More than 150 mutual funds call themselves socially responsible, investing only in companies that meet a series of ethical standards set by their fund managers. Then there’s the Vice Fund.
Its prospectus says it favors “products or services often considered socially irresponsible.”
The fund has fulfilled that promise under several different fund managers, investing mainly in companies involved with alcohol, tobacco, gambling and military contracting.
This politically incorrect approach has helped the Vice Fund outperform the Standard & Poor’s 500-stock index from its inception in 2002. But the fund has had more than its share of management turmoil.
In 2003 and 2004, civil and criminal charges were brought against three executives of the fund’s former adviser, Mutuals.com, in connection with market timing. One of the executives, Eric McDonald, was also the co-manager of the Vice Fund. All of those charges are still pending, including civil charges against Mutuals.com and two broker-dealers affiliated with it, Connely Dowd Management and MTT Fundcorp.
A special monitor appointed by a federal court remains in place for Mutuals.com and all its affiliates, including the Vice Fund, to ensure compliance with securities laws.
The Vice Fund, now managed by Charles L. Norton, 32, and Michael J. Henry, 26, has stuck to its knitting. Both funds depend on the insight that stocks that exploit the dark side of human nature are a natural for Wall Street, particularly during economic downturns.
Lately, the approach has again been paying off. Gambling and hotel casino stocks returned 25.3 percent this year through Thursday and 28.9 percent, annualized, in the past five years, according to Morningstar. The S&P 1500 Casino and Gaming Index, which tracks 10 stocks from the 1500 index, was up 10.1 percent through Thursday and 21.4 percent, annualized, over the past five years.
Tobacco stocks posted annualized five-year gains of 20 percent, while those for alcoholic beverages were up 12 percent, and the aerospace and defense sector, including military contractors, climbed 11.8 percent, according to Morningstar.
The Vice Fund returned 9.2 percent this year through Thursday, compared with 3.1 percent for the S&P 500. Over the past three years, the fund’s return has been 20.6 percent, annualized, outpacing the 10.9 percent of the S&P 500. The fund has no load, or sales charge, and has an expense ratio of 1.75 percent.
Its allocations as of May 31 were 26.9 percent to casinos, gambling and lotteries; 24.2 percent to aerospace and defense; 23.5 percent to alcohol; 20.9 percent to tobacco; and 5.1 percent to cash.
The Vice Fund has not experienced a “full business cycle,” Brown said, so “it remains to be seen how they do in the long run.”
The Vice Fund’s aerospace and military portfolio includes some companies that have had financial windfalls because of the war in Iraq, said David Strauss, an equity analyst at UBS Investment Research. General Dynamics, which manufactures armored vehicles, is a case in point, he said.
“Historically, the defense-company stocks have performed fairly well in a period of weak economic growth,” he said.
Scores of mutual funds have big dollops of certain holdings of the Vice Fund in their own portfolios.
“I think what they’ve done is taken a good marketing spin to the consumer discretionary sector,” said Philip Edwards, S&P’s managing director of fund research.