Fund manager touts the good side of vice Financial Schools Reviews

Fund manager touts the good side of vice

Written by Jessica Clark on August 26, 2010 – 10:07 am

In this recession, sin is in.

That’s according to a mutual fund manager who’s finding plenty of investment opportunities in companies profiting from vices such as smoking, drinking and gambling.Jeff Middleswart’s aptly named Vice Fund (), up 6.7%; Lorillard (), down 3.8%; and Altria Group (), up 14.8%. The fund recently ranked in the top 3% of its large-blend-fund peers, according to Morningstar, and is running about 5 percentage points ahead of the market.

Defense contractors, another Vice Fund mainstay, were recently up an average of 12%. Alcoholic beverages were up 6%. Vice is the lifeblood of a fund that’s a counterpoint to investment products touting themselves as socially responsible because they favor companies ostensibly benefiting society. This year, those stocks aren’t doing anything special. An index of socially responsible stocks, the MSCI USA Large Cap ESG, is down 4%.

The Vice Fund is rebounding from lagging returns in 2008 and 2009. Its turnaround would be even bigger if not for the average 30% decline for stocks of gaming companies. They’re struggling to cut hefty debt loads, a legacy from years of building casinos.

Vice is the only fund explicitly focusing on so-called sin stocks. Its portfolio of about 30 stocks is divided almost equally among cigarettes, alcohol, gaming and casinos, and defense industries that typically hold up well in tough times. Although such a small portfolio can lead to volatility, the fund offsets that risk by emphasizing stocks that pay steady dividends.

Middleswart, 40, replaced manager Charles Norton in February. The Dallas resident manages the 8-year-old fund for USA Mutual Funds, along with the smaller Generation Wave Growth (GWGFX) fund, which invests in stocks expected to profit from spending by baby boomers. Both were founded by Dan Ahrens, who left in 2005 after writing a book that explained his investment thesis. Its title: “Investing in Vice: The Recession-Proof Portfolio of Booze, Bets, Bombs, and Butts.”

Here are excerpts from a recent interview with Middleswart about the Vice Fund and this year’s standout performance for many sin stocks:

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