Sin stocks – Feature
The challenge for Nationwide would be to construct an index for its passive equities but that would mean it had to have a segregated mandate which would add layers of expense to the scheme.
I think we must acknowledge that luck probably played a large part in the outperformance of tobacco stocks since 1900.
Derry Pickford, Aon
“There are developing changes to the way certain indexes are constructed, the question is whether they can be delivered as cheaply and efficiently on a pooled fund basis as existing indexes and if you can get to that it may well may be we’ll see more funds transition to that. Or they take the view mentioned earlier, a lot of this is about active engagement,” Hedges says. He points out that Nationwide uses LGIM, which he says has been vociferous on certain controversial issues, citing its reac- tion to Unilever’s announcement that it would close its Lon- don offices, which was followed by a swift about turn by the pharmaceutical giant.
30% of the population owns a gun but in the UK it is a differ- ent matter, underscoring the regional differences in what is and is not considered ethically acceptable. “We got the impression their US investors had never raised an issue around it but we felt that we wouldn’t want to be associ- ated with loans to those sort of businesses so we decided to not proceed which was a bit disappointing because we’d spent rather a lot of time on due diligence and meeting the team,” Hedges says.
Exclusionary investment policies are much more viable in active areas, where pension schemes can be more explicit about the stocks in which they will not invest. There is, in fact, an inverse relationship between sin stocks and costs but it is a more intricate one than supposed and involves the designing of indices for passive investment. “When you have a passive mandate, you have to start thinking about how to construct a particular index that carves things out, whether someone offers that index and what the cost of it is,” Hedges says.
As the fund continues to reduce its equities, passive equities, which are currently down to 15%, are becoming an ever smaller part of its asset allocation. The scheme uses the MSCI All World Index and so will have holdings in oil, gas and tobacco. By contrast, the scheme has 20% in private markets, the area that’s driving its returns and in which it has been more active in considering various ESG issues.
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“Behaviours can be changed but they are not going to be changed by small pension funds,” Hedges comments, adding: “It needs to be a big collective, and that is the benefit of large pooled funds, they have a collectively larger investment. LGIM holds billions [of pounds] on behalf of smaller investors that it has more of an impact.” Yet despite the more nuanced approach to sin stocks, there is clearly a preference among investors for more virtuous stocks, if one were to take attitudes to ESG as being the ethical oppo- site of attitudes to sin stocks. Surveys of fund managers and analysts show time and again that interest in ESG is far from abating. The same cannot be said of their less virtuous oppo- site numbers. Pickford is in no doubt that there’s clearly far more intra-client interest in allocating to ESG managers than there is investing to managers specialising in sin stocks.
“Of the clients I have spoken to on this, I have never heard any of them say: “I’m interested in taking contrarian stance to ESG and investing in sin stocks”,” he remarks.
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