Tom Moore, who runs the £1.2bn Standard Life UK Equity Income Unconstrained fund, has been buying tobacco stocks for income.
Mr Moore said: “We started a new holding in British American Tobacco (BAT) after its share price fell because of concerns over US regulation on nicotine content in cigarettes.
"However, BAT is successfully mitigating sales volume declines through price increases and next-generation products. The earnings upside that we expect from the recent Reynolds American acquisition no longer appears to be reflected in BAT’s valuation, which resulted in an opportunity to buy the shares.”
The fund manager added: “We also started a new holding in Imperial Brands, which reassured investors on market share trends because of investment in its growth and specialist brands.”
The Standard Life UK Equity Income Unconstrained fund has returned 99 per cent over the past five years to date, compared with 63 per cent for the average fund in the IA UK Equity Income sector in the same time period.
Eric Moore, no relation, who runs the £190m Miton Income fund, which has a yield of 4.3 per cent, is much less sanguine on the prospects for the sector.
He said he has “done nothing but sell” tobacco shares in recent years. Mr Moore said: “There is going to be a time to sell all of the tobacco shares. I don’t feel we are yet at that time.”
Mr Moore is invested in both Imperial Brands and British American Tobacco, with Imperial the tobacco share he is most concerned about.
The fund manager said the company delivered disappointing earnings at the start of this year, but had reassured investors that earnings growth would return in subsequent quarters.
Mr Eric Moore said in subsequent updates the company has “moved away” from that previous confidence about its earnings.
He said for many years tobacco companies were able to put prices up by more than the cash they lose from declining sales, but that more recently volumes have been declining by more than the revenue generated from price increases, denting the investment case for Imperial Brands and other shares.
Mr Eric Moore said the outlook for tobacco shares is “less rosy” than it has been for many years.
Charlie Huggins, who runs the £242m Hargreaves Lansdown Select Income Shares fund, said he is retaining faith with tobacco shares due to the high levels of cash they generate and the ability to pay that cash out in dividends.
Adrian Lowcock, investment director at Architas, said tobacco shares represent such a large proportion of the dividends of the index that any underperformance represents a problem fro income investors, as the cash would be hard to replace.