This article was published on 9 October 2010. Some information may be out of date.

Prospering from booze, bets, bombs and butts

It won’t be everyone’s cup of tea — or perhaps I should say glass of scotch — but the performance of a US share fund called the Vice Fund suggests that investing in what other people shun can pay off.

The Vice Fund seems to be the world’s only fund that does the opposite to ethical investing.

Ethical funds either buy shares and bonds in “good” companies or avoid investments in “bad” companies — in terms of their products, employment policies, environmental practices and so on. Meanwhile, the Vice Fund invests only in alcoholic beverages, gambling, aerospace/defence and tobacco — or as founder Dan Ahrens calls them in a book title, “booze, bets, bombs and butts”.

And while ethical funds seem to have a pretty good track record — depending to some extent on which research you read — the Vice Fund has certainly held its own.

In the year ending September 30, the fund’s return was 9.59 per cent, not far off triple the return in the US market as a whole — as measured by the S&P 500 index — which rose 3.89 per cent.

We shouldn’t read too much into that. A year is far too short to judge any investment. And even if we look at the whole life of the Vice Fund — it started on August 30 2002 — the period is still too short to draw strong conclusions.

The fact is, though, that in that eight-plus years the Vice Fund has grown an average of 7.16 per cent a year, compared with the S&P 500’s 4.81 per cent.

If you had invested $10,000 in the Vice Fund at the start, it would have grown to more than $17,800, compared with just over $14,700 in a fund that invests in the S&P 500. Investing in undesirable” industries doesn’t seem to bring undesirable results.

Why has the Vice Fund done so well? According to its fund managers, “We believe that these industries tend to thrive regardless of the economy as a whole. In fact, they may have the potential to perform better when times are uncertain, leading many to view investment in ‘vice’ industries as a solid strategy during recessionary periods.”

It’s not all that solid, though. In 2008 and 2009 the Vice Fund did quite a lot worse than the S&P 500. Its strong performances came both in the economically healthy times before the global financial crisis and in the last year. So who knows where it will go next?

I’m not saying, therefore, that everyone should rush off and invest in the Vice Fund. What I am saying is that “bad” companies may not be bad investments, and “good” companies may not be good investments.

Let’s look, for example, at companies with a strong environmental record. While their products may be growing in popularity, that is probably already reflected in higher share prices. And if you buy shares at a relatively high price, that makes it all the harder to make big gains.

Indeed, people have made fortunes by doing “contrarian investing” — buying whatever is unfashionable and cheap. But there are no guarantees that this will make you rich, either.

The best bet — in terms of making a financial gain — is to invest across as wide a range of industries as possible.

We should acknowledge, though, that financial gain isn’t everything. If you prefer to invest only in “good” companies, fair enough. Even if they don’t perform particularly well, you might be happy to settle for a somewhat lower return and a somewhat clearer conscience.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.