The report explores the investment implications of a tobacco free investment portfolio. The health impacts of tobacco have long been acknowledged. For instance, 1 in 5 deaths in the US will be tobacco related. The addictive nature of tobacco means that although many people understand the risks of smoking and want to quit, only six per cent are actually able to.

These factors have led to tobacco companies being removed from investment portfolios. Historically, tobacco companies have been present in many investment portfolios as it met certain criteria that would make it a desirable stock, e.g. high barriers to entry, being a large established business and selling a high margin product. Genus analyse the benefits of divesting from tobacco companies in an investment portfolio using two different studies: A long term study looking at the performance over the last 20 years of portfolios containing tobacco companies and those that do not, and a six year study looking at the performance of portfolios that have different criteria for excluding tobacco companies.

The 20 year study found that there is no statistically significant difference between investment portfolios containing tobacco companies and those that do not. This study uses two methods to obtain the results, firstly it uses Tobacco free ‘Naive’ where the tobacco sub-industries are excluded from the portfolio and the other stocks are proportionately reweighed. Secondly, it uses Tobacco free ‘Optimised’ which uses the Tobacco free ‘Naive’ approach and performed ‘quarterly optimisation to minimise the tracking error’.

The six year study looked at portfolios using exclusion criteria based on the percentage of a tobacco companies involvement. It found that the lower the allowance for tobacco companies, the high the performance of the portfolio. The greatest performance came from the portfolios with no tobacco involvement.

Tobacco companies are becoming less common in investment portfolios because, while they may have boosted performance many years ago, decrease in demand for tobacco has meant that these companies are not performing as well. Anti-smoking campaigns, litigation, backlash from consumers and higher taxes have all also decreased the appeal of tobacco companies involvement in an investment portfolio.

Genus joined the Tobacco Free Finance Pledge in 2019 stating that they will be a tobacco free wealth investment firm.

1. This study finds that including tobacco companies in investment portfolios does not improve its performance (20 year study).
2. This study briefly discusses the negative impact the tobacco industry has on the economy, health and workers (producing tobacco).
3. Compared to the benchmark, portfolios with no tobacco involvement performed the best when compared to a benchmark.
4. The less tobacco involvement in portfolios seems to result in higher active returns to the portfolio in a 6 year study.
5. It is believed that in the future there will be even stronger restrictions to the tobacco industry through litigation, taxes and overall consumer opinion, furthering reducing the performance of tobacco companies.