Business | Investment
Choosing between mean and clean investments for the future
The combination of recession and efforts to jump-start economies can be an investment headache.
- Reuters
- Published: 23:32 December 8, 2008
London: 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.
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 per cent, despite smoking bans enforced in Britain and other Western countries.
In the year to November 30 the stock declined by 31.2 per cent, but still outperformed the FTSE 100's 35.8 per cent fall. British American Tobacco fell by just 14.6 per cent over the period, and drinks producer Diageo also outperformed, falling 18.1 per cent.
More ethical, or socially responsible, funds have to date shown a marked underperformance, but the changing tune coming from the US could give some a lift.
Sustainable investing
"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".
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 per cent return against a 5.08 per cent fall for the index. It underperformed in the first 10 months of the year, returning minus 37.5 per cent versus the S&P's minus 34 per cent.
"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 Inc, 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."
But if some plain vanilla defensive investments 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 higher accountability.
"People talk about environmental social and ethical factors as 'non financial'," she said. "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."
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