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Temple Bar could bar Mundy from ‘unethical’ tobacco stocks

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Temple Bar could bar Mundy from ‘unethical’ tobacco stocks

Temple Bar (TMPL), the £850 million UK equity income trust managed by Alastair Mundy, is considering a ban on ‘inherently unethical’ investments such as tobacco stocks.

In a move that could be interpreted as an attempt to prevent Mundy, a contrarian value fund manager, from buying back into tobacco stocks after heavy falls last year, the trust's new chairman Arthur Copple said the board was looking at whether some businesses were ‘inherently unethical’, even if they were legal, and whether ‘the trust should seek to profit from opportunities offered in such areas’.

Copple, who recently replaced John Reeve as chair, defined the stocks as those whose product ‘is both harmful to humans and addictive in nature, undermining the autonomous choice of the consumer to decide if he/she wishes to harm him/herself in this manner, and the product offers no significant benefit to consumer welfare to justify the harm’.

While the stocks that fall foul of the rules will change over time, Copple said ‘at present this approach would lead to the exclusion of tobacco stocks’.

The 93-year-old investment trust will consult with shareholders on whether it should exclude the tobacco giants.

While there are no tobacco stocks in the portfolio after Mundy sold positions in British American Tobacco (BATS) and Imperial Brands (IMB) in 2017, their 49% and 27% declines since their peaks in the past two-to-three years suggests they may have been coming back on to his radar. 

Mundy, who has run Temple Bar since 2002, looks to buy stocks that other investors have given up on, typically when they have underperformed by 50% or more. 

Tobacco shares have fallen hugely out of favour having been the worst performing sector of last year as fears over regulation and a slow pick up in next generation tobacco weighed.

According to Numis Securities data, only three UK equity income trusts hold tobacco stocks in their top five positions currently. Under pressure Mark Barnett is convinced of the cash-generative powers of tobacco companies and holds BATS as one of the biggest positions in both Edinburgh (EDIN) and Perpetual Income & Growth (PLI) while Simon Gergel, another value investor, prefers to allocate a top position in Imperial in Merchants (MRCH). 

Both BATS and Imperial offer dividend yields of around 7%, making them tempting targets for bargain hunters although others argue they face long-term structural challenges.

Although not an 'ethical' investor as such, Mundy is prepared to engage with a company if there are ethical or governance issues.

Unfortunately for Mundy (pictured), the trust continued its long run of underperformance as his style of investing remains persistently out of fashion.

In 2018 the trust saw a net asset value total return of -11.2%, underperforming the FTSE All-Share index, which declined 9.5% as Copple noted any turnaround in the value investing style had been ‘fairly short lived’.

Peter Lowery, a long-standing member of Mundy's team, has been promoted to deputy manager to help him on the trust.  

However, Copple said there are encouraging signs that the ‘anti-value stance of the market’ was reversing and January performance was ‘impressive’ at 3.6% - although still lagging the FTSE All Share’s 4.3% and he noted that it was ‘very early days’.

‘A return to more volatile market conditions, while undoubtedly offering a bumpy ride, is likely to play to Temple Bar’s strengths,’ he said.

‘Our preference…is to focus on an individual company’s financial strength and performance rather than seek to predict the direction of markets.’

The trust has had mixed success over three and give years, while its NAV total return has bettered its Association of Investment Company UK Equity Income peers over three years, returning 36.3% versus 25.2%, it has failed to beat the average over five years, returning 24.2% versus 31.4%.

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