With the festive season well under way, I thought it would be a good time to contemplate whether it is possible to build a winning investment portfolio based on sound ethical principles. But then I hit my first obstacle. What does ‘ethical’ mean?
Does your mother know
Ask 10 people what ethical means and you’ll probably get 10 different answers, and kick off a heated discussion about the topic. It can be a rather emotive subject for investors too. Some would be quite happy to include oil and mining stocks in an ethical portfolio, yet others would cite their negative environmental impact and say they were therefore unethical.
So finally I decided to narrow the scope to so-called ‘sin stocks’. It’s generally accepted that ‘sin stocks’ are those belonging to sectors that include alcohol, tobacco, gambling, weapons manufacture, and other naughty things you wouldn’t want your mother to know about.
Defensives
It’s not as easy as it seems, when you consider that companies in these sectors have generally outperformed the market over the years, with many now even considered as ‘defensives’. In other words, even when the economy is struggling, people are less likely to cut back on booze and tobacco for instance, than they are on retail and housing.
What does it say about society when alcohol, tobacco, and gambling rank alongside gas, water, electricity, toothpaste, and toilet paper as everyday essentials? When times are good – people drink, smoke and gamble. When times aren’t so good, they do so even more.
A healthier alternative
Core holdings like Diageo, Imperial Brands and British American Tobacco might not be that well known to those outside the investment community. But with instantly-recognisable global brands such Guinness, Baileys, Rothmans and Lucky Strike in their portfolios, these three goliaths last year managed to amass sales in excess of £60bn, with a large chunk of the profits being distributed to their shareholders.
Is there an alternative? I think there is. Why not invest in equally defensive companies that produce inhalers, vaccines, and cancer treatments? I’m talking about London-listed pharmaceutical giants GlaxoSmithKline and AstraZeneca. Both are go-to stocks in times of economic uncertainty, and both pay healthy dividends to their loyal shareholders. You’ll probably feel better about it too.
The only way is ethics
As one of the world’s largest weapons suppliers, BAE Systems has long been a target for both campaigners and investors, with the multinational defence contractor last year pulling in almost £19bn of business from countries all around the world.
Medical technology business Smith & Nephew on the other hand has been helping the wounded since the outbreak of the First World War. The company’s advanced wound management and joint replacement systems have helped to deliver an enviable track record of revenue and earnings growth over the years, and I see the company as a worthy alternative to BAE in a ‘sinless’ portfolio.
And as more corporations realise their customers expect them to ‘do good’ (as well as making good products) they’re more likely to take an actively ethical approach to business, making it even easier to avoid sin stocks.
As you can see, it’s just as easy to build a winning portfolio with companies you’d be proud to own, as it is with more ethically-challenged stocks. So why not give it a try?