March 20, 2003
Tobacco-Free Investments Avoid an Industry of Smoke and Mirrors
by William Baue
As court cases related to deception by the tobacco industry mount, individual and institutional
investors have options for avoiding exposure to tobacco stocks.
This week, the U.S. Department of Justice filed
more than 1,400 pages of documents in the United States v. Philip Morris et al. case,
demanding $289 billion from the tobacco industry on charges of fraud and dangerous marketing
practices. The case, which dates back to 1999, is under appeal by the five tobacco companies named
This amount eclipses the 1998 Master Settlement Agreement, which
requires tobacco companies to pay 46 states $206 billion, and the related settlement that requires
tobacco companies to pay the remaining four states $40 billion.
expressed skepticism that Judge Gladys Kessler of the Federal District Court will grant such a
sizable award. However, investors registered concern in the wake of the news, as stock prices fell
for all five companies. The defendants include Altria subsidiary Philip Morris (ticker: MO), R.J. Reynolds
(LTR) subsidiary Lorillard Tobacco, British American Tobacco (BATS.L)
subsidiary Brown & Williamson, and Vector Group (VGR) subsidiary Liggett Group.
would anybody invest in a terminal industry?" said John Montgomery, president and director of
Bridgeway Funds. "We just don't."
"Our longterm view on tobacco is that it's bad for
individuals, it's bad for a country, it's bad for an economy," Mr. Montgomery told SocialFunds.com.
Bridgeway screens only tobacco from its family of funds. One of its funds, the Bridgeway
Aggressive Growth Portfolio (BRAGX), gained 13.23 percent in annualized returns over the past
five years. Another, the Bridgeway Ultra-Small Company
Portfolio (BRUSX), grew by 9.91 percent over the same five-year period.
also acts as sub-advisor to one socially responsible investment (SRI) fund, the Calvert Large Cap Growth
(CLGAX). The fund was launched two and a half years ago, thus precluding five-year results. Since
inception, the Calvert fund has lost 21.86 percent in annualized returns; during the bear market,
it has lost 5.88 percent in annualized returns.
Most mutual funds that screen only tobacco
specifically try to avoid being labeled as SRI. Such funds include the American Mutual Fund (AMRMX),
which gained 1.43 percent in annualized returns over the past five years, and the flagship Pioneer Fund
(PIODX), which lost 1.64 percent over this same five-year period.
Likewise, many social
investors do not consider single-screen funds such as tobacco-free funds to be SRI. However,
almost all SRI funds include tobacco among their screens.
While individual investors can
avoid tobacco through tobacco-free funds or broadly-screened SRI funds, institutional investors can
also screen tobacco from their portfolio without fear of lapsing in their fiduciary responsibility.
So said the Investor Responsibility Research
Center (IRRC) in its 2000 publication, Tobacco Divestment and Fiduciary
Responsibility, A Legal and Financial Analysis.
"We came to the conclusion that an
institution can be within the bounds of its fiduciary duty to divest its tobacco holdings, mainly
on the basis that it would not have more than a de minimis effect on the performance of the
overall portfolio, either positive or negative," said Doug Cogan, director of IRRC's tobacco
information service. A de minimis effect is an inconsequential difference in return.
While the U.S. v. Philip Morris et al. case is important to watch regarding the future
of the tobacco industry, Mr. Cogan believes that a more important case may be the Engle case in
Florida, so-named after lead plaintiff Howard Engle.
"It's the one that brought tobacco
company shares down to rock bottom back in 2000," Mr. Cogan told SocialFunds.com. "Tobacco stocks
never got back to the previous highs that they had reached."
"It was a little bit more
than a dead cat bounce," Mr. Cogan added. "If you drop a dead cat from a high enough building,
it'll bounce when it hits the ground, but not much."
Florida's Third District Court of
Appeal is currently considering whether to uphold the jury's award of $145 billion to Florida
"If that judgment is upheld on appeal, the tobacco companies themselves have said
that they would not have the resources to make the payment in a lump sum, and therefore would have
to declare bankruptcy," said Mr. Cogan.