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.

03 Feb

Sustainable investment options for your Tax Free Savings

South Africans have until the end of February to make their first annual contribution of R30,000 as part of a R500,000 lifetime contribution limit to a Tax Free Savings Account (TFSA) scheme. Savetaxfree.co.za has a useful directory of tax-free investments. Unfortunately, as can be seen from AfricaSRI’s list of funds, there are very few focussed sustainable investment funds available in South Africa for individual or retail investors. Several of the providers of TFSAs are signatories to the Principles for Responsible Investment and the Code for Responsible Investing in South Africa, which means that they should theoretically be integrating sustainability factors, such as environmental, social and governance issues, into their investment decisions. However, it is still difficult to dissect the marketing material and determine which providers are actually taking steps towards implementing their responsible investment commitments.

Shari’ah funds

One option is to invest in one of the growing number of Islamic finance or Shari’ah funds. As the CFA notes, Islamic finance shares characteristics with SRI in terms of its objectives and methods. Shari’ah funds use negative screening to exclude from their portfolios companies that generate income from sales of alcohol, pornography, gambling, weapons or pork products. There are several Shari’ah funds available for TFSAs. These include the Element Islamic Balanced Funds, the Kagiso Islamic Balanced and Islamic Equity funds, Old Mutual Albaraka Balanced and Albaraka Equity funds, and the various Oasis funds.

Exchange Traded Funds

For those interested in low-fee Exchange Traded Funds (ETFs), there are two SRI options available via platforms such as EasyEquities. These are Nedbank’s Bettabeta Green ETF (BGREEN) and Newfunds Shari’ah Top40 ETF (NFSH40). The Newfunds Shari’ah Top40 ETF tracks the FTSE/JSE Shari’ah Top 40 index of the 40 largest and most liquid Shari’ah-compliant firms. The BGREEN ETF tracks the Nedbank Green Index, which is calculated on liquidity and, drawing on data from the Carbon Disclosure Project (CDP), environmental criteria. Eligible companies from the JSE Top 100 are determined from their CDP’s disclosure scores, while companies with better CDP performance (evidence of actions contributing to climate change mitigations, adaptation and transparency) are given higher weightings. The BGREEN ETF initially outperformed the All-Share Index and the JSE Top 40, but recent performance has lagged.

New SRI indices?

Unfortunately, for those looking for international exposure, only five DB x-trackers ETFs are available and none of these are based on ESG screens. In 2015, Old Mutual launched two ESG index funds, one based on the MSCI World ESG Index, the other on the MSCI Emerging Markets ESG Index. These are only available to institutional investors. UBS Global Asset Management recently found that ETFs tracking SRI indices outperformed the parent indices over the past five years. Hopefully in coming years South Africans will also be able to add SRI-based ETFs to their TFSAs.