An uncomfortable truth? Tobacco shares are performing surprisingly well

 
Francesca Washtell
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Axa announced it would stop investing in its tobacco portfolio at the beginning of this week (Source: Getty)

Earlier this week, Axa announced it will stop investing in tobacco shares on ethical grounds because of the "tragic" human cost of the cigarette industry.

The world's largest insurer said it will sell its tobacco portfolio, valued at around €1.8bn (£1.4bn), in a move it also hopes will generate savings by resulting in fewer claims for tobacco-related diseases.

There have been growing calls across the investment industry to support ethical investing and Axa's decision has arisen from what it sees as a contradiction between delivering health insurance and supporting a health-damaging product.

Read more: Will Axa's decision to quit investing in tobacco have a negative impact on the industry?

But it turns out that, despite the fact people are giving up smoking in their drovse, its shares have performed surprisingly strongly over the last decade. Tobacco producers make up just five per cent of the FTSE All Share index, but have delivered high returns with low volatility, according to Hargreaves Lansdown (HL).

The chart below, from HL, shows how tobacco has outperformed the remainder of the FTSE All Share index over the past 10 years.

Tobacco is a "defensive sector" and a favourite with some top UK fund managers, such as Neil Woodford, according to HL's Adam Laird.

Laird, the company's passive investment manager and senior investment analyst, said:

Axa believes investing in tobacco assets is a contradiction for a major health insurer. Ethics is a personal subject and each investor will approach it differently – one person’s renewable wind energy is another’s blot on the landscape.

Increasing regulation

In addition to momentum in ethical private investments, regulation on the tobacco industry has ratcheted up in both the UK and Europe in recent weeks.

Last Thursday, big tobacco firms lost a High Court challenge against new plain packaging rules that were implemented on Friday.

Since 20 May, all cigarette packets manufactured for the UK look similar, with the same green colour, font, size, case and alignment of text on boxes.

To comply with the European Union's Tobacco Products Directive, which also came into force on Friday, health warnings now also cover 65 per cent of the front and back of packets.

The EU law will also clamp down on e-cigarette advertising in print, on television and radio, and limit the strength of nicotine liquids and flavours that can be used for vaping.

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