Do 'Green' Funds Underperform…and Can Investing in 'Vice' Ultimately Be a Virtue?
An Investment U White Paper Report
From the InvestmentU Research Team
"We should know that too much of anything, even a good thing, may prove to be our undoing…[We] need … to set definite boundaries on our appetites." -- "The Book of Virtues" by William J. Bennett
In one single day the conservative author and social critic William J. Bennett did more to unite conservative and liberal moralists than any one person in recent history. The right's crusader of moral "truths" admitted to the not so virtuous habit of gambling. What made this admission so rich, of course, was Bennett's career of lecturing America about behavior, in his "Book of Virtues," "The Death of Outrage" and other rants against sin. But while Bennett made money on moralizing, he apparently didn't do so well in the "vice" arena. He told Newsweek, in fact, that "over 10 years, I'd say I've come out pretty close to even" at the casinos. In other words, Bennett made money on morality via socially responsible investing, but lost money on sin. He is the rare exception… Virtue Is The Rare Path to Riches
So-called "virtue" investments are at record highs, topping $2 trillion, or 12% of management assets. Shareholders have invested more than $150 billion in socially oriented mutual funds like the Timothy Plan Large/Mid-Cap Growth Fund (TLGAX) and the religion-based Noah Fund, among others. But while people may feel good about investing in environmentally friendly funds like the Sierra Club Stock Fund (FSUSX) and other "do-gooder" investment vehicles, the fact is that you've got a better chance at profiting in a lackluster market with booze and bets than investing in so-called "socially responsible" companies. If William Bennett had invested in gambling instead of betting on the house, he may have prospered far more. The U.S. gambling industry has surged 120% in the past five years, compared with a net loss of 5.24% in the Dow Jones Total Market Index. In fact, in 2003, when Bennett acknowledged his slots machine habit, the gambling industry scored one of its best years on record, skyrocketing 250%. A Little Gambling Can Lift Your Spirits…and Your Investing Portfolio Gambling stocks are no more "risky" than other large cap stocks. They're on the move in a big way. Twenty years ago, only two states - Nevada and New Jersey - had legalized gambling. Today, 28 states welcome casinos and riverboat gambling. The expansion of the industry to every area of the country has resulted in an additional $20 billion a year in state revenues. Americans now "spend more on gambling than movies, videos and DVDs, music and books combined," reports the New York Times. The gambling sector has seen an annual growth rate of 9% a year since 1991, and that pattern shows no sign of weakening. In fact, the number of slot machines nationwide could rise 50% in the next few years, according to industry analysts. Want more evidence? - Boyd Gaming (BYD) operates 17 casinos in five states. It owns more than 1 million square feet of casino space, containing 27,644 slot machines and 725 table games.
- Last year Boyd Gaming completed a $1.3 billion merger with Coast Casinos of Nevada. The company has sales of $1.7 billion and P/E ratio of 23.6.
- In the last five years, Boyd stock has shot up 1,075%. Ameristar Casinos (ASCA) was up 725% in five years and Scientific Games (SGMS) climbed 718%. Needless to say, these numbers tower over most indexes.
Take a look at the performance of Boyd compared to to the Dow Jones Index in the following chart: And here is a look at the performance of the DJ Gambling Index over the past 5 years. 
Cleaning Up Your Act Could Be Unhealthy to Your Investments
What happens to funds that adhere to socially responsible investing platforms and pledge to avoid investments in alcohol, tobacco, gambling, firearms and adult entertainment? They're often lackluster performers in the stock market. The reason? They take off the table some of the best run, most profitable and recession-proof businesses, like gambling, that are available. In fact, our research shows that these so called "vice" stocks are among the best market performers. We may live longer than our ancestors and have more disposable income, but the seven deadly sins are still alive and thriving: pride, envy, greed, anger, lust, gluttony and sloth all have a front-row seat in our microchip, ethernet world. And there are hundreds of companies whose products are intended to meet those desires and shortcomings, whether the multi-billion-dollar diet formula industry or the equally rich junk food industry, or the firearms and tobacco sectors. Sin is a Safe Bet over Socially Responsible Virtue Stocks
Why? Because human weakness is as universal and predictable as the next quarterly earnings report. In business, as in the market, predictable behavior is a powerful and bankable profit-generator. Just ask Tom Galvin. In 2001, Galvin, the chief investment officer of Credit Suisse First Boston, commissioned a study on vice stocks. The results confirmed what we've known since the days of greed: vice stocks "are beneficiaries of flaws in human character," Galvin said. "The demand for drinking, smoking and gambling remains pretty steady and actually increases during economically volatile conditions," he said. In her book Stocking Up on Sin, Caroline Waxler rightly points out that "historically, investments related to human weaknesses have been a safe bet - no matter how the market is performing." Here's the thrilling news. "Over the last five years, vice-based investments have outperformed the S&P 500, earning a 42% return, compared with a negative return for the S&P." Vice investors have done well in the Vice Fund (VICEX), which is operated by the Dallas investment firm Mutuals.com. It opened for business in August 2003 with just $9 million. In 2005, the fund had assets of $45 million. Its 3-year rate of return was 20.7%, compared to 12.3% for the S&P 500. If it's Good Enough for Bernanke… You may have kicked the habit years ago, but that doesn't mean you should short Altria, formerly Phillip Morris. The company is among the biggest to have survived a tobacco settlement that cost big tobacco about $250 billion. Altria is one of the Vice Fund's top holdings. In the past year alone, the stock has gained 34%. It has an attractive P/E ratio of 12 and a fat dividend yield of 5%. And best of all, one of Altria's shareholders is reportedly none other than incoming Fed Chairman Ben Bernanke. - Cigarette smokers have been banished from much of the United States but they're not kicked out into the cold in many parts of the world, where the Marlboro brand carries distinction.
- Likewise, British American Tobacco PLC, which manufactures Benson & Hedges, has seen its stock climb 71% in the past year. It boasts a P/E of 8 and a 2.2% dividend yield.
- Even smokeless tobacco has enjoyed resurgence. UST INC., which produces Skoal and Copenhagen, has seen its shares climb 42% in the last five years. Its dividend yield is 5.6%.
- Altria (MO) and the tobacco index have outperformed the Dow Jones by a mile.
Are Socially Responsible Investing Funds Good for Your Wallet? The socially and environmentally responsible folks may be out to save the world, but you wouldn't know it by the way many of them treat their shareholders. Many of these funds have sub-par performances and charge huge fees for the privilege. For example, the Calvert fund family delivers a 4.5% front-end sales load, as does the socially responsible New Alternatives Fund. The Parnassus Fund charges 3.5% up front. These investing funds also have high annual expense ratios, cutting into shareholders' returns. The religion-based Noah fund takes a mind-bending 2.2% a year. The Green Century Balanced fund charges a preposterous 2.4%. And that's every year.
When all was said and done, the Calvert Social Investment Equity fund rose 5.9% over five years, ending in March 2005. But the costs of getting into the fund cut into profits. Just Say Yes to Nuclear Power While the socially responsible investing funds were narrowing their search of desirable companies, other investors were expanding their reach. In 2005, for example, the Oxford Investment Portfolio locked in gains of 149% in Landstar, 155% in Chesapeake Energy and 294% in Fording Canadian Coal Trust. Undoubtedly, these companies would not have made the top 10 lists among the Sierra Club Stock Fund or other "green" funds. The portfolio also pocketed healthy returns in the following: - L-3 Communications, which sells electronic weaponry
- Korea Electric Power, which builds nuclear power plants
- Rayonier, which cuts down forests for timber
- and Raytheon, the missile manufacturer
A Stock to Put You in Fine Spirits Once you appreciate the investment potential in vice stocks, the next question is where to invest… gambling, sex or guns? Or, maybe, adult beverages. Let's take Diageo PLC, for example. Based in Britain, Diageo is the world's leading spirits company. It sells wine and beer, too. The company was formed in 1997 with the merger of GrandMet PLC and Guinness PLC. It operates in more than 180 countries and has more recognizable brands than perhaps any other alcohol producing company. Smirnoff vodka, Johnnie Walker and J&B scotch are among its holdings. Guinness stout, Baileys Original Irish Cream, Jose Cuervo tequila, Captain Morgan rum and Tanqueray are also in its product line.
It is a huge company, accounting for 60% of the volume of the world's top 10 premium spirits brands. Some analysts contend the booze business is a slow-growth industry, since the market is mature and the U.S. population is growing at only 1% a year. But they're missing the demographic secret.
The number of consumers reaching legal drinking age has been on a steady incline since 1999. Moreover, business is expanding among baby boomers. The over-55 group is reaching for spirits, not beer, studies show. Watch your spirits soar with Diageo…
Liquor's Emerging Market Diageo is also tapping emerging markets, the real powerhouse of growth. Population and incomes are increasing in India, China and elsewhere, and that's good news for Diageo. In fact, Diageo owns 10 of the top 20 spirits brands in the United States and has a 23% market share, which is 100% more than its nearest U.S. rival. The bottom line is that there is no bad time to own Diageo. Now may be an especially good time. Conclusions Investing in vice could ultimately be a virtue. Putting your money in sin stocks--in the short and long term--should win out over today's available socially responsible investing funds and green funds. Good investing, The Investment U Research Team P.S. If you're looking for growth-oriented investments and a safe approach to building long-lasting wealth, The Oxford Club is one of the best vehicles around. In the past five years, as recently confirmed by The Hulbert Financial Digest, the Club's portfolios have generated an 85% return. The Wilshire 5000 Total Market Index gained 24% over the same period. Here's how to get access to "the club you can't get into." We also encourage you to sign up for the free Investment U E-Letter, headed up by best-selling author Dr. Mark Skousen. It's full of actionable investing wisdom you can put to use right away to become a better investor. Related Articles: View the complete Socially Responsible Investing white paper in .PDF format Investment Reports Archives
Copyright 2006-2008, The Oxford Club, LLC 105 W. Monument St., Baltimore, MD 21201
All rights reserved. No part of this report may be reproduced or placed on any electronic medium without written permission from the publisher. Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed.
This report was originally published by in January 2006. Investment U is the educational arm of The Oxford Club.
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