example is doing more to aid terror, the U.S company that is violating the law or the Indian company that is not? Is it possible that the pharmaceutical company is actually working against terrorism by the nature of its operations? The hypothetical law we presented would probably not be seen as helpful in combating terrorism in this instance, but that kind of law and that kind of outcome is possibly what could result from a legislative prescription.
There will be unintended consequences under our suggested approach too, but the public forces at work will evolve a way to solve the problems, whereas a law would likely continue on the books whether or not it continues to make sense or to be fair and reasonable or to be good for our country overall. Laws will exist, be perpetuated and enforced for their own sake. The reason for their creation will be lost in the zeal to enforce them. Our approach, on the other hand, would be organic and develop and adapt appropriately as the world around us changes.
We think relying on the forces of the market and the larger community is a better way to evolve a best solution for terror-free investing than one-time legislation of specific and detailed investment rules by our elected officials.
We think voluntary “terror-free” investing is a good thing to do. After-all we are in a war and investments are one kind of resource and weapon for that war. However, we think using a process like the one we have described is best. The American people in the aggregate have more than enough common sense, patriotism and practical thinking ability to make the right decisions through the process we have outlined.
Index Fund Implications:
Terror-free investing, regardless how it may come about, if it comes about in any policy or legislative form, will have tremendous impact on debt and equity indices, particularly non-U.S. indices and the funds that track them. Consider Vanguard’s FTSE World ex U.S. ETF (VEU), or Barclay’s MSCI Emerging Markets ETF (EEM), or State Street’s SPDR S&P Emerging Middle East & Africa ETF (GAF), just to name one fund from each of three leading ETF sponsors. Those sponsors and the three corresponding leading index providers (MSCI, FTSE and S&P) would have to re-examine the indices and/or the degree to which the funds track the indices to be “terror-free”. The dislocations and disruptions under any set of scenarios would likely be quite something to observe.
Richard Shaw
QVM Group LLC
Disclosure: Author owns VEU
