(Repeats Tuesday item)
* Fund firms resist ditching stocks, debt after Axa exit
* Managers cite duty to make money, not exercise moral
* Anti-tobacco campaigners call for benchmark switches
* U.N. treaty seeks to cut global consumption by 30 pct by
* GRAPHIC - Tobacco stocks' performance tmsnrt.rs/2c5QwA6
By Sinead Cruise and Simon Jessop
LONDON, Sept 6 Eighteen months after the launch
of a global campaign to persuade money managers to black-list
tobacco stocks, just one major European investor has answered
the rallying cry.
Others are largely sticking with an industry that remains
lucrative despite tightening restrictions on smoking and a
series of lawsuits in the United States, saying they are
duty-bound to seek the best returns for their clients.
Even a United Nations-backed treaty which aims to cut
tobacco consumption by almost a third within 10 years is failing
to deter many investors in the likes of Philip Morris
International, British American Tobacco, Japan
Tobacco and Imperial Brands.
"We are firmly of the view that profits, cash and dividends
from tobacco stocks have many years of strong growth ahead,"
said Stephen Lamacraft, fund manager at Woodford Investment
Still, the Global Taskforce for Tobacco Free Portfolios,
backed by the Union for International Cancer Control, has scored
one big victory since it began campaigning in March 2015 for
financial institutions and pension funds to divest an estimated
$60 billion from the industry.
In May this year, French insurer and fund manager Axa agreed
to ditch its tobacco holdings, becoming the first major European
investor to sign up to the campaign, although others had already
opted out of tobacco before it was launched.
Axa said its role as a health insurer meant it could no
longer justify investing in something that had such a "tragic"
impact on public health. At the time it held 200 million euros
in tobacco stocks and about 1.6 billion euros ($1.8 billion) in
bonds issued by the cigarette makers.
Even then, the process is lengthy. Axa has almost completed
selling the shares but will keep the bonds until they mature.
Only in 2027 will the bulk - 97 percent - be off its books.
Many other investors appear reluctant to discuss the issue.
Reuters contacted 24 large fund managers which hold tobacco
stocks, and all but seven declined comment or did not respond.
According to the World Health Organization (WHO), tobacco
kills around 6 million people each year, including 600,000
non-smokers exposed to second-hand smoke. Many of the passive
victims are children.
The Taskforce's global Project Manager, Melbourne-based
Bronwyn King, has persuaded more than 30 Australian
superannuation funds to ditch tobacco but the campaign faces a
tougher challenge in Europe.
The same goes for the United States, where one influential
investor, the California Public Employees' Retirement System is
reviewing a 16-year investment ban on tobacco after a study
estimated the policy had cost it $2 billion to $3 billion in
Campaigners reject the fiduciary duty argument - that funds
must seek the best returns for their clients. They note that
about 180 countries have signed up to the WHO's Framework
Convention on Tobacco Control, which aims to cut consumption by
30 percent by 2025 through new regulations and tax increases
that will make tobacco less affordable.
Currently just a handful of countries fully comply with the
treaty, implying a significant future hit to the value of
tobacco stocks when others follow suit.
"Over the longer term, (the treaty) has to decrease the
validity of the product - you will have fewer people wanting or
being able to buy tobacco and that has to impact the investment
appeal of the producers," said Rachel Melsom, UK director of
campaign group Tobacco Free Portfolios.
Philip Morris International, Imperial Brands and BAT
declined to comment. Japan Tobacco did not immediately respond
to a request for comment.
ONE BILLION SMOKERS
The tobacco industry sells about 5.6 trillion cigarettes a
year to the world's 1 billion smokers, many of whom live in low
and middle-income countries. Here consumption is expected to
keep rising due to growing populations and income.
More people are quitting smoking or cutting down in
developed countries, but overall revenue and profit margins are
consistently buoyed by companies' ability to raise prices.
International players have also largely shielded themselves
from direct exposure to the U.S. market, which has a history of
litigation against big tobacco companies. For instance, Philip
Morris has been separated from Altria, which sells its
Marlboro cigarettes in the United States.
In the 10 years to 2015 - a period that included the crisis
of 2008-09 - the MSCI World Tobacco Index rose 10.4 percent
compared with just 2.64 percent on the MSCI World Index.
All this appeals to many fund managers. For instance, the
9.2 billion pound ($12.3 billion) CF Woodford Equity Income Fund
managed by veteran fund manager Neil Woodford holds BAT and
Imperial Brands - makers of the Lucky Strike and Gauloises
brands respectively - among its top 10 positions.
"(Tobacco's) dependable dividends are increasingly
highly-prized and still represent attractive yields," said
The dividend argument doesn't always hold water.
London-listed British American and Imperial reported dividend
yields of 3.2 percent and 3.78 percent respectively, compared
with an average 4.06 percent across the FTSE 100 index. New-York
listed Philip Morris International has a 4.01 percent dividend
Louise Dudley, portfolio manager at Hermes Investment, said
she has barred tobacco stocks because she believes returns are
unsustainable in the long-term.
"The industry has faced and continues to face increased
regulation and consumers are becoming more aware of the health
impacts of tobacco. The general trend is towards more healthy
lifestyles. Tobacco products don't tend to fit within that."
A spokeswoman for Standard Life Investments (SLI) said its
decision not to black-list tobacco reflected the needs and views
of its clients. But Melsom said ordinary savers didn't always
know where their money was being invested.
"If every individual who has a pension fund could see their
level of investment in tobacco and the costs associated with
that, I think that would make a difference," she said.
Client attitudes towards tobacco varied widely, according to
Iain Richards, Head of Responsible Investment, EMEA, at Columbia
Threadneedle Investments. "We are satisfied that, for our
mainstream funds, our approach is measured, works well and
serves our clients' best interests. We therefore don't intend to
adopt a blanket divestment policy on tobacco," he said.
Amra Balic, Head of BlackRock's EMEA Investment Stewardship
team, said her firm did not make social, ethical or
environmental values judgments on behalf of clients, and company
engagement was critical in addressing the health and social
risks of tobacco.
"I don't think that we will end up, by divestment, in a
world where tobacco won't exist, therefore engagement by
responsible investors is key to holding companies to account on
ESG (environmental, social and governance) issues".
A spokeswoman for M&G, another investor in the sector, said
it regularly discussed environmental, social and ethical risks
with tobacco company management, and encouraged improvements
where it considered performance to be poor.
SLI, BlackRock, M&G, Columbia Threadneedle, Handelsbanken
and Aberdeen Asset Management all said clients could bypass
tobacco with their socially responsible investment (SRI) funds.
Handelsbanken said about 40 percent of the assets that it
manages are in funds that exclude tobacco investments.
The performance of SRI funds, which often also avoid
industries such as armaments and alcohol, is typically
benchmarked against indexes that exclude tobacco firms.
But mainstream funds are benchmarked against indexes that
usually include them. Any that chooses to drop tobacco stocks is
likely to underperform its benchmark index, putting pressure on
managers to stick with the status quo.
"You need to benchmark against other funds that don't
include tobacco and see how you how perform in other investments
you have put in its place," Melsom said.
The following firms declined to comment or didn't respond to
a Reuters request for comment:
JPMorgan Asset Management, Nordea Asset Management, Invesco
Perpetual, Morgan Stanley Investment Management, Vanguard,
Franklin Mutual, Capital Group, RBC, Legal & General Investment
Management, Credit Suisse Private Banking, SEB Investment
Management, Andra AP Fonden, Forsta AP Fonden, Oppenheimer
Funds, Gabelli Funds, Capital Research and Reinet Investments.
($1 = 0.7482 pounds)
($1 = 0.8965 euros)
(additional reporting by Martinne Geller; editing by David