Warning: top-performing funds are highly likely to contain tobacco

Axa will no longer invest in the tobacco industry: the French insurance giant will sell €184 million of shares and gradually reduce its €1.6 billion bond holdings in the sector. No surprise, given Axa’s role as a health insurer and the oft-repeated statistic that smoking kills six million people a year; indeed, you might think any health-related investor would have taken the decision years ago. Except that cigarette-makers have been stellar stock market performers since the beginning of the century: British American Tobacco’s shares have multiplied in value a dozen times while paying rich dividends, and Imperial Tobacco (now Imperial Brands) has been almost as good. MSCI’s global index of tobacco shares has outperformed equities generally three times over for the past decade.

And that creates a conundrum, especially for pension-fund managers. Tobacco is legal; smokers persist, of their own free will, despite health warnings. But to the extent that smoking has declined in the UK and other parts of the developed world, it is a factor in the rising longevity that challenges the pensions industry. Funds need high-yielding investments in order to pay out for longer, but those such as Calpers (the Californian public workers’ pension scheme) that took an early decision to shun tobacco measure the opportunity loss in billions.

Axa ducked that issue by arguing that tobacco is a ‘sunset industry’ because ‘more and more countries are going to put controls on it’. Health campaigners, by contrast, talk of a ‘global epidemic’ driven by lack of controls and health warnings in the developing world. The heaviest consumption is in China, the former Soviet bloc and southern Europe (with far more women smokers these days) and other emerging nations are ripe for exploitation — for example, by selling cigarettes one at a time rather than in packs, to capture younger and poorer customers.