Morningstar - Winter 2019 - 21

U.S.) so the impact on earnings and valuation
is negligible, although some write-down would be
taken on Blu. Imperial paid $7.1 billion for
Blu along with the Maverick cigarette brand from
Lorillard, plus Kool, Salem, and Winston from
Reynolds American. We estimate any write-down
to be in the $1 billion to $2 billion range (4% to
8% of market capitalization) because the value
of the Blu brand has grown substantially overseas
since that time.

Like Imperial, British American Tobacco has
invested heavily in vaping, and through
the 2017 acquisition of Reynolds American, it
assumed ownership of the Vuse brand. Also
like Imperial, vaping accounts for 1.5% of British
American's total revenue. At least half of
this is likely to be in the U.S., although we think
margins are negligible.
For most manufacturers, the impact of the
potential U.S. vaping ban is fairly limited.
The category is immature, has higher customer
acquisition costs than cigarettes, and requires
heavy investment in a pipeline of new
products, akin to nontobacco consumer staples
categories. A ban in the near term would
remove little from the operating income line and
revert companies' focus, at least in the U.S.,
to the high-margin combustible business
model. However, it would also shut the tobacco
manufacturers out of a new and younger
consumer segment, although our base-case
valuations do not assume incremental growth
from vaping.
Perhaps the most contentious assumption in our
analysis is that a ban will occur only in the
U.S. Regulators outside the U.S. have so far been
more permissive than the FDA regarding the
vaping category, so we think this is a reasonable
assumption in the short term. In the longer term,
however, it seems likely that vaping regulation
will tighten across the world as more data comes
to light about the public health impacts.
Philip Gorham, CFA, FRM, is director of equity research for
Ibbotson Associates Japan, subsidiary of Morningstar.

Fidelity Clear Winner
in Our HSA Checkup
Health savings accounts, or HSAs, continue to
grow rapidly and have reached more than
$60 billion in assets, nearly a tenfold increase over
the past decade. To help investors navigate
the hundreds of HSAs that exist, Morningstar
annually evaluates and ranks 11 of the
largest HSA providers. Our evaluations identify
which HSAs we believe represent the best
choices for individuals as opposed to employers,
where fees are often negotiable based on
a number of factors. In our latest report, a new
entrant into the HSA market, Fidelity, has
quickly seized the top ranks. (The full report is
titled "2019 Health Savings Account Landscape"
and available for download.)
We evaluate providers assuming two distinct use
cases: HSAs as a spending account to cover
current medical costs and HSAs as an investment
account to save for future medical expenses.
Overall, providers have improved on multiple fronts,
so we have raised the standards in our
evaluation process. Still, there's plenty of room
for continued progress. Only Fidelity earns positive
marks across the board as a spending account,
and none meet that standard as an investing
account. Fees vary significantly across providers,
and most require individuals to keep money
in the checking account before they can invest.
Moreover, transparency remains subpar,
as most providers' websites fail to disclose all the
relevant information needed to select a provider.
Fidelity is the best HSA provider for both spenders
and investors. For spending accounts, Fidelity
does not charge maintenance fees, offers much
higher interest rates on deposits than competitors,
and doesn't have any additional fees. Lively
comes in second place; it does not charge
maintenance fees or additional fees and offers
reasonable interest rates that rank as the
third-highest among the group. The HSA Authority
comes in third place because it does not charge a
maintenance fee, although it has a lot of
additional fees (18 in total) and a lower interest
rate than competitors.

For HSAs for investors, Fidelity again represents
the best choice. It has strong investment
options, allows first-dollar investing, and charges
rock-bottom fees that no other provider can
compete with. For example, an HSA investor can
buy a passive 60/40 portfolio at Fidelity for
an all-in cost of 0.02%, compared with 0.29% at
the second-cheapest provider and 0.69% at
the most expensive provider. The HSA Authority
and Bank of America represent the next best
picks for investors. Both have good investments
and cheaper fees than peers. That said, Bank
of America requires investors to keep $1,000
in their checking account before they can invest,
creating an opportunity cost, and The HSA
Authority should clean up its investment menu-
which has too much overlap in strategies-
to make it more easily navigable.
Leo Acheson, CFA, is an associate director of multiasset and
alternative strategies with Morningstar Research Services.

Can Canada
Go Low-Carbon?
AMERICAS

Canada

Canadian investors are confronting the effects
of climate change, saying investors and
businesses will need to navigate new industries,
infrastructures, and opportunities.
"Climate change has been recognized as a systemic
financial risk," says Sarah Keyes, principal
at ESG Global Advisors, noting that the Bank of
Canada identified climate change as a top
vulnerability to Canada's financial system as part
of its 2019 Financial System review.
"Canada experiences double the average global
warming compared to the rest of the world,"
says Jamie Bonham, corporate engagement
manager at NEI Investments. "Globally, we are
experiencing the effects of an average 1 degree
Celsius of warming, Canada is experiencing

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