More than ever before, investors are applying their political and ethical beliefs to selection of investments. In the US alone, 10% of professionally-managed funds – about $2.7 trillion – are now deployed using such criteria.
There are times when being “ethical” yields investment benefits (for example, it’s advantageous to have no oil stocks when the oil price is plunging), and there are some cleverly-managed “ethical” funds that outperform. But generally speaking SRI returns are below market averages.
That’s only to be expected, if certain well-managed companies are excluded from portfolios on principle.
I have no problem with investors allowing their political or religious views to shape the pattern of their own investments, being willing to pay the price for their beliefs in the form of relative underperformance. After all, it’s their money to do with what they wish. Just don’t expect me to follow suit!
What does interest me, however, is the contrary investment concept of deliberately seeking out “sin stocks.” There are great returns from guns, booze, gambling and pornography.
The latest study by Frank Fabozzi and his team at Yale University, spanning 37 years and 21 national stock markets, showed a total return for a “sin portfolio” averaging 19% a year compared to less than 8% for those markets as a whole.
People will always drink, smoke, gamble
There is even a Vice Fund in America that has been spectacularly successful investing only in such stocks. It was recently rated by Lipper as the best of 610 funds in its Multi-cap Core category for total return.
Its founder, Dan Ahrens, argues in his book Investing in Vice: The Recession-Proof Portfolio of Booze, Bets, Bombs and Butts that sin stocks thrive “no matter what happens to the economy”. People are “always going to drink alcohol… smoke… gamble”. And national security will always be a concern.
Such stocks do well in rising markets. But more importantly, they are resilient in falling ones. “When it’s good, it’s very, very good… and when it’s bad, it’s better”, the Vice Fund claims of its concept.
What the FT calls “the naughty trade” has historically been a stunning outperformer in bear markets. A study by Merrill Lynch showed that in six recessions in the US alcohol, tobacco and casino stocks returned an average of 11% a year compared to a 1½% loss for the S&P 500 benchmark index.
Unfortunately only US residents are allowed to invest in the Vice Fund. But there is nothing to prevent your putting together a small portfolio of listed companies operating in ‘sinful’ sectors.
Here are a few ideas:
• Tobacco has consistently performed well over the years, despite the mounting hostility of governments to smoking.
Companies’ cash flows and profits are stable and relatively insensitive to economic downturns. Although sales in advanced countries are stagnant because of smoking bans and health-risk publicity, they continue to expand in developing countries, which account for 70% of cigarette demand.
British American Tobacco (LSE: BATS), the world’s third biggest tobacco group, would seem to be the choice in this sector.
• Liquor is fortunate in having avoided entirely the ignominy heaped on the tobacco sector, despite causing more deaths. Release of studies that show alcohol in moderation is actually good for you, certainly help.
In beer, wine and spirits the trend is for the big groups to get ever larger through acquisition, seeking cost-saving through rationalisation, and greater market share for their brands.
The markets are generally mature and slow-growing. Or, as in China, intensely competitive.
Three counters to consider are Carlsberg, the giant AnheuserBuschINB (NYSE: BUD)group and SABMiller (LSE: SAB).
• Gaming is another sector that has largely escaped political attack despite its social costs, and is even politically-favoured as governments facing severe financial pressures look for relatively easy sources of tax revenue.
Among the interesting stocks are the Austria-based on-line gambling company bwin Interactive Entertainment (Austria: BWIN), Asia-based Genting International (Singapore: G13)and SJM Holdings (HKG: 0880), and the recovering US giant Las Vegas Sands (NYSE: LVS).
• Sex has become a more respectable business with changing morality and social behaviour, although perhaps the most important influence has been the flood of pornography readily available over the internet, and said to account for up to half its total traffic.
However, there are few opportunities for investing in the business. The most interesting is Rick’s Cabaret (Nasdaq: Ricks), the first publicly-traded topless bar chains. It operates 19 “adult” nightclubs across the US and several “adult entertainment” websites. Another possibility is Australia’s Planet Platinum (ASX: PPN), the world’s only listed brothel stock.
• Armaments manufacture has long been unpopular, but nevertheless has enjoyed a resurgence thanks to the wars in Iraq and Afghanistan. Major nations have also sought to upgrade their armed forces as they move away from the traditional model of lots of metal and foot-soldiers towards electronics-based integrated weapons systems.
Looking forward, however, governments’ severe financial problems suggest that the trend will be towards cutbacks in defence spending.
There are lots of big and well-known companies to invest in, but individual investors would probably do better better by looking at smaller specialists such as London-listed Chemring (LSE: CHG), which makes military flares and counter-measures such as decoys; Ultra Electronics (LSE: ULE), supplier of battlefield infotech equipment; or Cobham (LSE: COB), which produces missiles and ejector seats.
• Nuclear energy was a no-go area for decades after the world got a fright from the Chernobyl catastrophe. There is still strong opposition because of worries about disposal of radioactive waste and possible terrorist sabotage.
However, nuclear power is winning the political battle as it becomes clear that it’s the only realistic alternative to carbon-fuelled power stations and as nations become more sensitive to the risks of dependence on imported energy resources.
Investment opportunities include Areva (Paris: CEI), the French nuclear engineering giant; Cameco (Toronto: CCO), the Canadian uranium miner; and perhaps the speculative uranium play Paladin Energy (ASX: PDN).
• Genetic modification is a highly controversial concept – strongly opposed by the green lobby in Europe, but largely welcomed elsewhere for boosting agricultural production, reducing usage of chemicals and raising the nutritional quality of food crops.
Two big listed companies supply genetically-modified seed worldwide – America’s Monsanto (NYSE: MON) and Switzerland’s Syngenta (NYSE: SYT).
If you reckon ‘vice is nice’, there are plenty of investment opportunities.
• This article was written by Martin Spring in On Target, a private newsletter on investment and global strategy. Email
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