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Tobacco stocks: time to kick the habit?
Tobacco shares have performed strongly over the past couple of years, but many now believe they're overvalued. We look at where some top managers stand on the issue.
‘My portfolios are still as exposed as they have been to tobacco, although it is no longer the largest sector – pharmaceuticals is actually slightly larger now,’ he says. ‘I still think there is value in tobacco. The point about certainty of earnings is, I think, a very good one for tobacco companies.’
Similarly, Jan Luthman is maintaining an overweight to the sector in the CF Walker Crips Equity Income fund he co-manages with Stephen Bailey. Both Imperial Tobacco and British American are top 10 holdings.
‘Like pharma, tobacco has very secure income streams and good pricing power,’ Luthman says. ‘In emerging markets there is also the potential to push consumers upmarket to more premium brands as spending power grows.
‘There is regulatory risk in the Far East as governments wake up to the damage smoking does, but it is such a popular pastime and is a huge revenue earner.’
Managers shunning the sector
But there are a few managers who are shunning tobacco altogether. JOHCM UK Equity Income manager Clive Beagles has had a long-term zero allocation to the sector, warning that many classic defensive stocks are ‘monstrously overvalued’.
This has led him to steer clear of many of the ‘highly consensual narrow band’ of tobacco and pharmaceutical stocks favoured by a lot of his rivals.
Schroder Income managers Kevin Murphy and Nick Kirrage are also continuing to shun the sector, citing stretched valuations. The pair favour pharmaceuticals, which have also had a strong run and could yet be the next divisive sector among equity income managers.
More about this:
Look up the funds
- Artemis Income I Inc
- Threadneedle UK Equity Income C1
- Invesco Perpetual Income Inc
- CF Walker Crips Equity Income Acc
- JOHCM UK Equity Income GBP Acc Inst
- Schroder Income A Acc
Look up the shares
- British American Tobacco PLC (BATS.L)
- Imperial Tobacco Group PLC (IMT.L)
- AstraZeneca PLC (AZN.L)
- GlaxoSmithKline PLC (GSK.L)
Look up the investment trusts
Look up the fund managers
- Adrian Frost
- Leigh Harrison
- Neil Woodford
- Mark Barnett
- Jan Luthman
- Stephen Bailey
- Clive Beagles
- Kevin Murphy
- Nick Kirrage
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