For investors looking for mutual fund investments that reflect their social values there are hundreds of socially responsible investment (SRI) choices available, not to mention dozens of faith-based funds that take the tenets of a particular faith, be it Roman Catholic, Lutheran, Mennonite, Islam or any of a number of other denominations into consideration when applying screens. But for those interested in the opposite of virtue, there’s only one choice–The Vice Fund. The fund’s original manager, Dan Ahrens, succinctly summed up its concentration on alcohol, tobacco, gaming, and defense companies in the title of his 2004 book, Investing in Vice, the Recession-Proof Portfolio of Booze, Bets, Bombs and Butts (St. Martin’s Press).
Although the name is certainly provocative, according to Charles Norton, who has managed the five-year-old fund since September 2005, it’s really a fund that “was established to focus on four sectors that were identified to have the potential for long-term gains in a variety of different market and economic conditions.”
Acknowledging that the fund’s name generates a lot of buzz, Norton stresses, “this is a real strategy. Despite the fact that the name might imply such, we’re not making any sort of moral judgment on these sectors. We’re completely indifferent when it comes to that. We just look at it through the eyes of the investor and we see a lot of investment merit in these four sectors.”
There’s an unvarying demand for the goods and services of these four industries. They’re global in nature with most of the growth coming from outside the U.S. There are high barriers to the entry of new players in any of these sectors. All are important to national and local governments either as an important source of tax revenue, or in the case of defense, as a supplier of vital materials, giving government a vested interest in seeing that these businesses remain viable. Alcohol and tobacco have very low production costs and all four industries are very profitable.
While Norton may not care about how other funds compare, we were curious to see if virtue or vice pays better wages in this world, so we decided to compare the performance of the Vice Fund to one faith-based and three SRI funds as well as to the S&P 500 Total Return Index and the S&P/Citigroup 1500 Growth Index and let the numbers speak for themselves. The Vice Fund, Amana Trust Growth Fund (uses Islamic principles in screening) and Pax World Growth Funds (full integration of environmental, social, and governance criteria into investment analysis) are all ranked by S&P as equity all-cap growth funds. The Calvert Large Cap Growth (will not invest in companies with poor environmental records including significant compliance and waste management problems) and Green Century Growth (uses environmental and social criteria in evaluating investments and actively excludes alcohol, tobacco, gambling, and weapons) funds are classified as equity large-cap growth funds.
Tracked for the five years ending September 30, 2007, the Vice Fund returned $26,031 on a $10,000 investment, compared to $18,954 for the Growth Index and $20,509 for the Total Return Index. The only fund that we looked at to keep pace with the Vice Fund for the entire period was Amana Trust Growth, which returned $28,641. For the year-to-date, one-year, and three-year periods, however, the Vice Fund performed slightly better.
From this admittedly small sampling we might conclude that while in the case of the Amana Fund, virtue can offer as tangible a reward as vice, it’s also obvious that adding additional screens that could remove companies with strong performance from the mix can make it more difficult to deliver returns that keep pace with the overall market.