Fund Profile: The Vice Fund
by Ann C. Logue
Many investors pursue socially responsible strategies, looking to make money from businesses that also do well. Rarely, though, is it the best way to maximize profits. A recent study by Joshua Margolis of Harvard University and Hillary Anger Elfenbein of University of California at Berkeley found that good corporate behavior has a weak relationship to good stock performance. Investing socially doesn’t cost investors much, but it doesn’t pay them much, either.
But maybe it’s the bad stuff that leads to big profits, which is the philosophy behind the Vice Fund. Its goal is capital appreciation through investments in alcohol, tobacco, gambling, defense and aerospace companies.
The fund has the right to invest in any size company, domestic or international (up to a third of the fund’s assets can be in foreign companies), but in practice, its investments skew toward large U.S. consumer products companies. The largest holding at 9.07% of assets is Altria Group, Inc. (NYSE: MO), the tobacco company formerly known as Philip Morris. Another tobacco company, Carolina Group (NYSE: CG), is the second-largest holding at 7.15% of assets. The third-largest position in the fund is MGM Mirage (NYSE: MGM), a casino and resort operator that makes up 5.63% of assets. The largest international holding is Diageo PLC ADR (NYSE: DEO), owner of several liquor brands and 5.26% of assets.
This is not a diversified portfolio. The Vice Fund holds just 28 stocks, with a turnover rate of 44%. Because people around the world have habits that they’d all like to break but never quite get around to doing so, the companies tend to be huge. That as much as the investment style creates the potential for concentrated holdings.
But the Vice Fund isn’t a joke, either. The alcohol and tobacco companies produce branded and addictive products that many people will continue to purchase even when times are bad. These purchasers are all over the world, so these companies have been helped by the weak U.S. dollar. Gambling is a play on both vice and tourism, as it is possible to have a lovely time in Las Vegas without ever pulling a slot machine. (Gary? Well, in Gary, you gamble or go home.) And no matter what happens in Iraq, there are plenty of nations interested in adding to their defense arsenals.
And unlike social funds that rarely perform better than average, the Vice Fund’s shareholders have had plenty of reason to indulge. For the first two months of 2008, it was down 6.70%, compared to a decline of -8.7% for the Large Blend category. For the year ending Feb. 29, the Vice Fund was up 8.77% while the average fund in the category had a loss of 3.03%. For the last five years, the Vice Fund had an average annual return of 21.90% while the category average return was 11.53% and the S&P 500 average return was 11.63%.
The Vice Fund has just $182.9 million under management, which means that operating expenses are allocated over few shareholders and net expenses are high, at 1.75% of assets. That’s after a 0.15% fee waiver, too. The expense ratio may go down if the fund grows in size. It’s a no-load fund with a 0.25% 12b-1 fee and a 1% redemption fee on shares held for less than 60 days. The minimum initial investment is $4,000.
The fund managers, Charles Norton and Allan Gillespie, both hold the Chartered Financial Analyst designation and have experience as analysts and portfolio managers elsewhere. They brought their track records to this fund, which they founded. Are these men without redemption? Well, Gillespie’s biography mentions that he is on his church’s investment committee, so maybe he likes a little virtue in his life — just not in his mutual fund.
If you are interested in large-cap companies that appeal to our worst natures, and if you like the cyclical balance between consumer products and defense, this might be an interesting adjunct to your portfolio.
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