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UC Regents Urge Delay on Tobacco Stocks

Funds: One faction of the board opposes the investment as socially irresponsible. The other says it's needed to maximize financial returns.


Postponing official action, the UC Board of Regents on Wednesday informally instructed the university staff to hold off on buying $55 million in tobacco stocks until it can vote on the issue in January.

That was the only consensus reached by the deeply divided board after more than an hour of closed-door debate over how to reallocate the university's $52.9-billion portfolio.

Lt. Gov. Cruz Bustamante said he expects spirited debate to continue at the regents' next meeting in January. "I believe," he said, "it will be a close vote."

One faction argued that investing in tobacco stocks is socially irresponsible, morally troubling and unneeded in a balanced investment portfolio. The other side maintained that eliminating one type of stock departs from the university's strategy of maximizing investment returns with minimal administrative costs.

"It's hypocritical for the University of California to take $22 million in Proposition 99 [tax dollars for tobacco-related health research] and then invest $55 million in tobacco funds," said Bustamante, who is a regent by virtue of his office. "We shouldn't do it."

As it stands now, the university has no tobacco stocks in its massive portfolio because UC's former treasurer, Patricia Small, made a practice of excluding them.

Small resigned under pressure last fall after outside consultants criticized her investment strategy as too heavily concentrated, in fewer than 100 major stocks.

To diversify UC investments, the Board of Regents this summer instructed staff members to buy into a Russell 3000 index fund, which covers 3,000 big stocks, and a Morgan Stanley index fund. Both of the funds include tobacco stocks, such as Philip Morris and R.J. Reynolds.

Although tobacco accounts for only 0.5% of the funds' holdings, it would work out to about $55 million of UC's endowment and pension funds.

That has rankled some of the 136,000 current and retired employees covered by UC's pension system. They cite the trend of other institutions that have decided against supporting tobacco interests with investments.

The California Public Employees' Retirement System last month, for instance, decided to divest itself of about $525 million in stock it holds in tobacco companies in similar passively managed portfolios. The pension for California State University employees is part of the CalPERS retirement system.

Other institutions, including Harvard, Stanford and the universities of Michigan, Washington and Wisconsin, have decided to shun tobacco stocks.

"We find it particularly ironic that the university would consider investing in tobacco, given that so many UC faculty have been in the vanguard of tobacco control research," wrote a dozen medical professors from UC San Francisco.

The professors noted that the university administers the state's Tobacco-Related Diseases Research Program and that the university has been sued twice by the tobacco industry in an effort to suppress academic investigation into industry practices.

"This is an industry that stands for deception and lies and kills a half-million people a year, so it's an embarrassment to have our pension funds investing in them," said Stanton A. Glantz, a UC San Francisco professor of medicine and author of "Tobacco War," about the politics of tobacco.

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