Monday, 26 June 2017

Virtuous divestments

The phrase ‘virtue signalling’ can be overused, but how else can one describe the ludicrous divestment movement which seeks to bring down industries by trading their shares.

The Guardian believes that if you get rid of your shares in fossil fuel companies you will somehow help prevent climate change. Aviva, the insurance company, recently announced that it would be selling off its tobacco stock in order to ‘limit the damage tobacco can cause to health’. Various universities and local councils have loudly proclaimed their intention to abandon their investments in ‘sindustries’ such as alcohol, coal and weapons. It is the emptiest of empty gestures and, for those whose pensions rely on sound investments, an expensive one.

Like it or not, tobacco stocks have outperformed almost every other form of investment since the turn of the millennium. Since 2000, the share price of Imperial Brands (formerly Imperial Tobacco) has risen tenfold while shares in British American Tobacco have risen twenty-fold.

If Aviva believes that the tobacco market has peaked then they should sell, but that is not the view of most investors and it does not seem to be Aviva’s motive. By publicising its divestment, the company seems to be reaching for the high moral ground, perhaps believing that future dividends are worth sacrificing for the sake of being viewed as an ethical investor.

Let us hope that there is nothing more to it than that because the company would be deeply deluded if it thought that selling its shares in cigarette companies will have the slightest effect on cigarette consumption. The most that can be achieved by divestment is a dip in the share price, but unless huge numbers of shares are dumped simultaneously, this will be barely perceptible on the stock market. And even if large-scale divestment made the share price wobble, it would not affect the fundamentals of the business and could not possibly have any effect on consumption of the product.

You have to wonder whether campaigners for divestment really understand how the stock market operates. From their rhetoric, you would think that Exxon Mobil and Philip Morris were start-up companies looking to raise money by floating on the stock exchange and that they can be starved of cash if people refuse to buy their shares. This is obviously not how it works. Divesting from tobacco stock will have a negligible impact on the share price and will have absolutely no impact on either cigarette sales or company profits. There is no mechanism by which selling shares could deter a single person from smoking. 

I am not in the business of forecasting how the stock market will perform in the future but it is a simple truth that any fund manager who has neglected tobacco shares in the last fifty years has missed a trick. They have consistently outperformed the rest of the market. If anyone has been persuaded to sell their tobacco stock in the hope of lowering the smoking rate, it has been a futile act of economic self-harm.

People who disapprove of a company’s products are free to invest in something else; they may even feel morally obliged to invest in something else. You can sell your shares and feel virtuous, but don’t pretend that you are changing anything.

First published by City AM

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