Tobacco stocks' value
In the Feb. 3 Others' Views commentary article, Steve Schueth creates the impression that investments guided by social concerns should be preferred by pension managers to those based on a traditional strategy of maximizing returns consistent with prudence. The evidence suggests otherwise.
Of the more than 40 funds devoted to social investing, Mr. Schueth discusses only one, the Domini Social Index, which he claims has exceeded the performance of the Standard & Poor's 500 since its founding in May 1990. It is little wonder that Mr. Schueth decided to "cherrypick" this fund from among the many in the category, since it is one of the few that compares favorably with traditional benchmarks like the S&P.
Moreover, it's worth noting that when security transaction costs and investment fees are considered, the returns of Domini, the leader in the category, actually fall short of the S&P.
Perhaps Mr. Schueth decided to use the Domini Index as an example, rather than one of his firm's Calvert social funds, because the Calvert funds have only two-year track records, with five of the six significantly lagging the S&P 500 in one of the hottest markets ever.
While Mr. Schueth exaggerates the case for "social investing," he minimizes, to the point of distortion, the stellar performers like Philip Morris. For example, he is being misleading when he states that the "overall fortunes of the tobacco industry took a sharp downturn in 1996." This completely misses the point that, in 1996, Philip Morris Cos. Inc., a family of companies which includes the nation's largest tobacco company, experienced 18% growth in earnings per share and a phenomenal 30% return to shareholders.
In addition, although it is true that equities in a controversial category such as tobacco are subject to short-term volatility, Philip Morris has been a consistently outstanding performer over time. The 10-year returns of the tobacco group as a whole (23.12%) have handily exceeded the S&P 500 (14.97%) and, since 1955, Philip Morris has provided investors with an annual return of 20.2%, a long-term return which Fortune magazine has characterized as "extraordinary."
These longer-term track records provide a better indication of performance than the record of a fund that was created less than seven years ago at the beginning of one of the greatest bull markets in history.
Finally, one must keep in mind that Mr. Schueth is a fund manager with a specific product to sell ("socially responsible" funds) and he is also the president of a group with an anti-tobacco agenda. His column can hardly be taken as objective investment advice and is more correctly regarded as a marketing ploy in which he has managed to combine both of his major interests.
In summary, Mr. Schueth is simply wrong when he state that tobacco investment have no role to play in an investment strategy designed to maximize returns. Tobacco companies have provided very strong and consistent investment performance over many years. If the ERISA requirements are to be taken seriously, then a diversified portfolio which includes a tobacco component should be favored over the traditionally underperforming category of socially invested mutual funds.
and Financial Communications
Philip Morris Management Corp.
In the Feb. 17 issue of Pensions & Investments, the Scoreboard report on investment managers that added the most net new assets from new business in 1996 was published.
We were disappointed to see that Sit/Kim International Investment Associates Inc. was missing from the list of international/global managers with $250 million to $1 billion under management.
From Dec. 1, 1995, to Dec. 1, 1996, the firm added $146 million in net new U.S. tax-exempt discretionary client accounts, and would have been one of the top ten in its class.
Sit/Kim is a U.S.-based international growth equity manager with $654 million under management, primarily for U.S. tax-exempt investors.
The firm utilizes a team approach, and adds value through stock selection, active management of regional and country allocations, and investment in non-index countries on an opportunistic basis.
Linda S. Perrella
Letters to the editor and submissions of commentaries for the Others' Views section may be sent to Barry B. Burr, editorial page editor, by mail at 740 N. Rush St., Chicago, IL 60611 or by e-mail to [email protected] or by fax to (312) 649-5228. Pensions & Investments welcomes all contributions and comments.