InvestmentsAug 24 2017

Tobacco shares have lost their spark, say UK fund managers

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Tobacco shares have lost their spark, say UK fund managers
ByDavid Thorpe

Tobacco shares have long been a staple of the UK equity income portfolio, but increased regulatory risks and high valuations mean many prominent investors have been reducing their exposure.              

Eric Moore, who runs the £190m Miton Income fund, has been wary for some time about the investment case for British American Tobacco, and has relatively less tobacco shares than does the index as a whole.

He said that for some years tobacco companies have been able to respond to falling tobacco sales by putting prices up, and this ensured the companies always generated enough cash to pay the dividend.

But Mr Moore is concerned about the outlook over the medium term.

He said: “Putting prices up to compensate for sales falling has worked for the tobacco companies for years. But it is a trick that gets harder to pull off as the years go one.”

Job Curtis, who runs the £1.5bn City of London Investment Trust, noted tobacco company shares have suffered in recent months as the US regulator the Food and Drug Administration (FDA) recently announced an intention to force tobacco companies to have a smaller quantity of nicotine in their products.

He said this pushed tobacco share prices downwards, but he added his view that the path to any such regulatory change will be gradual, so profits are unlikely to be affected in the short-term.

But the regulatory actions do highlight the risks of investing in the sector, he said.

Mr Curtis has been selling British American Tobacco shares over the past year on valuation concerns and has sold more recently to the point where the proportion of his fund invested in tobacco shares is now level with the weighting those shares have in the FTSE All Share as a whole.

High-profile fund manager Neil Woodford has had a number of skirmishes with the stock market of late, but his decision to sell all of his shares in British American Tobacco around a month prior to the regulatory news from the US appears prescient.

Mr Woodford was a long-term evangelist for the cause of investing in tobacco stocks, believing the market was under estimating the ability of those companies to replace revenues lost in developed markets with increased sales in emerging markets.

But he revealed he has sold his shares in British American Tobacco, though he is still an investor in rival tobacco company Imperial Brands.

Mr Woodford said he has been invested in the tobacco sector more than three decades, during which time the industry has faced many challenges.

Of the regulatory news from the US, he said: “The FDA has proposed a new regulatory ‘roadmap’ to address the issues of addiction.