Most popular stocks in Unit Trust and OEIC portfolios
| Rank | Stock |
| 1 | BP |
| 2 | Vodafone |
| 3 | Royal Dutch Shell |
| 4 | HSBC |
| 5 | GlaxoSmithKline |
| 6 | BG Group |
| 7 |
AstraZeneca |
| 8 | British American Tobacco |
| 9 | BHP Billiton |
| 10 | Nestle |
In a year when the FTSE All Share fell by 30 per cent, investors should be looking towards sectors that are not correlated to the movement of the market as a whole. Tobacco is seen as an extremely non-cyclical and therefore defensive stock. The volatility in the global markets has led fund managers to seek ways of reducing their fund’s volatility and many fund managers have chosen an increase in exposure to the tobacco sector.
British American Tobacco (BAT) has an r-squared of 0.29 in relation to the FTSE All Share, which indicates its performance is not tightly correlated to that of the market. Such data would suggest that holding BAT in a fund’s portfolio throughout 2008 would have helped to reduce the overall loses for the fund. We can see in this chart that the performance of BAT does not mirror that of the FTSE All Share, and though loses were experienced they were minute in comparison to those suffered by the market.
Performance of BAT versus FTSE All Share
Source: Financial Express Analytics
Funds
Many funds already held BAT in their top tens at the start of 2008, but there has been a steady increase both in terms of the number of funds including the stock and also in the percentage allocated to this stock by fund’s already holding it.
The following table shows which funds have the largest weighting allocated to BAT, and whether they have increased, decreased or maintained the weighting from the previous month.
| Fund | Weighting | Change on previous month |
| Morgan Stanley - Global Brands |
7.86 | Up |
| M&G - Dividend |
7.5 | Same |
| L&G - UK Active Opportunities |
7.23 | Same |
| L&G - Equity |
7.23 | New |
| Threadneedle - UK Accelerando |
6.6 | Up |
| MFM - WH Ireland UK Growth |
6.11 | Up |
| F&C - UK Growth & Income |
6.05 | Down |
| Threadneedle - UK Equity Alpha Income |
5.8 | Same |
| Liontrust - First Growth |
5.75 | Same |
| AXA - UK Opportunities |
5.7 | Same |
Data from Financial Express Analytics shows that in most cases funds with a large holding in BAT performed better than their sector in the difficult conditions of 2008. For example, Morgan Stanley Global Brands fell just 4.91 per cent for the year whereas the IMA Global Growth sector lost 24.32 per cent.
With the exception of the Threadneedle UK Accelerando, all of the funds have high Alphas – meaning that the fund manager is a good stock-picker. He is choosing stocks which will help protect his fund from massive losses and this includes BAT. It is interesting to note that all but Morgan Stanley Global Brands have Betas close to 1, which indicates that the manager is not boosting his performance by moving his portfolio away from the benchmark; rather he is choosing the good stocks within his investment remit.
Conclusion
The non-cyclical nature of the tobacco industry makes a large holding in BAT a wise choice for fund managers in the current climate. This, of course, makes for an ethical dilemma for those who do not wish to have their money poured into an already giant tobacco corporation. Fund managers operating the type of ethical fund which avoids such industries find themselves restricted for choice when it comes to defensive stocks. Many of the defensive sectors are perceived to be the least ethical, such as the arms manufacturing industry and, as we saw in the previous article in the series, the big bad boys of the pharmaceutical industry also fall into the category of non-cyclicals.
So for the ethical investor, the decision has to be whether to invest in a fund which is well positioned to minimise losses but takes a large holding in tobacco, or to invest in an ethical fund which is not able to protect itself in the same way. Or, there’s always cash.