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A visitor tests a Smith & Wesson gun model M&P9, 9 millimetre, at the MILIPOL International State Security Exhibition in Paris October 9, 2007.© Regis Duvignau/Reuters

After California State Teachers' Retirement System found out the weapon used in the mass killing at Sandy Hook Elementary School in Newtown, Conn., on Friday was made by a company they were invested in, they began reconsidering their stakes in gun makers.

CalSTRS invests in U.S. private equity firm Cerberus Capital Management, which owns Freedom Group, the largest gun maker in North America. Bowing to investor pressure, Cerberus quickly decided to sell its 94 per cent stake in Freedom.

Other investors sold gun stocks on Tuesday. Prices on Smith & Wesson Holding Corp. and Sturm Ruger & Co. Inc. dropped nearly 20 per cent the day after the Sandy Hook massacre, although they have since started to rebound.

But what about Canadian companies that invest in gun makers?

Due to index investing, many large Canadian institutional investors appear in the list of holders of Smith & Wesson and Sturm Ruger. The asset management arms of Royal Bank of Canada, Manulife Financial Corp. and AGF Management Ltd. all have small stakes in both companies, according to Bloomberg data.

Bank of Montreal also owns a small stake in Sturm Ruger (a 0.13 per cent share worth about $25,000) as part of a model based product that screens and ranks 1,200 U.S. stocks for six factors. The stocks change frequently and Sturm Ruger has only been in the portfolio since June. "On a monthly basis, the portfolio is re-adjusted based on changes in ranking," said Paul Deegan, vice-president of government and public relations, in a statement. "Discretionary changes to the model are not permitted."

For investors that buy an index, it's almost impossible to steer clear of companies that find themselves in headlines for the wrong reasons. Both of the aforementioned firearms companies appear in dozens of major indexes. For fund managers, avoiding these stocks can either be impractical (all their competitors invest in them) or too expensive.

U.S investment management company Vanguard Group Inc., which owns the largest share of Smith & Wesson at a little over 6 per cent, said in a statement that its goal to maximize shareholder returns would be difficult if not impossible to achieve if it also had to consider the social concerns of all its shareholders. The company said "with $2-trillion in assets under management, our funds are the largest holder in many companies. We own at least a small stake in nearly every publicly traded company in the country."

For those who aren't satisfied with that explanation, there's always Vanguard's FTSE Social Index Fund, which screens stocks for a variety of social, human rights, and environmental behaviours.

Leo de Bever, chief executive of Alberta Investment Management Corp., made the same case for his company's stake in Sturm Ruger – just 0.05 per cent. He said that because the investment is part of an index the company is investing in, it's too expensive to avoid it. But AIMCo, which invests money on behalf of pension funds and the Alberta government, isn't actively invested in any so-called sin stocks. "We don't have any active positions in anything of that nature," he said.

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