Heady whiff from tobacco scrips

BS Tobacco Index up nearly six-fold in 10 years versus Sensex's 2.25 times

A public interest suit against insurance companies investing in tobacco stocks has again sparked a debate on ethical investing. However, insurance companies—or any investor for that matter— could risk underperformance by eliminating tobacco companies from their portfolios. 

The BS Tobacco index, an in-house gauge for the performance of five domestic cigarette companies, has returned 460 per cent since March 2007. Significantly higher than the benchmark Sensex of the BSE, which delivered 125 per cent return in the period. 

The performance mirrors that of ITC, the country’s largest cigarette maker, nearly 60 times bigger than the second-biggest listed tobacco company, Godfrey Phillips. The ITC stock has outperformed the Sensex in six of the past 10 years, having returned 390 per cent in this period.

“If an institutional investor, like a mutual fund or insurance company, doesn’t want to invest in tobacco stocks on ethical grounds, they should let everyone know at the outset by mentioning it in their offer document. By doing so, they give a chance for investors to take a considerate view,” says U R Bhat, managing director at Dalton Capital Advisors.

Ethical investing isn’t a new concept in the Indian markets. Investors from certain communities, such as Jains or Muslims, avoid companies which operate in businesses that go against their religious strictures. For instance, Muslims avoid liquor stocks or banks (which earn a profit by charging interest,  prohibited in orthodox Islam).

“There is a large segment of the population which makes investments based on their personal beliefs. However, there shouldn’t be any such restrictions on the government. If the government allows tobacco companies to do business, there shouldn’t be a problem for a government-owned entity to invest in these,” says Bhat.

“A fund can follow a stated investment philosophy but it might not be correct to ask a fund with a broad investment mandate to avoid a particular stock or sector. Someone will say a fund should avoid tobacco, someone will say avoid coal companies, as they pollute. It will then become difficult to manage a fund," says Rajeev Thakkar, investment head at PPFAS Mutual Fund."

A group of seven citizens, which includes Tata Trusts’ managing trustee R Venkataramanan, think otherwise. They have filed a suit at the Bombay High Court against the government and six other state-owned insurers, including Life Insurance Corporation. They want divestment of these companies' holding in tobacco companies and prevent them from such investments in the future.

At stake are investments worth Rs 1.1 lakh crore and a bar on future investments in ITC, which has the highest weightage in the benchmark Sensex and Nifty indices.

“The prime objective of a fund is to maximise investor returns. Investment decisions should be based on the prospectus and ethics has no place in this,” says a fund manager, asking not to be named.

Globally, pension funds go through a similar dilemma, on whether to invest in the highly profitable tobacco industry or to avoid the sector, associated with severe health hazards. Pension funds and sovereign wealth funds—big investors in the stock market—set ethics criteria which act as a guidebook for investing. Typically, ethical funds avoid companies which cause environmental damage, such as coal or tobacco companies or entities not adhering to certain labour laws. This, however, means forgoing of returns.

For instance, the average annual return for the MSCI ACWI Tobacco, an index of the world’s largest tobacco companies, has been 13.4 per cent for the past 10 years. In comparison, the MSCI ACWI index, a gauge for the performance of world equities, has returned 5.8 per cent per annum for the past 10 years. The MSCI EM has returned 7.5 per cent for the same period.