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Investors who quit the tobacco sector haven’t benefited

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Written by: Paloma Kubiak
27/06/2017
It’s nearly a decade since the public smoking ban was implemented in England and while it’s good for your health, investors who stubbed out the sector have missed out on returns.

July 1 marks ten years since the smoking ban in public places in England was implemented. The move was seen by many as the final straw for the tobacco industry.

However, while it beneficial for public health, research shows that investors who quit the sector haven’t benefited. In fact, the tobacco sector has performed four times better than the market since 2007.

The FTSE All Share Tobacco sector has returned 300.56% since 1 July 2007, while the wider market, the FTSE All Share, has returned 70.99%.

And it’s not just a UK phenomenon, according to Fund Calibre analysis of FE Analytics data. THE MSCI ACWI/Tobacco sector returned 433.99% compared with 133.36% for the MSCI World.

Juliet Schooling Latter, research director of Fund Calibre, said: “10 years ago, everything seemed to be going against the sector, with many stocks being priced to zero. Smoking in the developed world is still declining and restrictions are increasing in emerging markets too.

“However, the big threat of litigation has mostly passed and cigarette companies have managed to grow profits – the one thing they do have is pricing power. They’ve also cut costs and hefty advertising budgets, due to the bans and the result is that their cash flow is passed back to shareholders via dividends and buybacks – income that is hard to come by in other sectors right now.”

Three funds that invest in tobacco

Back in 2007, while acknowledging the decline in tobacco consumption, star fund manager, Neil Woodford was quoted as saying “this trend has led tobacco businesses to focus on margin rather than volume, protecting earnings’ growth through a mix of pricing and efficiency gains in manufacturing and distribution.” He continued to rate them highly as investment opportunities.

However, in May, Woodford trimmed his holding in tobacco giant British American Tobacco (BAT) in his equity income fund, favouring housebuilders instead.

The CF Woodford Equity Income fund currently has both BAT and Imperial Brands in the top ten holdings accounting for 12% of the portfolio.

The Fidelity Enhanced Income fund and M&G Global Dividend fund also hold two tobacco stocks in their top 10 holdings accounting for 8.3% and 9.9% of the respective portfolios.

Three funds that have kicked the habit

In May last year, AXA announced it would cease to invest in tobacco. It said there were conflicts of interest with its role as an insurance business. As a consequence, AXA Framlington UK Select Opportunities fund no longer invests in the sector.

Other funds have screened out tobacco companies for many years on ethical grounds. Edentree Amity UK fund is an example. It screens out any company where production of tobacco contributes to 10% or more of pre-tax profits or turnover.

Standard Life Investments UK Ethical fund is another example and it eliminates the whole sector from its investment universe.

Fund Calibre notes that all three funds have comfortably beaten the FTSE All Share in the past 10 years.

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