To invest in tobacco or not to invest?

That question has been heating up as pressure mounts on the tobacco companies, both in the public-policy arena and in the markets. As a few public pension funds have begun to rein in their exposure to tobacco, the issue has become the new South Africa for the socially responsible investing crowd.

The noise from the just-say-no folks on one side and the don't-tie-our-hands money managers on the other is as loud as it is predictable. But for a really interesting cut on all this, we'd suggest tuning out the noise and instead watching what Robert Hoffman has been doing with his growth and income funds for years now.

Hoffman is no political crusader. He is, instead, a highly successful

Scudder, Stevens & Clark

money manager whose funds turn up on just about everyone's best lists. But by doing nothing more than run money for his clients at Scudder and the

American Association of Retired Persons

, for which Scudder manages funds, he has moved the tobacco argument from a he-said, she-said shouting match to an everyday demonstration that can be measured in percentage points.

Hoffman's two funds, the $4.2 billion

Scudder Growth & Income

fund (SCDGX) and the $4.6 billion

AARP Growth & Income

fund (AGIFX), are nearly exact clones of each other in management, size and what's in the portfolios. Neither carries a sales charge or load. The one important difference: The Scudder fund includes tobacco stocks; the AARP fund does not.

And what does that mean for investors? It doesn't mean beans.

The Scudder fund leads the tobacco-free AARP fund for the last year through Jan. 31, 23.05% to 22.50%, according to


. But for the last three years, the AARP fund is ahead on an average annual return basis, 18.07% to 17.79%. For five years it is a dead heat, both up 16.55% annually, Morningstar says.

The AARP fund has a marginal advantage in expenses, and one fund runs ahead of the other depending on whether tobacco is up or down at the moment, says Christine Benz, a Morningstar equity analyst. She adds: "Overall it is a wash.''

That kind of wash is, in fact, a powerful vote on behalf of the anti-tobacco crowd, which has been arguing for some time -- mostly to themselves -- that investors can kick the smoking habit without giving up returns. And it comes not from the mouths of the professional do-gooders, but from the works of a money manager who says he is apolitical on the whole debate.

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Hoffman believes that broad restrictions that close out whole sectors -- say environmental screens -- would hurt returns. And he believes that, in general, you'll create more change by staying in a company and voting your proxies than bailing out in protest.

The AARP fund screens only tobacco. And Hoffman does think the track record of his two funds shows that dropping one or two stocks -- say

Philip Morris


RJR Nabisco,

which he holds in the Scudder fund -- does not have to hurt returns. "If the question is will you get essentially the same returns by eliminating one or two stocks, the answer is yes as we have shown,'' he says.

Tobacco aside, Hoffman and his team are essentially value investors who bet on dividends to give them a head start. So Hoffman buys out-of-favor stocks whose yields are 20% greater or more than the yield on the

S&P 500.

As a stock regains favor and its yield drops to 75% of the market average, he'll start selling.

Hoffman is anything but a momentum player. "We're buying early and selling early," he says.

Both Hoffman funds carry four stars from Morningstar. With his funds the choice is tobacco or no tobacco, and investors can get the smoke-free Hoffman even if they can't get into AARP. Scudder says that while the fund is geared to investors 50 and over, it is open to those of any age. "You don't have to show your AARP membership at the door to get in," says Hoffman.

Good thing. Rob Hoffman is but 38 himself.

Steven Syre and Steve Bailey write a financial column for

The Boston Globe.

This column is exclusive to

The Street.

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