South Africa: Vice-Friendly Benefits

Source from:  Business Day (Johannesburg) 18 October 2007 10/19/2007

SOCIETY's disapproval of alcohol, tobacco and gambling means a growing number of institutional investors have to relinquish the companies that peddle these products -- which, according to a joint study by the University of British Columbia and Princeton, translates into a slew of undervalued stocks for those who don't mind the stigma. "While sinful stocks aren't necessarily good for the soul, they do deliver higher returns," say Marcin Kacperczyk of UBC and Harrison Hong of Princeton, in a paper titled The Price of Sin: The Effects of Social Norms on Markets . "There is a societal norm against funding operations that promote human vice and some investors, particularly institutions subject to public scrutiny and social norms, pay a financial price for not holding these stocks." The study found that North American institutions hold about 19% of the shares of sin stocks, which is about 14% lower than the institutional ownership of comparable stocks. It also found that tobacco, alcohol and gaming listings deliver estimated annual returns ranging 2%-4% higher than those from comparable food, hotel and nonalcoholic beverage stocks on a risk-adjusted basis. What's more, they come cheap: the market-to-book ratios of "sin stocks" were on average about 15% lower than those of comparable companies between 1965- 2004. According to Kacperczyk and Hong the case of tobacco best illustrates the hypothesis. A half-century ago, cigarettes were as acceptable to the mainstream as soft drinks or breakfast cereal. Today, they are held responsible by the medical community as the leading cause of preventable death ... and an affront to public health . Market valuations for tobacco companies reflect this: whereas in the 1950s, tobacco stocks were valued in line with other sectors, these days they are relatively undervalued. The reason simply being that "as fewer institutional investors want to be associated with the nicotine trade, the pool of investors who decide to hold them need to share proportionately more risk and reward." But while "sin stocks" are defined by most "socially responsible" investment funds, to include tobacco, alcohol and gambling it suggests a moral equivalency that might not really be there. It's not clear that alcohol and gambling, in moderation, are harmful to most people, in the way that tobacco is. What's more, gambling may enjoy a possible flipside to the hypothesis. Given that the gaming industry has enjoyed greater mainstream acceptance in recent years, it might benefit from a favourable revaluation in the years ahead. Enditem