MARKET COMMENT
Building A Vice Fund

By David Kuo (TMFDragon)
November 1, 2004

"There are two types of people in this world, good and bad.  The good sleep better, but the bad seem to enjoy the waking hours much more." ~ Woody Allen

I am often asked if morality should ever play a part in financial decision-making.

Hmm... that is a tough question for any investor. However, in my view, investing is solely about making money - no ifs and buts. So, provided a business is making money, and as long as it is legal, then it is always worth considering as an investment. Consequently, there is little point in trying to screen potential investments based on morality issues.

Recently, the Vice Fund (Nasdaq: VICEX), a US-based fund that invests primarily in the alcohol, gambling, tobacco and defence industries, reported a 22.6% return for the 12 months to 30 September. The US market, as measured by the Standard & Poor's 500 Index returned 14% over the same period.

The Vice Fund started in August 2002 and invests 80% of its assets in companies that derive a minimum of 25% of their revenues from industries that are said to be socially irresponsible.

The arguments in favour of each of the socially-irresponsible sectors can be quite compelling. The tobacco industry has continued to grow in both good and bad times for the economy because the world population is growing faster than the rate at which smokers are stubbing out their nicotine habit. Over the last ten years, the FTSE All-Share Tobacco Index has increased 208%, equivalent to an annual growth of almost 12%!

Alcohol is another business that is almost immune to economic conditions because people drink in both good times and bad. Over the past decade, the FTSE All-Share Beverage Index that counts Diageo (LSE: DGE) and SABMiller (LSE: SAB) as two of its main constituents has almost matched the performance of the wider market. Since 1994, the index has gained 46% compared to the FTSE All-Share Index, which has gained 50%.

Defence is another sector that has performed well in the past decade. The FTSE Aero & Defense Index, which includes companies such as BAE Systems (LSE: BA.) and Rolls-Royce (LSE: RR.), has risen 86% since 1994.

There is no specific index for the gambling industry. However, a number of the major players in the gaming sector that include Hilton Group (LSE: HG.), Stanley Leisure (LSE: SLY) and London Clubs International (LSE: LCI) form part of the FTSE All-Share Leisure Index. This index, which also includes pub companies, has almost matched the performance of the FTSE All-Share Index over the past decade.

Before building a 'vice portfolio', remember that the Vice Fund is still in its infancy, and past performance is no real guide to the future. Furthermore, the fund isn't particularly diversified, insofar as it invests only in a few sectors.

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