The combination of recession and efforts to jump-start economies can be an investment headache.
In recessions, vices like tobacco and alcohol win ground among those daring enough to buy shares. But if Barack Obama’s plans to invest in clean energy and tighten regulation set a trend, growth plays in worthier sectors may also reward.
This mix of slowdown and conscientious investment suggests that while a sprinkling of traditional defensive vice may help short-term, some ethical stocks could benefit too.
Received wisdom among fund managers is that the next generation of fund products will be designed to be ”back to basics”, easy to understand. Among classic defensive plays, companies focusing on human habits fit that bill squarely.
”People will not stop smoking in recession, they might even smoke more because they are nervous,” said professor Andrew Clare, chair in asset management at London Cass Business School.
”Whatever happens people need cigarettes and do not tend to cut back on alcohol,” he said.
Amid the fracas of recent months, many investments in classic defensive sectors — of the type offered by a US-based fund that uses the idea of ”vice” as its promotional gimmick — have fallen less sharply than the broader market.
British firm Imperial Tobacco on November 25 reported an annual adjusted earnings increase of 15%, despite smoking bans enforced in Britain and other Western countries.
In the year to November 30 the stock declined by 31,2%, but still outperformed the FTSE 100’s 35,8% fall. British American Tobacco fell by just 14,6% over the period, and drinks producer Diageo also outperformed, falling 18,1%.
More ethical, or socially responsible, funds have to date shown a marked underperformance, but the changing tune coming from the United States could give some a lift.
”My view is that the clean energy sector will be one of the first to come out of the recession,” forecast Nick Robins, senior analyst on Socially Responsible Investing at HSBC and author of a book, Sustainable Investing.
Defensive vice
Investors prepared to look beyond the obviously addictive products such as alcohol and cigarettes to invest in gambling and weapons manufacturers in the aerospace industry could explore the ”Vice Fund”, which covers just these four sectors.
Data on its website shows the fund was hit by the market downturn but outperformed its benchmark of reference, the S&P 500, in the year to March 31, when it yielded a positive 4,44% return against a 5,08% fall for the index.
It underperformed in the first 10 months of the year, returning minus 37,5% versus the S&P’s minus 34%.
”We focus on four sectors that have the potential for long-term gains in a variety of different market and economic conditions,” said Charles Norton of GNI Capital, which is involved with the fund’s management.
”They also are often overlooked and underfollowed, which means our target sectors tend to offer more inefficiencies and opportunities.”
The Vice Fund’s main fund manager, Mutual Advisors, declined comment.
But if some plain vanilla defensive investments — whether focused on escapist sins or basic necessities — offer shelter in times of trouble, they also tend to lag a market recovery.
Karina Litvack, head of governance and socially responsible investment at UK-based asset manager F&C argues investors would be better off preparing for a recovery that demands stricter corporate governance and higher accountability.
”People talk about environmental social and ethical factors as ‘non financial’,” she told Reuters. ”From my perspective anything that is a value-driver and makes the company succeed over the longer term is a financial risk factor, only it does not drive the share price up or down in the next 24 hours.”
With its launch of the Stewardship Growth Fund to exclude alcohol, tobacco and gambling stocks in 1984, F&C was one of the first to join the broad church of investment products known as ethical or socially responsible investments (SRI).
At the end of October the Stewardship Growth Fund had £468,3-million in assets, having underperformed its benchmark, the FTSE All-Share Index. On a year-to-date basis, the fund yielded minus 38,7% versus the FTSE’s minus 31,2%.
In spite of the losses, Litvack said investors in this fund, most of them retail investors, have remained generally loyal due to their long-term view.
A patient customer base is also what Christian Zimmermann, portfolio manager for the €739-million Pioneer Global Ecology Fund, says he can count on.
Zimmermann said most of its investors stuck to the fund, even though assets had nearly halved since the end of 2007 when it had €1,3-billion.
Though considering upping the fund’s cash weighting from the current five percent, he maintained opportunities would come from Obama.
”Obama has committed to renewable energy,” he said. ”At the moment it looks like the immediate future is depressing but looking beyond 2009, it is brighter than it seems now.”
Cass Business School’s Clare warned against reading too much into funds’ simplistic tags, noting that subtleties of definition could disappoint some investors.
He also doubted there is any financial advantage in the ethical route: ”The academic data that I have seen suggests that the difference in the performance of an SRI fund and an ordinary [one] are very limited.”
Of course, HSBC’s Robins disagreed.
He said investments in companies incorporating ethical social and corporate governance (ESG) principles outperformed the MSCI World index in the five years to 2007. – Reuters