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Kicking the habit: why more income managers are falling out of love with tobacco giants

by James Phillipps on Feb 06, 2013 at 08:16

Kicking the habit: why more income managers are falling out of love with tobacco giants

A growing number of equity income fund managers are either selling down or exiting tobacco stocks as the defensive stalwarts continue to fall out of favour.

The sector outperformed strongly throughout the uncertainty of the first half of 2012, but has been left behind since the market has moved back into risk-on mode.

British American Tobacco’s (BAT) share price rose by 8.05% over the first eight months of last year compared to a 0.2% rise in the FSTE 100, but from there it has fallen by 1.58% compared to a 9.69% gain in the blue chip index.

Imperial Tobacco’s fall from grace has been even more pronounced. Peaking at 6.57% higher on 10 July last year when the FTSE 100 was down by 0.63%, it has since fallen by -7.9%, while the FTSE 100 has surged 10.61%.

Thomas Moore, manager of the Standard Life Investments (SLI) UK Equity Income Unconstrained fund, says despite this turnaround in their performance, tobacco stocks remain overvalued and over-owned by other income fund managers.

Research by SLI found that some 71% of funds in the Investment Management Association’s UK equity income sector have exposure to BAT which he deems a worryingly consensual trade.

‘BAT has been suffering consistent downward revisions to its earnings forecasts and this reflects the discussions analysts are having with the company’s management around pricing issues and volume data,’ he says. ‘It has fundamental issues of weakening demand and adverse regulation. We are also seeing downward revisions to its dividend due to this decline in fundamentals.’

A number of countries are currently in the process of tightening up their regulations on smoking with both Russia and China set to restrict the practice in public places and Australia having increased taxes in a move that has pushed prices through the psychological Aus$20 a packet barrier.

Moore’s fund, which is up 43.5% over three years compared to a sector average gain of 33.7%, has zero exposure to the sector.

Even some long-term backers have been reducing their exposure, including PSigma Income fund manager Bill Mott.

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