Happy returns: It's a sin how well this fund performs

Investment in vice paying off handsomely; antistocially conscious

Mar 31, 2013 @ 12:01 am

By Jason Kephart

Gerald Sullivan runs what you might call the antisocially conscious fund.

While socially conscious managers do their best to avoid the “sin” stocks of the world, he can't get enough of them. As portfolio manager of the $131 million Vice Fund (VICEX), Mr. Sullivan invests almost exclusively in three types of stock that such funds often avoid: alcohol, tobacco and gambling.

The fund's top holdings include tobacco manufacturers Altria Group Inc. (MO) and Philip Morris International Inc. (PM), gaming companies Las Vegas Sands Corp. (LVS) and MGM Resorts International (MGM), and alcohol companies SABMiller PLC (SAB) and Diageo PLC ADR (DEO).

“It sure does generate publicity,” Mr. Sullivan said. It's also generated a fair amount of outperformance. Over the 10-year period ended March 25, the fund posted a 12.21% annualized return, easily trumping the S&P 500's 8% annualized return over the same period, according to Morningstar Inc.

LESS PANIC SELLING

Mr. Sullivan attributes the performance of sin stocks to their less-than-wholesome nature. They tend to be less widely held by institutions and have less analyst coverage. That leads to less panic selling when the markets get scary and less overbuying when things are going well, Mr. Sullivan explained.

Given the fund's performance, Mr. Sullivan is surprised he's still running the only fund that focuses on sin stocks.

“You'd think investment companies would flock to it,” he said.

Even though the fund is centered strictly on the traditional sin stocks, Mr. Sullivan keeps an open mind. Somewhat recently, defense stocks such as The Boeing Co. (BA) have become a staple of the fund.

“Defense stocks have evolved into sin stocks as more and more people started looking at weapon production as being very bad,” Mr. Sullivan said.

jkephart@investmentnews.com Twitter: @jasonkephart

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