More and more western companies are doing business with Iran, thanks to a nuclear deal with the West. But Iran is still one of the world’s biggest backers of terrorism. And that sets up a dilemma for some investors: How to buy stocks without inadvertently supporting a state sponsor of terror.
One firm is appealing to those investors with a so-called terror-free investment fund that denies cash to Iran—and its new western business partners.
“Put pressure on governments so they would either fall or change their policies,” said Mark Langerman, co-founder of the Patriot Fund.
Patterned after the divestment campaigns that helped end apartheid in South Africa, the Patriot Fund’s managers claim it’s the only investment fund that guarantees your dollars won’t go to companies who do business with Iran, or other state sponsors of terrorism like Syria, Sudan and even North Korea—though Pyongyang wangled its way off the terror list via a nuclear deal it’s since reneged on.
Critics doubt the fund will make much of a difference, however.
“Virtually the entire world is getting back into the Iranian market—except U.S. businesses,” said Trita Parsi, author of the forthcoming book Losing an Enemy—Obama, Iran and the Triumph of Diplomacy. “That will make any divestment campaign immensely ineffective.”
And so far, there haven’t been many takers for this kind of investment vehicle. The fund is relatively puny at just north of $22 million, the founders said. That’s despite a claim of outperforming the Standard & Poor’s top 500, and earning a five-star rating from Morningstar in just under four years since it was founded in 2012, said co-founder Paul Wigdor.
That’s left the fund’s chiefs wondering if Obama administration critics are willing to put their money where their activism is.
“This makes so much sense to us, but we felt people were reluctant to invest in something that excludes certain companies,” Wigdor said.
That may be starting to change. The fund actually doubled in size over the past year as the lifting of Iran’s nuclear sanctions loomed, said Langerman, whose email signature includes the Mark Twain quote, “Patriotism is supporting your country all the time, and your government when it deserves it.”
“There are 42 U.S. companies doing business in Iran, Syria, Sudan and North Korea,” representing 10 percent of the S&P 500, Langerman said, citing figures from January. He says that’s out of more than 800 companies globally on a growing list.
They won’t know how many new U.S. companies are jumping in, yet.
“Given that the [American and international] terror and human rights sanctions [on Iran] are still in place, it's too early to tell how many additional U.S. companies will start up business with them at this point,” Langerman said. “But if they do, we'll know about it and make sure not to invest in their stock.”
Last year, when Boeing got a humanitarian exemption to sell Iran Air navigation parts, data and replacement parts, the fund dropped the Seattle, Washington-based company.
“The IRGC (Iranian Revolutionary Guard Corps) runs the Iranian economy,” Langerman said. “It’s possible they could repurpose some of these parts of information for military purposes. For instance, Iran was transporting guns to Syria with commercial aircraft.”
How much pain can a $22 million fund inflict? Probably not so much.
But at least 28 U.S. state legislatures have also passed laws banning state investment with companies that do business with state sponsors of terrorism, according to Portland, Me.-based IW Financial, which tracks investments for the Patriot Fund and several states, according to its CEO Samuel Pierce.
“A handful of large oil companies that are going back in,” said the firm’s chief researcher Michael Berry, who tracks everything from a company’s news releases to its SEC filing to see where it’s doing business.
“They legally have to explain what they are doing in Iran or Syria,” Berry explained. “Usually companies will over-report, which is great because I would have never found that information.”
For instance, Berry had to inform a Japanese car-maker that a state IW Financial represented would be divesting from them, because the car company had sold cars to the Iranian embassies in Indonesia and Japan.
“We got pushback from the company, saying we’re not in Iran. I had to write back and say, unfortunately, you sold to the government of Iran, in Iran,” because an embassy is legally considered the sovereign territory of the country it represents, Berry said.
Many of the states are keeping their legislation on the books, despite the recent nuclear deal, including Texas, Arizona, Colorado, Missouri, Florida and Ohio.
There’s no choice for the state of Michigan, because its 2008 divestment law targets terrorism, not nukes, according to Terry Stanton, of the Michigan Department of Treasury.
That means its state retirement fund, worth roughly $60 billion, can’t touch “companies with active business operations in countries that the U.S. Department of State designates as ‘state sponsors of terrorism’—currently Iran, Sudan and Syria,” Stanton wrote in an email to The Daily Beast.
So though Iran may be off the hook for its alleged nuclear weapons program, it still won’t be seeing any of that Michigan cash.
“U.S. investors and companies are prohibited from investing in Iran under congressional sanctions, but are not prohibited from investing in companies that do business with Iran,” said Jim Phillips of the conservative Heritage Foundation in Washington. He said funds like this one would help investors avoid inadvertently assisting state sponsors of terrorism.
“This is not unlike socially responsible investing—like those who invest based on environmental or other considerations,” said Jonathan Schanzer, of the right-leaning Foundation for Defense of Democracies in Washington, D.C. “It probably won’t change the landscape, but it feels good for those who care deeply about the issue.”
Yet critics of such moves say they could hobble U.S. companies and give European and Asian competitors an edge, at a time when a lucrative deal with Iran could spell survival in tough economic markets.
“In this global economic climate, business are going to be most concerned about their bottom line,” said Reva Bhalla, vice president of global analysis at Austin, Texas-based analysis firm Stratfor. That includes her clients.
“Companies are asking about Iran: …where do the sanctions allow some room to maneuver?” she said. “Where there is opportunity, they are going to explore that opportunity.”
"It's not entirely clear that the Islamic Republic of Iran's political establishment wants large investments from U.S. companies,” added Afshin Molavi, senior fellow at Johns Hopkins SAIS, who studies Iran's economy and other global emerging markets. “We know that the pragmatic faction around President Hassan Rouhani and the Foreign Minister Javad Zarif would like to see more investment… but there have been no signals that the powerful Supreme Leader Ayatollah Ali Khamenei or the Revolutionary Guards who have significant business interests.