Lazard’s global equity income fund manager Pat Ryan has warned investors off buying tobacco companies after the rush to buy safe haven-style stocks sent valuations sky-rocketing.
Speaking to Investment Week, Ryan said he has removed the last of his exposure to the sector within his fund, with legal risks and declining volumes leaving them looking vulnerable.
“They are now trading at a premium to the broad market, but people are overlooking the litigation risks in these stocks,” he said.
Tobacco companies remain among the largest and most popular stocks in the UK market, with British American Tobacco (BAT) appearing among the top 10 of 44% of funds in the UK Equity Income sector, according to data from FE.
Globally names including Reynolds American and Altria have also been popular.
The UK-listed stocks have delivered very strong returns for investors in the past decade, with British American Tobacco delivering a total return of 661.44% over the period, while Imperial Tobacco returned 230.54%, according to Morningstar.
However, Ryan and other managers are growing concerned over the outlook for the sector. PSigma’s Bill Mott, as well as Liontrust’s Stephen Bailey and RLAM’s Martin Cholwill, have significantly cut their tobacco holdings in recent weeks amid fears over the impact of plain packaging rules being introduced in Australia.
A key market for cigarette manufacturers, the country is bringing in plain packaging rules next month, meaning brand names will be removed from packets, and other countries are poised to follow suit. Managers believe this could cause margins to decline if smokers turn their backs on certain brands.
Ryan said there were also other worries for the sector. “Volumes go down in developed markets every year, and we removed the last of our exposure recently,” he said.
Read more: http://www.investmentweek.co.uk/investment-week/news/2223652/out-of-puff-lazards-ryan-cuts-overvalued-tobacco-stocks#ixzz2C0azckhy
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