Monday, February 11, 2008

FINANCEHYPE: Vice Is Nice - Gambling Beats Green

No, that's not a misspelling of a college football game result.

There's been a lot of hype over the past few years about socially responsible investing (SRI). Basically, this means that one would only choose to invest one's money in companies with socially acceptable practices. If this sounds silly already, it's because you might have realized that there are many different standards of acceptable behavior - and who's to say whose is the right standard?

For example, SocialFunds.com, with its self-proclaimed "over 10,000 pages of information on SRI mutual funds, community investments, corporate research, shareowner actions, and daily social investment news," doesn't appear to have an explanation of the SRI philosophy (perhaps manifesto is a better word) anywhere on its site. Interesting.

Domini Social Investments is one of the SRI mutual fund firms out there, and does a decent job of explaining its criteria for considering a potential investment to be socially responsible. For example, their Social Equity Fund (DSEFX) "seeks to hold the stocks of corporations that, on balance, contribute positively to the creation of a wealthy and healthy society" (more specific info is provided on their site).

Some of the things that SRI-minded funds (and people) find abhorrent:
  • Tobacco, alcohol, and gambling
  • Nuclear power and related services
  • Defense (i.e., companies that make bombs, missiles, tanks, military equipment, etc.)
Let's take the risk of being politically incorrect, and look at the flip side of this coin - investing in companies engaged in socially irresponsible practices. Unfortunately, there aren't many options out there. Private Media, a well-known Swedish porn company, went public a while back and trades on the NASDAQ market (PRVT). For different reasons, it's not doing so well. Besides, it's not wise to invest in a single company if one is looking for exposure to a whole sector (due to unsystematic risk). It's wiser to diversify one's assets over a broader range of companies if possible, and one easy way to do this for individual investors is via mutual funds.

Enter the Vice Fund (VICEX) - something that discards all pretensions of political correctness, and goes straight for the dark side of the corporate world: Alcohol, Tobacco, Gambling, and Defense stocks. Their top 5 holdings at the end of 2007 were Altria, Loews, Diageo, MGM Mirage, and British American Tobacco. All well-known companies engaged in some form(s) of what could be called vice, to be sure.

Now, one might wonder what's to be gained by focusing strictly on these types of companies. There must be some free publicity, to begin with. There is probably also some degree of protest (from the people that might choose to invest in accordance with the SRI philosophy). But the most important thing in the mutual fund business is delivering performance for the shareholders, and at this the Vice Fund beats the above-mentioned Social Equity Fund quite nicely (not to mention the S&P 500):



What you see above is the most recent five-year performance of VICEX, compared to DSEFX and the S&P 500 (^GSPC; a widely-used proxy for the US stock market). It speaks for itself. Don't take our word for it, though - check for yourself at Yahoo! Finance (click on the chart, although it should update automatically every day).

The choice of where to invest your hard-earned dollars, then, boils down to this: capitalist or commie? Are principles more important than money? If you're after increased wealth, buy the bombs, booze, butts, and blackjack. If you'd rather feel good about yourself (and maybe eat ramen noodles in retirement), go ahead and be socially responsible.

But before you make your choice, keep in mind that this is the real world - people are going to keep getting hammered, addicted to smoking, and gambling away Junior's college fund. And that's before we take the American politician into account. After all, there are apparently a lot of people in this world that still need to be bombed!

1 comment:

David said...

It seems authentic to invest based on what people do rather than what they say. The defense portion of the vice fund honors the fact that citizens today are coerced to fund via taxes a Nazi like government that wields aggression in the name of democracy and lies about it.