Tobacco businesses, namely British American Tobacco and Imperial Tobacco, are amongst the most popular stocks held by managers such as Neil Woodford due their reputation for reliable dividends and capital growth.But they also court ongoing controversy for their connection to a string of smoking related diseases.
Over the past year, more health conscious consumers have sparked a decline in global cigarette sales and the rapid rise in popularity of e-cigarettes.
The spectre of plain packaging legislation and recent downgrades in forecasts for global economic growth has added to tobacco firms’ woes.
According to FE Analytics, both Imperial Tobacco and British American Tobacco (BAT) have seen material falls in share price over the past month with the two firms down 7.93 per cent and 4.71 per cent respectively.
By comparison the FTSE All Share is down 6.46 per cent.
Performance of stocks and index over 1 month
Source: FE Analytics
However, the share price of both firms has seen further falls in this morning’s trading - not yet captured by our data - as investors have ditched holdings due to lower than expected earnings from BAT for the first nine months of the year.
BAT blamed the decline on foreign exchange and a fall in cigarette sales, partly due to higher global taxation of tobacco products.
Star manager Neil Woodford is one well-known holder of tobacco stocks, having popularised their holding throughout the 2000s while at Invesco Perpetual and carrying on the strategy at his new business Woodford Investment Management.
Woodford holds both BAT and Imperial Tobacco –as well as US-listed Reynolds American – in the top 10 of his £3bn CF Woodford Equity Income fund, accounting for more than 15 per cent of his portfolio.
FE Alpha Manager Mark Barnett, who took over Woodford’s £6.6bn Invesco Perpetual Income and £12.4bn Invesco Perpetual High Income funds as well as his £1.1bn Edinburgh Investment trust while retaining his £886m Invesco Perpetual Strategic Income fund, has also been a keen holder of tobacco stocks.
He holds BAT as the largest position in all of the funds previously mentioned as well as holding Imperial Tobacco and Reynolds American in each fund’s top 10.
In total, tobacco exposure makes up approximately 15 per cent of each of Barnett’s portfolios.
Over the past month, which has been characterised by broad market weakness with all major indices sharply selling off, both Barnett and Woodford have lost more than 5 per cent in their open ended funds but have stayed ahead of the average performance in their respective sectors as well as the FTSE All Share.
The Invesco Perpetual Income, Invesco Perpetual High Income and Invesco Perpetual Strategic Income funds are down a respective 5.38, 5.33 and 5.13 per cent over this period, compared to the IMA UK All Companies sector average loss of 6.91 per cent. The FTSE All Share fell 6.46 per cent.
The CF Woodford Equity Income fund is down 5.38 per cent while the average fund in the IMA UK Equity Income sector lost 6.41 per cent and the FTSE All Share lost 6.46 per cent.
Performance of fund vs sector and index over 1 month
Source: FE Analytics
Tobacco stocks are very widely held by funds in the IMA universe. BAT is held by 152 funds as a top 10 holding, Imperial Tobacco by 83 funds and both are held 19 funds.
Well-known holders of BAT include Jupiter UK Growth, Jupiter High Income, F&C UK Equity Income, GLG UK Select, JOHCM Global Opportunities and Newton Higher Income.
Large holders of Imperial Tobacco include the Artemis Income, Jupiter UK Special Situations, Schroder UK Equity and Trojan Income funds.
Apart from Barnett and Woodford’s funds, other vehicles to hold both stocks include JOHCM UK Opportunities, Franklin UK Opportunities, JPM UK Managed Equity, Premier Monthly Income, Threadneedle UK Monthly Income and Threadneedle UK Extended Alpha.
Chris Beauchamp, market analyst at IG, says the fall in tobacco stocks is part of wider investor concern for the consumer sector but that BAT’s recent revenue decline is unlikely to continue due to its connection to sterling’s strength this year.
“British American Tobacco’s disappointing numbers today have sent the shares to their lowest level since April, although the strong pound’s impact will diminish in the next update given that sterling is continuing to fall,” he said.
“The currency was given another shove in the direction of $1.60 as minutes from the BoE pointed towards a delay in interest rate hikes. This backs up the public statements made last week at the height of the market’s volatile period, but it illustrates how the attempt at clear forward guidance simply leaves the bank at the mercy of events.”
Sterling reached a five-year high against the dollar earlier this year, providing a disadvantage to many FTSE 100 companies’ bottom lines due to their conversion of overseas revenues back to pounds.
However, sterling has weakened in recent months.
Performance of sterling versus dollar in 2014
Source: FE Analytics
Beauchamp says he expects markets to pick up throughout the rest of 2014 following the recent falls: “The 10 per cent correction was a nasty shock, but with the end of the year looming there will be a lot of investors looking to jump on board a late-stage rally that will do much to buff performance figures for the year.”
