Investors who are hoping to cash in on the trend for toasting the end of lockdown with a stiff drink could be more likely to end up nursing a hangover, due to changing societal attitudes towards alcohol.
This is according to Ben Peters (pictured), Chris Elliott and Bethan Rose of the TB Evenlode Global Income fund
.
Evenlode invests in asset-light companies that have a strong competitive position and generate healthy amounts of free cash flow.
The managers note that all of these attributes apply to the alcoholic beverage companies that sit in the Global Income fund’s investable universe, which also benefit from the strength and heritage of brands that have created a strong sense of consumer loyalty.
However, the managers warned that businesses with exposure to the production and consumption of alcohol are coming under increasing scrutiny due to their impact on the environment and society.
“Environmentally, their use of water and effect on agriculture is high on the list of concerns – a key theme for the likes of brewers Anheuser-Busch InBev and Heineken given the number one ingredient in beer is water (90 to 95%),” they said.
“Socially, there is also an increasing awareness of the potential negative social impact that these companies' products can have. For example, Norway's largest pension fund recently pointed to a statistic from the WHO that in Norway, more than 50% of incidents of violence involve alcohol and that alcohol-related costs to the nation are estimated at $2bn annually.”
The managers noted that the Nordic market, arguably the most advanced in the consideration of environmental, social and governance [ESG] factors in investing, includes alcohol on its list of 'sin industries'. This list also includes tobacco, weapons, oil & gas and pornography, all of which have been shunned by a growing number of investors in recent years.
Society's view on alcohol is more nuanced, with the vast majority of consumers able to drink responsibly with a minimum impact on their health. Yet there are signs that people are falling out of love with “a quick pint” or “a glass of wine with dinner”: younger generations are drinking less, while the number of individuals defining themselves as non-drinkers is on the rise. There is a suggestion that this is down to a growing recognition of alcohol-related health risks.
The managers noted drinks companies have reacted to these emerging trends by offering low and no-alcohol offerings such as the Heineken 0.0 product, while the growing popularity of low-calorie ‘hard seltzers’ highlights how consumers continue to buy into new health trends.
Yet they added negative environmental and social impacts are still very much in focus.
“For example, AB InBev in its Sustainable Development Goal framework highlights the importance of water use and reduction, as well as how it treats workers and farmers within its supply chains,” the managers continued.
“This has a knock-on effect for agriculture as a whole and climate change exacerbates the issue, given weather scenarios are becoming less and less reliable.”
The TB Evenlode Global Income managers rank the risks for all businesses they invest in with a score from A to E, which is then used to define the maximum position they are willing to hold in a company.
Performance of stock over 5yrs
Source: FE Analytics
In the case of alcoholic beverages, the key risk factor is the ‘S’ in ESG, or social impact, while concerns remain around the ‘E’ as well.
As an example, Diageo scores a C, balancing the potential negative effects on public health with its goals around environmental sustainability and positive drinking initiatives.
“To sum up, it is vital for food companies to invest behind emerging sustainability trends, and it is just as, if not more, important for alcoholic beverage companies to invest in their product range, production practices and social programmes to ensure that they remain relevant to an increasingly health- and environment-conscious consumer,” the managers said.
“As investors, it is important that we critically assess those efforts. At Evenlode we are enhancing our analyses to better understand how businesses are adapting, for example by identifying measurable key performance indicators that we can track against the UN Sustainable Development Goals over time.
“With this effort, we aim to reduce risk for investors and also improve outcomes, in financial terms of course, but also for the broader range of communities touched by the companies that we invest in on behalf of our clients.”
TB Evenlode Global Income has no exposure to alcoholic beverage companies in its top 20 holdings.
Data from FE Analytics shows the fund has made 49.8% since launch in November 2017, compared with gains of 53.4% from the MSCI World index and 29.86 per cent from the IA Global Equity Income sector.
Performance of fund vs sector and index since launch
Source: FE Analytics
The £1.3bn fund has ongoing charges of 0.85% and a yield of 1.9%.