Saturday, August 27, 2005

The Vice Fund

I had not posted on an investment idea in a while, and I was reading up on exotic investments in mutual fund form. I came across a fund that I already had heard of "The Vice Fund". The Vice Fund is a mutual fund that invests in companies that make money off of vices and defense contractors. Think of it as a politically incorrect mutual fund. You can see their holdings here and here. As you can see, the find is 25% gaming, 23% defense, 21% alcohol, 14% tobacco and 16% other (a component of other is Berkshire Hathaway B shares, haha). The fund claims that they might be recession proof because the industries that they invest in see capital appreciation through good and bad times.

I like the idea of the fund but I take exception with the claim of recession proof investing. Movement of stock prices is still greatly affected by the movement of the market as a whole. I like the idea of defense investment as the Global War on Terror is going to be a long term endeavour. Investing in industry leaders like United Technologies, Northrop Grumman, and General Dynamics is a good way to enter that market (especially since UTC just split). The problem lies in gambling. Gaming is a discretionary spending centered fund, and the moment that hard times come people peel away at their outer layer of spending first. Gambling is usually one of the outer most layers of spending (unless you want to pin your investment hopes on gambling addicts). Gambling has become more widley distributed in locations, but is still dependent on travel for a majority of its patrons. I feel gambling will feel pain when the next recession comes. People might buy a case of Bud when they lose their job and feel down, but they don't buy plane tickets to Vegas for a weekend of gambling.

This fund has only been effective since mid-2002, so we have not seen how this fund acts in a down market. This group also is limited in breadth, as there are only 49 holdings in the portfolio. The fund has a higher P/E than the S&P 500 and many people think that the S&P is overvalued right now. If the market suddenly drops, I would not be surprised to see this fund make a deeper dip. This is a quasi-sector fund so you're puttign your eggs in a smaller basket than a broad index fund. In the next bear market, I will watch this fund closely. If it dips with everything else and deeper, then I will say "It's not recession proof, and that 1.75% expense ratio does not help". If it fights the dip of the broad market and outperforms the market or even makes gains, I will consider an investment in it. I find that high expense ratio tough to swallow with no knowledge of how it acts during a real recession.

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