Tobacco delivers quadruple returns as funds divest

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The FTSE tobacco index has delivered returns four times higher than the mainstream index over the last 10 years as major asset managers divest from the sin stock.

Since 2007, the FTSE All Share Tobacco has returned 300.6 per cent while the FTSE All Share has delivered 71 per cent. Looking globally, the MSCI ACWI/Tobacco sector returned 434 per cent compared with 133.4 per cent for the MSCI World.

The figures coincide with 10 years since smoking was banned in public places in England following similar bans in Scotland, Wales and Northern Ireland.

FundCalibre research director Juliet Schooling Latter says everything seemed to be going against the sector at the time, 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 no 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.”

Last week Aviva announced it is in the process of divesting £1bn from tobacco, following in the footsteps of French rival Axa, which divested from the sector last year. Third party investors would not be impacted.

Woodford Equity Income, Fidelity Enhanced Income and M&G Global Dividend are among funds that favour tobacco holding 12 per cent, 8.3 per cent and 9.9 per cent respectively, Latter notes.

Woodford recently trimmed his holding in British American Tobacco to fund his contrarian bet on the UK economy, although he noted at the time that despite its high valuation it is still a high quality, dependable growth business.

However, Latter says investors can choose funds that avoid tobacco on ethical grounds.

She notes that Edentree Amity UK does not invest in any company that derives more than 10 per cent of pre-tax profits or turnover from tobacco, while the Standard Life Investments UK Ethical fund eliminates the whole sector from its universe.

The Axa Framlington UK Select Opportunities also no longer invests in the sector.

Latter notes all three funds have “comfortably beaten” the FTSE All Share over the last decade.