Very few can argue with the performance of tobacco stocks over the past decade but, as Sebastian Cheek finds, investors are starting to question the sustainability as well as the ethical and cost implications of investing in the crop.
“The world index outperformed tobacco by more than four percentage points. It is not the case that you have to be invested in tobacco if you want a reasonable return.”
James Bevan
For many years tobacco stocks have been a slow-burning mainstay in investors’ portfolios as relatively low-risk and reliable dividend payers. However, the craving for such stocks might be beginning to run out of puff as investors begin to consider not only the ethical implications of investing in tobacco, but also the increasing risk of uncertainty around the long-term sustainability.
In the last six months two UK pension funds have stubbed-out tobacco from their portfolios: in July the London Borough of Croydon switched all its equities (around £350m) to a global ethical investment fund to avoid exposure to tobacco, nuclear power and arms stocks; while elsewhere Suffolk County Council members asked their pension fund committee to stop investing in tobacco companies altogether.
The ethical concern over the effect smoking poses to people’s health has of course been known and debated for many years, but more recently concerns around the sustainability of large global tobacco firms has drifted onto investors’ radars. So not only have many of the UK’s local authorities begun to take a lead role in anti-smoking initiatives, but a stricter approach to tobacco and its health implications is expected to take place in the emerging market nations, which have largely propelled the weed’s growth in recent years.
LIGHT UP OR STUB OUT?
It is difficult to argue with tobacco’s performance, however. In October ‘star’ fund manager Neil Woodford announced an increase in his £3.08bn Woodford Equity Income fund’s weighting in British American Tobacco on “undeserved” weakness of its value. In fact, as at 7 October this year British American Tobacco boasted a total return of 561.01% over 10 years, 119.74% over five, 38.38% over three and 12.74% over one year, according to data from S&P Capital IQ. More impressive still, Pakistan-based Khyber Tobacco has produced a stellar 10-year total return of 5069.44% – a price change of 4341.74%.
For certain funds, the decision to avoid tobacco is an easy one. The £6.1bn Church Commissioners for England Endowment Fund has no direct investments in tobacco stocks as part of its ethical investment policy dictated by the Church’s Ethical Investment Advisory Group (EIAG). The EIAG stipulates that the fund should not hold investments in firms where more than 10% of the business is involved in gambling, alcohol, tobacco or conventional armaments, as well as 3% in pornography and 0% in indiscriminate weapons (cluster bombs, nuclear weapons).
“We use a provider, MSCI ESG Research,” explains Edward Mason, head of responsible investment at the Church Commissioners. “Our total universe is 9000 companies so MSCI screens it against our exclusionary policies and generates a restricted list which we go through and sense check to make sure it is in line with all of our policies and that is passed on to our segregated managers.”
For other funds however, the decision to leave out tobacco is less straightforward. From a legal standpoint, it comes down to whether or not choosing to omit such stocks has a detrimental effect on the financial performance.
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