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Guest Comment: Is Investing In Tobacco Such A Bad Thing?

Garry White

Charles Stanley

16 December 2013

The UK charity effort, Comic Relief, has come under criticism for investing in tobacco shares. However, according to Garry White, chief investment commentator at the London-based investment management firm , these companies offered the best returns in the market and therefore helped the donated money, go as far as possible. The editors of this publication greatly value these insights but as ever, do not necessarily share all the opinions contained in the piece.

Millions of pounds donated to the Comic Relief charity have been invested in funds that own shares in tobacco, alcohol and arms companies, an investigation by BBC current affairs show Panorama has claimed. But is this really a major scandal or are the charity’s money managers in the right?

The aim of Comic Relief is to raise as much money as it can for its good causes which it uses to “tackle the root causes of poverty and social injustice”. It does not spend all of the cash raised through its appeals at once – and some of it has to be invested to ensure that its value is not eaten away by inflation.

Ethical investing is something that is difficult to define because individual people tend to have different views on what is right and wrong. It is therefore almost impossible for any individual to outsource their own unique morals to any investment company.

However, the most significant problem with ethical investing is that it is the “unethical” sectors that tend to offer the best returns over time – especially the “sin” investments of tobacco, alcohol and gambling.

Let’s take tobacco as an example. 

Recent research from Hardman & Co revealed that the best investment return of any sector in the UK between 2000 and 2013 came from tobacco investments. This was then followed by alcohol, another questionable investment for some.

Hardman’s research showed that £1 invested in tobacco in 2010 would now be worth £7.78. A similar amount invested in the second-best returning sector of alcoholic beverages would have returned £4.58. The third-best return would have been in the arguably environmentally unfriendly chemicals sector.

The returns over the last few years seen in UK tobacco is not a new or UK phenomenon: It is long-term and global. The MSCI World Tobacco Index had the highest return out of 67 groupings in the MSCI World Index in the 10 years to 2011. Not investing in tobacco would therefore be likely to reduce the returns of any investment strategy.

BAE Systems is another company in which Comic Relief has indirectly invested. As a way to preserve capital it has also been a good share to own. Indeed, the BAE’s current yield of about 5pc is significantly better than those available from a bank account.

Also, it is arguable that ethical funds are simply a marketing ploy by canny fund management companies. If you scan the lists of the top holdings of some of these “ethical” funds they do not seem much different to ordinary funds.

For example, the top three holdings in the UK’s oldest “ethical” fund, F&C Stewardship Growth, are Vodafone, HSBC and BG Group. It is entirely reasonable to argue that there is nothing ethical about these investments in some way. For example, Vodafone promotes the use of smart phones which contain trace metals mined from developing counties. There have also been concerns about factories in China where such handsets are assembled. That’s before controversy surrounding the company over tax is considered. 

Comic Relief said it uses its funds to "deliver the greatest benefits to the most vulnerable people". It is unlikely to do this by omitting to invest in some of the best returning sectors offered by the market such as tobacco, oil and defence, thus reducing the amount of money it has to invest in its projects.

The popular charity did not invest directly in these companies. These investments were carried out by third parties that are professional money managers. If the charity was to perform due diligence on each of the investments to see if they met some stringent ethical guidelines then costs to the charity would increase significantly.

A petition has now been launched to try and force Comic Relief to invest “ethically”. If it succeeds, the charity is likely to see a fall in future returns because it will have to invest by omission and not consider companies that offer the best returns in the market. This is unlikely to be a good thing for the valuable work that Comic Relief performs.