Nov. 10, 2003 — Alcohol, cigarettes, gambling, weapons — these might be regarded as sinful activities, but companies manufacturing these products are supplying a never-ending demand from the public. Vice Fund (VICEX), a $7-million portfolio that invests almost exclusively in stocks associated with these goods and services, has flourished since it commenced operations last year.
For the one-year ended October 31, the portfolio leapt 21.4%, versus a 19.7% gain by the S&P 500-stock index and a 16.1% rise by the Dow Jones Industrial Average.
Co-portfolio managers Dan S. Ahrens and Eric McDonald invest at least 80% of the fund’s assets in four industries: gaming, tobacco, alcohol and defense. This represents a somewhat limited universe of stocks to choose from — numbering a few hundred at best. “We don’t see that as a disadvantage for us, though,” said Ahrens. “This small number of stocks allows us to identify and invest in the best ideas for the long haul. We are neither growth nor value investors. We follow Warren Buffet’s philosophy of managing money. We put great emphasis on unlocking intrinsic value and holding onto undervalued, growing companies for the long-term. We are not model-driven, and we don’t trade in and out much.”
As of October 31, the fund’s top ten holdings comprised Altria Group (MO), 4.7%; Multimedia Games (MGAM), 4.5%; Anheuser-Busch Cos (BUD), 4.1%; L-3 Communications Hldgs (LLL), 4.0%; Constellation Brands`A` (STZ), 3.9%; Shuffle Master (SHFL), 3.9%; British Amer Tobacco ADS (BTI), 3.8%; ManTech International`A` (MANT), 3.6%; Northrop Grumman (NOC), 3.5%; and United Technologies (UTX), 3.5%.
The fund currently holds 47 stocks and typically ranges between 45 and 50 holdings.
The portfolio’s largest sectors consist of gaming, 25.9%; alcohol, 24.4%; defense, 23.4%; and tobacco, 16.4%.
Ahrens is not restricted by weighting restrictions. “Our industry allocations largely reflect the growth of the stocks we have selected,” he said. “We are currently overweight in gaming because of the growth prospects in that industry. Moreover, these weightings haven’t varied by more than 5% since we started the fund.”
Ahrens doesn’t view sin stocks as defensive investments. “These sectors performed well in 2000, 2001 and 2002, when the overall market was in decline,” he noted. “From that perspective, you might think these are defensive sectors. But the performance of these sectors are not at all correlated with the market. We think they can perform positively in an up-market as well. Case in point, in 2003, during a favorable market climate, we have outperformed both the S&P and the Dow.”
“The gaming industry is enjoying phenomenal growth in this country,” Ahrens said. “It’s not just Las Vegas and Atlantic City anymore. There are horse tracks, dog tracks, riverboat casinos, state lotteries and gambling over the Internet. And there is plenty of upside because an increasing number of states are legislating in favor of gaming.”
One of Ahrens favorite gaming stocks is Multimedia Games, the largest supplier of interactive electronic games and electronic player stations to Native American casinos. “They have a great niche market which they dominate,” he said. “As more states pass legislation to allow casinos on American Indian property, their business will continue to grow.”
The company’s stock has doubled to nearly $40 year to date. Revenue more than doubled in the past year, while net income has more than tripled. The stock is still trading at a moderate p/e of under 18.