Why I'm Investing in Sin Stocks

Sustainable and responsible investing are big themes for asset managers at the moment - a growing army of investors want to know their money is doing good in the world as well as generating financial returns. But Edward Murray is taking a contrarian approach and is not afraid to hold so-called sin stocks.

Edward, who lives with his wife and three children, has been an investor for around 40 years. He considers himself a self-made but experienced investor, who has managed to generate considerable returns over the years. He looks at longer-term trends to decide where to invest, considering how these might shift over time. He then tries to select funds or managers whose style he thinks will fit this environment.

"I have my own views of the different asset classes and how they fit together, and I look for funds that can perform a role in this and maximise returns in a particular area," he explains. "For the past 10 years, the investment environment has favoured low-cost ETFs that track the stock market. But now I am switching to look more at managers with a 'bottom-up' approach, who make active decisions. The conditions may not exist for these managers to justify their fees."

However, Edward is wary that choosing active managers means taking on the risk that they will make the wrong call on the stocks they invest in and fail to deliver returns. He is also concerned that backing active managers generally means paying higher fees than an index tracking fund. "I don't mind paying a decent fee for a amanager who does a great job," he says. "The problem is that while lots of managers are charging higher fees, it isn't always easy to find those doing a great job."

Shunning Sustainable Investing

There has been significant growth in ESG investing, where asset managers take into account environmental, social and governance issues, alongside traditional financial metrics when making investment decisions.

However, Edward thinks this rush to appear more "green" may create investment opportunities elsewhere. He screens for non-ESG and so-called sin stocks - areas such as tobacco and gambling, which are typically screened out of many sustainable funds. He points out that during the first decade of this century, tobacco stocks rose in value significantly as sales continued to grow, despite the fact the companies were increasingly shunned for ethical reasons.

He adds: "I also run a filter to identify exposure to shifts like decarbonisation and the impact on positions I already hold. I think you have to protect what you have before adding in new risks; many people focus on trends that are inconsistent with what they already invest in."

Edward owns investments spread across a number of Isas, pensions and investment accounts, held with multiple companies. He focuses some accounts on particular themes such as technology or income funds, believing this helps him better keep track of his portfolio and the risks within it. Having several different accounts also makes it easier for him to leave a provider if he is not pleased with the service.

Betting on Biotech

One of Edward's current largest holdings is PureTech Health (PRTC), a US-based biotechnology company listed on the FTSE 250 index. He likes the stock because it has developed unique technology linked to "gut chemistry", which he thinks could be a new frontier of medicine.

The company has certainly delivered for shareholders in recent years. According to Morningstar data, it was produced annualised returns of 32.18% over three years compared to annualised returns of 6.42% from the FTSE 100 over the same period. Over the past 12 months, shareholders have seen a 69.54% return on their money.

Elsewhere, Edward holds the iShares MSCI World ETF (IWRD), a tracker he describes as a core holding for international equity exposure at a competitive price. The ETF has a four-star Morningstar rating and analyst Dimitar Boyadzhiev rates its "sensible approach" to delivering exposure to global stock markets.

The ETF has produced above-average risk-adjusted performance over three, five and 10-year periods compared to peers in its Morningstar category, although Boyadzhiev thinks the 0.5% annual charge is relatively high and the most expensive MSCI World ETF available.

More recently, Edward has recently started to look at UK funds with a value approach to investing and a focus on mid-cap companies. While there was a risk these funds may have been hit if Labour had won the General Election in December, he is optimistic they will prosper under a Conservative leadership.

Another area he has started to look at more is private equity, and he invests in a number of tax-efficient Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS). These can be incredibly risky to invest in and Edward admits he has "had a few disasters along the way".

"I've learned you should never buy what you don't understand, and to always buy enough of a holding that you care about how it performs. Small positions get neglected and often forgetten, and can end up being expensive," he adds.

Another investment lesson Edward tries to follow is to buy the future not the past. "The world in 2050 will be very different to that of 2020," he says, "Some companies will adapt and others won't."