November 06

Saint or Sinner?

Socially responsible investment (SRI) funds continue to be very popular with investors, with global investment institutions now managing $13.6 trillion of assets incorporating environmental, social and governance concerns. However, in the current low-yield environment, another way of investing has come to the fore. ‘Vice’ funds invest in companies which are involved with ‘sin’ (alcohol, gambling, weapons or tobacco) – areas that SRI funds seek to avoid. Vice funds’ increasing popularity raises the question: is it better to be a saint or a sinner in the investment world?

SRI evangelists argue that it is possible to do good and still make money. They believe that socially responsible companies are likely to be well managed, because their foundations are based on solid core values. Conversely, so called ‘sin-stock’ investors argue that there’s no reason to miss out on the opportunities offered – some companies have the potential to outperform when times are uncertain, leading many to view these industries as a solid strategy during recessionary periods. After all, people may be inclined to gamble, smoke and drink more when times are tough.

And there are other factors that make sin stocks attractive to investors. Many of the companies have strong brand recognition and can compete strongly in a global marketplace. They tend to have higher profit margins, and are subject to heavy regulation with significant barriers to entry. Most importantly, these defensive industries can pay higher dividends. For example, Phillip Morris, one of the largest cigarette manufacturers in the world, announced in September that its board had approved a 10.6% increase in its quarterly dividend – a 4.5% yield looks tempting in light of persistently low interest rates.

But can we really classify all of these as ‘sin’ stocks? Boeing could be viewed as such, as around half of its business comes from the defence sector. But it is also one of the largest airline manufacturers in the world. So where do we draw the line? Should we refuse to invest in anything that could be bad for us? According to a recent study of half a million people across Europe, diets high in processed meats are linked to cardiovascular disease, cancer and early death. Should we stop investing in fast-food restaurants, which use processed meat, or do we avoid the suppliers who sell the animal feed to the farmers who breed the pigs?

Additionally, some tech and clothing companies which do not automatically fall into the sin category have faced allegations concerning workers’ rights in China, Bangladesh and India. Furthermore, some gene-sequencing companies have been accused of ‘playing God’, even when the processes involved could eventually cure diseases and save lives. Biotechnology firms find themselves in a similar position. Monsanto was awarded the 2013 Nobel Prize of Agriculture, partly for its development of genetically modified crops and pest-resistant seeds and herbicides. Some believe this technology is damaging to the environment and health, while others believe it is the future of managing global food production.

Whatever your view, there are lots of interesting opportunities for investors. Whether you prefer to invest in SRI or vice funds, the lines are more blurred than you might think. As for whether a company is a saint or sinner, we must ultimately decide for ourselves.

Katy Fillingham, 6 November 2013