03 Mar

Tobacco free portfolio options in South Africa: hard to get away from BAT

British American Tobacco has been in the news again recently over allegations that it is involved in corporate espionage in an effort to disrupt competitors in South Africa. BAT holds around 85% of the South African cigarette market. According to Eyewitness News, a whistle-blower’s affidavit that forms part of a complaint to the Competition Commission claims that BAT used a network of spies and corrupt law enforcement agents to undermine competition. The complaint has been brought by the Fair-Trade Independent Tobacco Association (Fita), the body representing small, local tobacco producers. Secret payments from BAT to informants in South Africa are under investigation in the UK.

BAT also faces allegations relating to its business conduct in other countries such as Uganda and Kenya, including making payments to undermine anti-smoking regulations. There are now calls for the US Department of Justice to investigate possible contraventions of the US Foreign Corrupt Practices Act. BAT has denied all allegations and has appointed law firm Linklaters to investigate the East African allegations.

While the media has regularly published updates on BAT’s alleged behaviour, there has not been a major outcry even though BAT is, for example, a constituent of the Dow Jones Sustainability Index that recognises companies for their sustainability practices, and forms part of the new FTSE/JSE Responsible Investment Index. The lack of reaction by investors in South Africa may in part be due to the fact that the allegations are caught up in a long-running and complex political battle within the South African Revenue Service (SARS). However, it is noticeable that the voices of the asset managers who have signed up for the Code for Responsible Investing in South Africa are missing from the coverage. The tendency of funds to engage behind closed doors and weak transparency means that it is difficult to assess the efficacy of any engagement strategies.

However, as local business commentator Bruce Whitfield has pointed out, it is incongruous to focus on allegations of corporate espionage when investment managers make so little of the fact that BAT makes a product that has such serious negative implications for its customers’ health. Despite the risks associated with investing in tobacco, BAT, which listed on the JSE in 2008, appears to have almost revered status in the investment community in South Africa. BAT accounts for a high percentage of the assets of many of the funds managed by many of the country’s largest retirement or “Reg 28” funds. These funds appear to find BAT’s business model attractive and praise its defensive, high-quality earnings growth. But as a result, if you are investing in a pension in South Africa you are highly likely to hold BAT in your portfolio. In some cases, the exposure increases due to holdings in Reinet, of which BAT makes up around 70% of net asset value.

Fund name BAT percent of portfolio (January 2016)
Allan Gray Balanced Fund 7.5%
Investec Absolute Balanced Fund 5.9%
Stanlib Balanced Fund 4.19%
Foord Balanced Fund 3.8%
Coronation Balanced Plus Fund 3.1%
Old Mutual Balanced Fund 2.2%

Unfortunately, there are very few options available to individuals who, for moral or investment reasons, do not want to hold BAT in their retirement portfolios. Compare this to Australia where over 30 large pension funds now implement tobacco free mandates. This is largely due to the success of the Australia-focussed Tobacco Free Portfolio campaign, which has identified that the total social cost of smoking far outweighs the revenue raised from tobacco sales. In 2015, a Global Task Force for Tobacco Free Portfolios was established but it appears that the message has not yet reached South African asset managers.

Until it does, investors looking to eliminate tobacco from their retirement portfolios will have to choose either one of the Shari’ah funds, which also exclude companies that generate revenue from alcohol, gambling, pornography and weapons, or be satisfied with finding a fund that only holds a low percentage of its portfolio in BAT. However, investors should also, where possible, make enquiries about tobacco-free alternatives from their financial advisors and/or pension fund trustees.

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