By Sinead Cruise and Simon Jessop

LONDON (Reuters) - Eighteen months after the launch of a global campaign to persuade money managers to black-list tobacco stocks, just one major European investor has answered the rallying cry.

Others are largely sticking with an industry that remains lucrative despite tightening restrictions on smoking and a series of lawsuits in the United States, saying they are duty-bound to seek the best returns for their clients.

Even a United Nations-backed treaty which aims to cut tobacco consumption by almost a third within 10 years is failing to deter many investors in the likes of Philip Morris International <PM.N>, British American Tobacco <BATS.L>, Japan Tobacco <2914.T> and Imperial Brands <IMB.L>.

"We are firmly of the view that profits, cash and dividends from tobacco stocks have many years of strong growth ahead," said Stephen Lamacraft, fund manager at Woodford Investment Management.

Still, the Global Taskforce for Tobacco Free Portfolios, backed by the Union for International Cancer Control, has scored one big victory since it began campaigning in March 2015 for financial institutions and pension funds to divest an estimated $60 billion from the industry.

In May this year, French insurer and fund manager Axa agreed to ditch its tobacco holdings, becoming the first major European investor to sign up to the campaign, although others had already opted out of tobacco before it was launched.

Axa said its role as a health insurer meant it could no longer justify investing in something that had such a "tragic" impact on public health. At the time it held 200 million euros in tobacco stocks and about 1.6 billion euros ($1.8 billion) in bonds issued by the cigarette makers.

Even then, the process is lengthy. Axa has almost completed selling the shares but will keep the bonds until they mature. Only in 2027 will the bulk - 97 percent - be off its books.

Many other investors appear reluctant to discuss the issue. Reuters contacted 24 large fund managers which hold tobacco stocks, and all but seven declined comment or did not respond.

INVESTMENT APPEAL

According to the World Health Organization (WHO), tobacco kills around 6 million people each year, including 600,000 non-smokers exposed to second-hand smoke. Many of the passive victims are children.

The Taskforce's global Project Manager, Melbourne-based Bronwyn King, has persuaded more than 30 Australian superannuation funds to ditch tobacco but the campaign faces a tougher challenge in Europe.

The same goes for the United States, where one influential investor, the California Public Employees' Retirement System is reviewing a 16-year investment ban on tobacco after a study estimated the policy had cost it $2 billion to $3 billion in returns.

Campaigners reject the fiduciary duty argument - that funds must seek the best returns for their clients. They note that about 180 countries have signed up to the WHO's Framework Convention on Tobacco Control, which aims to cut consumption by 30 percent by 2025 through new regulations and tax increases that will make tobacco less affordable.

Currently just a handful of countries fully comply with the treaty, implying a significant future hit to the value of tobacco stocks when others follow suit.

"Over the longer term, (the treaty) has to decrease the validity of the product – you will have fewer people wanting or being able to buy tobacco and that has to impact the investment appeal of the producers," said Rachel Melsom, UK director of campaign group Tobacco Free Portfolios.

Philip Morris International, Imperial Brands and BAT declined to comment. Japan Tobacco did not immediately respond to a request for comment.

ONE BILLION SMOKERS

The tobacco industry sells about 5.6 trillion cigarettes a year to the world's 1 billion smokers, many of whom live in low and middle-income countries. Here consumption is expected to keep rising due to growing populations and income.

More people are quitting smoking or cutting down in developed countries, but overall revenue and profit margins are consistently buoyed by companies' ability to raise prices.

International players have also largely shielded themselves from direct exposure to the U.S. market, which has a history of litigation against big tobacco companies. For instance, Philip Morris has been separated from Altria <MO.N>, which sells its Marlboro cigarettes in the United States.

In the 10 years to 2015 - a period that included the crisis of 2008-09 - the MSCI World Tobacco Index rose 10.4 percent compared with just 2.64 percent on the MSCI World Index.

All this appeals to many fund managers. For instance, the 9.2 billion pound ($12.3 billion) CF Woodford Equity Income Fund managed by veteran fund manager Neil Woodford holds BAT and Imperial Brands - makers of the Lucky Strike and Gauloises brands respectively - among its top 10 positions.

"(Tobacco's) dependable dividends are increasingly highly-prized and still represent attractive yields," said Lamacraft.

The dividend argument doesn't always hold water. London-listed British American and Imperial reported dividend yields of 3.2 percent and 3.78 percent respectively, compared with an average 4.06 percent across the FTSE 100 index. New-York listed Philip Morris International has a 4.01 percent dividend yield.

Louise Dudley, portfolio manager at Hermes Investment, said she has barred tobacco stocks because she believes returns are unsustainable in the long-term.

"The industry has faced and continues to face increased regulation and consumers are becoming more aware of the health impacts of tobacco. The general trend is towards more healthy lifestyles. Tobacco products don't tend to fit within that."

CLIENT ATTITUDES

A spokeswoman for Standard Life Investments (SLI) said its decision not to black-list tobacco reflected the needs and views of its clients. But Melsom said ordinary savers didn't always know where their money was being invested.

"If every individual who has a pension fund could see their level of investment in tobacco and the costs associated with that, I think that would make a difference," she said.

Client attitudes towards tobacco varied widely, according to Iain Richards, Head of Responsible Investment, EMEA, at Columbia Threadneedle Investments. "We are satisfied that, for our mainstream funds, our approach is measured, works well and serves our clients' best interests. We therefore don't intend to adopt a blanket divestment policy on tobacco," he said.

Amra Balic, Head of BlackRock's EMEA Investment Stewardship team <BLK.N>, said her firm did not make social, ethical or environmental values judgments on behalf of clients, and company engagement was critical in addressing the health and social risks of tobacco.

"I don't think that we will end up, by divestment, in a world where tobacco won't exist, therefore engagement by responsible investors is key to holding companies to account on ESG (environmental, social and governance) issues".

A spokeswoman for M&G, another investor in the sector, said it regularly discussed environmental, social and ethical risks with tobacco company management, and encouraged improvements where it considered performance to be poor.

SLI, BlackRock, M&G, Columbia Threadneedle, Handelsbanken and Aberdeen Asset Management all said clients could bypass tobacco with their socially responsible investment (SRI) funds. Handelsbanken said about 40 percent of the assets that it manages are in funds that exclude tobacco investments.

The performance of SRI funds, which often also avoid industries such as armaments and alcohol, is typically benchmarked against indexes that exclude tobacco firms.

But mainstream funds are benchmarked against indexes that usually include them. Any that chooses to drop tobacco stocks is likely to underperform its benchmark index, putting pressure on managers to stick with the status quo.

"You need to benchmark against other funds that don't include tobacco and see how you how perform in other investments you have put in its place," Melsom said.

The following firms declined to comment or didn't respond to a Reuters request for comment:

JPMorgan Asset Management, Nordea Asset Management, Invesco Perpetual, Morgan Stanley Investment Management, Vanguard, Franklin Mutual, Capital Group, RBC, Legal & General Investment Management, Credit Suisse Private Banking, SEB Investment Management, Andra AP Fonden, Forsta AP Fonden, Oppenheimer Funds, Gabelli Funds, Capital Research and Reinet Investments.

($1 = 0.7482 pounds)

($1 = 0.8965 euros)

(additional reporting by Martinne Geller; editing by David Stamp)