Should mutual funds be backing off on holdings in gun and armament makers?

In the aftermath of the "Batman" movie shootings in Aurora, Colo., where 12 people died, and the elementary school massacre in Newtown, Conn., where 20 children and six adult staff members perished, officials both in and outside of the mutual fund industry have taken up arms to block investments in firearm manufacturers.

In addition, public officials such as Chicago Mayor Rahm Emanuel have launched their own divestment campaigns against mutual funds.

On Jan. 30, Emanuel wrote letters to six fund companies-BlackRock, Capital World Investments,Vanguard Group, Allianz Global Investors, Dimensional Fund Advisors and James Investment Research urging them to withdraw their investments in firearms manufacturers.

According to Emanuel, BlackRock has $39.4 million invested in Smith & Wesson Holding Corporation stock and $43.7 million in firearm maker Sturm Ruger & Co. Allianz and James hold $67.9 million and $40.4 million in Sturm Ruger stock, respectively. Other mutual funds that hold gun stock include Bridgeway Small-Cap Growth and Ultra Small Company funds and Olstein Strategic Opportunities and All Cap Value funds, according to Morningstar.

Socially responsible funds, in particular, argue that when it comes to major social and other issues, financial investments and government policy cannot be viewed separately.

"When companies actually do things in the real world, they're not just numbers on the page," said managing director Adam Kanzer of Domini Social Investments, a Providence, Rhode Island-based socially responsible investment shop.

That concept forms the basis of socially responsible investment funds, which come in two varieties: traditional funds, which tend to omit specific sectors like alcohol, tobacco, gaming, nuclear power and defense; and environmental social governance funds, which invest in companies that possess strong environmental records, good corporate governance and above-average safety records.

Socially responsible funds typically respond in one or more ways to current events, said executive director Laura Berry of the Interfaith Center on Corporate Responsibility (ICCR), a coalition of actively managed fund shareowners in this space.

In the case of firearms, investment groups often choose to avoid weapons manufacturers altogether. Others who invest in retailers that sell firearms and ammunition will actively engage with retailers, educating them on the impact of the products they're selling, Berry said.

Domini's Kanzer, for instance, has written extensively on the topic of how investments in gun companies may have contributed to the recent fatal shootings of 2012. Domini's founder, CEOAmy Domini, is, incidentally, an alumnus of the Sandy Hook Elementary School, where the December 14 shootings took place.

"You have an obligation to think about what is the company making and what are the pressures of society and shareholders driving them to do," Kanzer said.

The Praxis Mutual Funds, a family of faith-based mutual funds based in Goshen, Ind. similarly emphasize the need to recognize the role of corporate influence on governmental policy, according to director of stewardship investing Mark Regier. Responsible funds should not simply avoid investments in companies they screen against, but engage shareholders and companies in conversation to help them reflect social values in the investment and business practices. Reflecting the values of a fund, such as tightening gun control laws in an investment portfolio and, simultaneously, achieving a return are a fund manager's fiduciary duty, Regier said.

"It's not about just picking a value. It has to be done in a way that recognizes that people invest in us not only to prove a point but also to provide for their families," said Reiger.

Boston-based separately managed accounts firm Zevin Asset Management, which screens companies for both socially responsible investing standards and environmental, safety and governance factors, leans both ways, said Sonia Kowal, director of socially responsible investing.

"When we have an inkling something is not right, we're going to steer very clear of them," she said. "Our view is that we will screen out and not invest in companies that will engage in intrinsically destructive companies, as these are companies that can only be changed by policy." In the case of retailing giant Walmart, the nation's largest seller of firearms, Kowal said that "a better approach is to engage them in dialogue."

Not all mutual funds are shying away from gunmakers. In fact, some mainstream mutual fund firms have responded to Emanuel's request with a polite, firm "no."

"Firearm safety and access is a government policy issue, not an investment issue," according to a statement from the Vanguard Group, which is among the largest shareholders of both Smith & Wesson and Sturm Ruger, in an e-mailed statement. "We do not believe that mutual funds are the best agents for changing the laws that govern our society."

The firm argued that "as one of the largest investment firms in the world" - the Malvern, Penn.-based fund giant currently manages nearly $2.1 trillion in assets - it owns shares in "nearly every publicly traded U.S. company," including the two gun companies.

Furthermore, the bulk of these investments lie in "about a dozen" index funds based on target benchmarks developed by third-party companies, it said. The firm added that investors with social investing goals should themselves be aware of alternative investment options including Vanguard mutual funds that do not invest in gun manufacturers and Vanguard's own FTSE Social Index Fund.

Chuck Freadhoff, director of media relations for The Capital Group Companies, said that the Los Angeles-based firm "takes social issues into account as part of the investment process," but said it prioritizes the ability to "select the most appropriate investment for the funds we manage."

Besides defense companies, roughly $61.6 million of Sturm Ruger stock is held in one fund of the American Funds Insurance Series, which serve as underlying investment options for variable annuity contracts and insurance policies, Freadhoff said.

A DFA statement issued on Feb. 27 said it would consider Emanuel's request since "companies with good corporate governance should listen to and consider their shareholders' viewpoints." Dimensional holds $17.3 million in Smith & Wesson, according to Emanuel's letter.