The business - Patrick Hosking reports that tobacco is in fashion

Did you think the smart money was going into new ideas that improve the lot of mankind? You'll be sh

Read only the political and health pages, and the future of the tobacco industry might look as promising as a discarded butt-end. The anti-smoking lobby never lets up. The chief medical officer, Sir Liam Donaldson, has just called for a ban on smoking in all workplaces, pubs and restaurants. Restrictions on advertising get ever tighter. Three-tenths of the surface on packet covers now has to be devoted to grisly warnings about heart disease, damage to unborn babies and death. Sales are static or shrinking across most of the western world. The product is taxed more relentlessly than any other.

Overhanging the industry, too, is the never-ending spectre of lawsuits where the digits on compensation claims go on for longer than a super-kingsize: the US justice department is due to launch a $289,000,000,000 suit next year against Big Tobacco, alleging that it conspired to misinform consumers for 50 years.

Even on non-health matters, this most unloved of industries manages to spill ash down its front. British American Tobacco is under fire for its continuing presence in Burma after the renewed crackdown on the pro-democracy opposition leader Aung San Suu Kyi by the Rangoon military government.

Ministers and the media these days shun Big Tobacco, but it has been winning new friends. Investors love it. The other day, the financial information group Citywire came up with the bright idea of asking Britain's most successful institutional investors which companies they most liked. Only the fund managers with the best recent track records were consulted. Humbug, bias and the desire to appear PC were removed by the simple expedient of focusing wholly on the actual holdings of the fund managers. Weight of money, not weight of opinion, was therefore measured. The findings were adjusted so that larger companies would not be given undue prominence. Citywire confined its analysis to the FTSE 350 - the 350 biggest quoted companies in Britain - and stripped out all investment trusts, leaving a pool of 307 possible investment candidates. Anyone of an optimistic disposition, who believes that the smart money gets channelled into new ideas and technologies that generally improve the lot of mankind, should read no further.

With the cream of blue-chip Britain to choose from, our savviest investors gave the top three slots to BAT (Rothmans, Dunhill, Lucky Strike), Imperial Tobacco (Lambert & Butler, Drum and Rizlas) and Gallaher Group (Benson & Hedges, Silk Cut and Hamlet cigars).

Meanwhile, the heavyweight blue chips renowned for investing in R&D, product innovation or customer service did mostly very badly. Vodafone came 307th out of 307, with AstraZeneca, GlaxoSmithKline, BP, Unilever and Tesco all languishing in the bottom ten. In the City the tobacco sector is fashionable. Cigarette-makers churn out cash. They are low-tech. The employment costs are low, with most production done in low-wage countries. The dividends are juicy. The product is addictive to governments (which need the tax revenues) as well as smokers. Best of all, the litigation risk is regarded as manageable. The vast compensation victories tend to be overturned on appeal. BAT simply earmarks about £150m per year to pay the lawyers and carries on regardless. "It's just the cost of doing business in the US," says its chief executive, Martin Broughton, cheerfully.

The survey needs to be treated carefully. Since the technology and media bubble burst, the best-performing fund managers have inevitably been those who like safer, stodgier, old-economy investments that pay good dividends. Inevitably - in their view - tobacco scores strongly. Just because they were right over the past three years, it doesn't mean they will be right in future.

But it is somehow dispiriting that the brightest, most closely followed brains in the City today are plunging capital into tobacco in the same way as their colleagues were throwing it at potty dotcoms and other high-tech chimeras three years ago. The consolation (or further embarrassment, depending on your point of view) is that cigarettes are a great British industry. Three of the world's six biggest tobacco companies are UK-based. I'm hard-pressed to think of any other industry where we have such dominance.

A little treat is in store for the unsung heroes of business pages - the headline writers who come up with puns to liven up the dullest financial stories. Train companies hit the buffers; airlines take off or nosedive; champagne companies fizz or go flat. And so forth. So a warm welcome to Guildford-based Futura Medical, which floats on the stock market later this month. Futura specialises in treatments for erectile dysfunction. It hopes to raise (groan) £30m.

Patrick Hosking is deputy City editor of the London Evening Standard