By Greg Roumeliotis and Ross Kerber
(Reuters) - Gun makers are facing pressure from some major U.S. investors after the Newtown elementary school shooting, with private equity firm Cerberus Capital Management LP announcing it would sell the largest U.S. manufacturer of firearms and major public pension funds reviewing their gun-related investments.
Cerberus said on Tuesday it would sell Freedom Group, whose AR-15-type Bushmaster rifle was used by a 20-year-old gunman to kill 20 children and six staff in Sandy Hook Elementary School in Newtown, Connecticut.
Cerberus' move came after some of its investors had expressed concerns, including the California State Teachers' Retirement System (CalSTRS), which said on Monday that it was reviewing its investment with the private equity firm.
"It is apparent that the Sandy Hook tragedy was a watershed event that has raised the national debate on gun control to an unprecedented level," said Cerberus, which has more than $20 billion under management.
The $150.1 billion New York State Common Retirement Fund is reviewing its investments in firearm manufacturers, a spokesman for New York State Comptroller Thomas DiNapoli said on Tuesday.
New York City's pension funds are also reviewing investments and may sell nearly $18 million worth of stock in four companies that manufacture guns and ammunition, a spokesman said on Tuesday. The city's mayor, Michael Bloomberg, has been a leading advocate for gun control in the U.S.
The city's $128 billion pension funds hold nearly $14 million worth of shares in ammunition maker Olin Corp, $1.7 million in gun maker Smith & Wesson Holding Corp, $2.4 million in gun maker Sturm Ruger & Co Inc and $17,866 worth of stock in Brazilian gun maker Forjas Taurus SA.
Shares of Smith & Wesson fell nearly 10 percent, shares of Sturm Roger fell 7.7 percent, shares of Forjas Taurus fell 3.8 percent and shares of Olin fell 2.1 percent on Tuesday.
It wasn't just public pension funds who were questioning whether they should have investments in gun companies.
King Lip, chief investment officer for San Francisco-based wealth adviser Baker Avenue Asset Management, said has received calls from clients wanting to make sure that the firm did not own or buy shares in gun-makers or gun-related companies.
"This one has especially hit close to home for a lot of people. A lot of our clients have kids or grandkids," said Lip, whose firm has about $800 million in client assets under management. The firm does not own any gun-related stocks.
As outrage grew over the killings in Newtown, some gun retailers pulled rifles off their shelves. Wal-Mart Stores Inc, the world's largest retailer, took down an informational website about semi-automatic Bushmaster rifles.
Dick's Sporting Goods pulled all guns from its store closest to the site of the massacre, and suspended the sale of certain kinds of semi-automatic rifles from its chains nationwide. Cabela's however, continued to advertise the AR-15 type Bushmaster rifles on its website.
California Treasurer Bill Lockyer on Monday asked CalSTRS and the California Public Employees' Retirement System (CalPERS) to account for their investments in gun manufacturers. Lockyer proposed that the state's public pension funds, the largest in the United States, sell their interest in any company that makes guns that are illegal under California's assault weapons ban. California's ban includes the Bushmaster rifle.
"We are not precluding the possibility of extending a divestment move to the retail sector, but right now we are focused on the source, which is the manufacturers," Lockyer's spokesman Tom Dresslar said.
U.S. lawmakers have not approved a major new federal gun law since 1994, and a ban on certain semi-automatic rifles known as assault weapons expired in 2004.
The Newtown killings have led President Barack Obama and some congressional leaders to reconsider what has been a largely hands-off approach to gun control in recent years.
The percentage of Americans favoring tough gun regulations rose significantly after the killings at the Connecticut school, a Reuters/Ipsos poll showed on Monday.
While the latest moves by investors could herald a new chapter in corporate America's stance toward the issue of gun rights, it remains to be seen if they will have lasting effects.
Several investors held firm about investing in gun-related stocks, seeing the debate more as a knee-jerk reaction to a tragedy. Vanguard Group Inc, the largest shareholder in Smith & Wesson, for example, said it was not in a position to meet what it called the "social concerns" of all shareholders.
Vanguard said in a statement it was "deeply saddened by the tragedy" but that most of its shares in Smith & Wesson and Sturm Ruger were held in index funds.
"All these stocks are getting hit, but ironically I think what we'll find is that traditional gun purchases will actually rise," said Timothy Ghriskey, chief investment officer of Solaris Asset Management in New York.
"People are scared, and there's a good slice of America that very much believes they have a right to protect themselves," said Ghriskey, whose firm has a small position in gun retailer Cabela's. Cabela's shares fell 5.9 percent.
A German fund manager, who focuses on "sin" stocks such as firearms, alcohol and gambling, said he was sticking with his recommendation to buy Smith & Wesson stock despite Newtown.
It's a terrible tragedy, he said, "but everyone who changes his investment strategy now should ask himself if he really is surprised. Didn't they read newspapers in the past?"
Still, investor outrage over the shooting was enough for Cerberus to decide to sell Freedom Group.
The firm's decision came late on Monday night, after executives deliberated on the impact of the shooting, according to a person familiar with the matter who spoke on condition of anonymity because the discussions were private.
The private equity firm, which was founded by Stephen Feinberg and William Richter in 1992, also has to be careful not to anger investors at a time it is seeking to raise up to $3.5 billion for a new buyout fund.
Feinberg's father, Martin Feinberg, is also a resident of Newtown, Bloomberg reported on Tuesday, citing an interview with him. Public records show a Martin Feinberg residing in a retirement facility in Newtown.
Cerberus bought firearms maker Bushmaster in 2006 and later merged it with other gun companies to create Freedom Group, which reported net sales of $677 million for the nine months ended September, up from $565 million a year earlier.
Cerberus filed for an initial public offering of Freedom Group in October 2009 but withdrew the registration in April 2011, without offering a reason.
"It's an unusual move by Cerberus but it was a terrible event, so they are responding to some of their investors who are teachers' funds. I'm sure they will be selling it at a low price because now would not be a good time to sell the business," said Steven Kaplan, a University of Chicago finance professor.
(Additional reporting by Martine Geller, Hilary Russ and Ashley Lau in New York, Lisa Baertlein and Peter Henderson in Los Angeles and Dan Burns in Newtown, Connecticut; Editing by Paritosh Bansal, Tiffany Wu and Michael Perry)