Vice fund a consistent top performer

Your Money

September 19, 2006|By The Dallas Morning News

DALLAS -- Investing heaven may be only a sin away.

The Dallas-based Vice Fund has left political correctness to others and sinfully gone where other mutual funds fear to tread. The Vice Fund, which celebrated its fourth anniversary on Aug. 30, invests in casino stocks and companies that make liquor, tobacco and bombs.

Given people's proclivities to drink, smoke, gamble and blow each other up no matter what the economic climate, it should come as no surprise that the Vice Fund has been a consistent top performer. It has beaten the Standard & Poor's 500 index in each of the past three years and is on track to do it again this year, with a 10 percent gallop so far in 2006, compared with a 5 percent gain for the S&P.

The Vice Fund holds Morningstar's highest five-star rating and over the past year ranks 22nd out of the 174 mutual funds that invest in mid-size growth and value stocks.

"We have a history of outperforming the market," said Charles L. Norton, co-portfolio manager of the Vice Fund and principal at GNI Capital. "You soon realize that there is true investment merit in these sectors."

Merit indeed. Cigarette maker Altria Group Inc., the fund's largest holding, is up almost 70 percent during the past 18 months. Another holding, London-based Diageo PLC, which makes and distributes wine and spirits - including Johnnie Walker Scotch and Smirnoff vodka - is up about 30 percent during this period. In the gaming sector, one of Norton's favorites is Las Vegas Sands Corp., which has gained about 40 percent.

He believes these defensive sectors should perform even better - relative to the overall market - in the coming months if the economy slows as most financial experts predict. That's because people will spend money to smoke, drink and probably even to gamble during a recession.

The defense sector is essentially tied to the U.S. military budget and moves independently of U.S. economic cycles. But given the current geopolitical turmoil in the Middle East, no one is projecting big budget cuts in defense.

"Based on historical precedent, right now is the most opportune time to be invested in this fund," Norton said. "The reason is we are at an inflection point in the economy. We are already seeing signs of softening in the economy."

Not everyone shares this much enthusiasm for the Vice Fund. Hugh Johnson, chairman of Johnson Illington Advisors in Albany, N.Y., said while it is true that the sin sectors have outperformed the broader market in recent years, there's no assurance that will continue.

"The Vice Fund clearly has hit it right recently, where all four of those sectors are doing well at the same time," Johnson said. "The odds are against that working all the time."

Further, Mark Luschini, head of asset management at Parker Hunter Inc., a Pittsburgh money management firm, said these four sectors are by no means all of the defensive plays. Health care stocks, utility stocks and other consumer staples, such as soft-drink companies and household products, should hold up reasonably well if the economy slows.

"The Vice Fund seems to be pretty narrowly focused," Luschini said. "I would be a little shy of being that tightly focused. You are leaving out a lot of prominent industry sectors."

Norton said, however, that there are hundreds of companies to choose from in those four sectors, so "it's pretty broad-based." Further, he said there are more nuanced strategies in vice investing than just playing on human weaknesses.

First, there are high barriers of entry into these sectors. For example, only a limited number of gaming licenses are issued, and "you are not seeing any new tobacco companies that are starting up," Norton said.

Second, companies in these sectors are highly profitable, with excellent cash flow and solid management.

Third, many of these vice stocks, especially the distillers and tobacco manufacturers, have substantial overseas operations. More recently, some of the Asian countries are opening up to U.S. gaming companies.

And finally, alcohol, tobacco, gaming and defense industries have been around for hundreds of years. Fads come and go, but people will probably always engage in those activities, he said.

"In the case of the alcohol and tobacco industries, those products are never made obsolete by new technology," Norton said.

Obviously, some investors have moral objections to investing in these kinds of industries. In fact, there are so-called socially conscious mutual funds -- such as the Bethesda-based Calvert funds - that won't buy any sin stocks.

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