CCLA’s Bevan however, believes there are ways to replicate tobacco with other stocks that have similar hallmarks. He observes there are common risk factors which drive certain stocks’ returns which most modern risk engines can decompose to around 20 characteristics, including things like foreign currency, emerging markets, high cashflow and low valuation.
“That is the typical scoreboard of a tobacco stock and those factors go in and out of fashion and can certainly be replaced with other stocks that can exhibit those characteristics,” he adds. “It is by no means a perfect science though.”
DO THE MATHS
According to ShareAction director of campaigns and engagement Louise Rouse, it is not as straightforward as simply taking out stock A and replacing it with stock B, which she claims is how many funds incorrectly approach the process.
“It is not appropriate to say tobacco is a great investment and it would be financially detrimental to pull out of it,” she says. “The major problem is in the past people have either not done the maths or they have done it in a crude way, saying ‘if we exclude those companies, how much dividend income would we lose?’ As opposed to saying ‘what alternative portfolio would we construct?’”
Rouse believes funds have tended to take a “blanket approach” to this rather than a fund-specific analysis of what excluding tobacco would mean for the fund, meaning they are shunning ethical issues as a result.
“The test is really whether there is an investable universe which generates the same return, not whether reducing tobacco would make the universe smaller. Up until now it is a refusal to do that analysis and people are hiding behind a blanket saying ‘we can’t take ethical issues into account’.”
SMOLDERING ISSUES
Yet as Bevan observes, it is reasonable to anticipate the controls on smoking behaviours that are so prevalent in the developed world will follow in emerging economies which have been the main areas of growth in recent years . This, he adds, will make it difficult to project profits.
He explains: “When you buy any equity you buy a capitalised value of any future profits and given the scale of those profits is going to be heavily impacted by any successful litigation which in the US is open ended, it is certainly down to legislation and regulation.
“I think more people will see the litigation, regulation and legislation risks to tobacco as very hard to quantify but substantial. So you may buy something cheap but it may turn out to be a very expensive error.”
Opinion clearly remains divided on tobacco. For some, it is a stock that can and should be avoided while still receiving a decent return. Others, including the Church, believe it is actually detrimental – albeit not materially so – to exclude tobacco compared to portfolios which can invest where they wish.
Those who do invest in tobacco and still believe in its story meanwhile, would also do well to question the sustainability of buying stocks in global tobacco producers given the creeping threat of regulation and the increasing popularity of safer electronic alternatives.
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