The devil has the best tunes and he also, as it happens, has some of the best investments. Because if you are interested in making money during the current period of uncertainty it is hard to beat the returns offered by companies which take advantage of humankind’s failings. For my own part I subscribe firmly to the idea of socially responsible investment and I would never invest in any of the sectors mentioned in this article. The fact is that from a financial perspective there can be no doubt that vice is not just nice – it’s lucrative. Tobacco, gambling, alcohol, and armaments – to name the key sectors – have always shown consistent, above-average returns. Why should this be?
Whatever different governments and societies may ordain the fact is that vice, in all its many guises, never seems to go out of fashion. Indeed, whether markets rise or fall wars will be waged and people will seek comfort in such things as smoking, drinking and a flutter on the horses. Vice stocks are – like it or not – fairly recession proof, leading many investors to hold them as a defensive play against a possible slowdown in economic growth.
There is (so far as I am aware) only one managed fund specialising in gambling, tobacco, alcohol and defence related stocks. It is called, appropriately enough, the Vice Fund, and it was launched in the USA in 2002. Since then it has delivered a rather patchy performance. Over the last year it has shown a 12.65% return, over the last three years 16.60%, but over the last five years a mere 0.22%. In other words, it fell with the rest of the market after 2007. Charles Norton, the man who manages the fund, describes himself as ‘a conservative family man’ and stresses that he likes to invest in vice stocks because they are ‘very strong’ performers. It would be a mistake, though, to think that all vice stocks are equal. To achieve such gains on a regular basis requires an active investment strategy that takes into account both sector developments and individual company prospects. Here is a quick round up of the different options.
Tobacco
The Guardian recently (14.2.12) pointed out that £100 invested in BAT shares on 1st January 2003 would now be worth £749. In a long feature article on the subject of the tobacco industry the newspaper pointed out that: ‘The financial crisis has claimed many scalps – governments, banks, fraudsters by the dozen – but it has given a surprise fillip to one of Britain’s most controversial sectors, the tobacco industry. The stock prices of stalwarts such as British American Tobacco and Imperial Tobacco have hit record highs in the past 12 months – with BAT doubling to £30 as investors fled bank and retail shares in search of safer havens. Never mind that cigarettes kill six million people a year and the industry faces an onslaught from health campaigners who want to extinguish its commercial viability. On global stock exchanges, tobacco firms have been among the biggest beneficiaries of the financial dislocation in the developed world.’
Smokers in the first world may be quitting, taxes may be rising and countries may be leaping on the public ban bandwagon – but the tobacco sector is still thriving. Why? Analysts say companies have found a neat solution to the problem. Not only do they pass on tax rises to smokers, as one would expect, they also impose an additional price increase to offset the lost sales that are inevitable every time excise duties are raised.
Martin Deboo, analyst at Investec Securities, says: ‘These stocks are about the closest you can get to a bond on the stock market in that they offer a relatively stable income stream, not easy to find in the equities space.’
Gambling
The gaming industry has been dominated, over the last few years, by the rise of online gambling. There are around 2,500 gaming websites generating an estimated at between $9 and $10 billion a year. When the US government decided to crack down on online gambling several years ago – it is illegal to offer it to US residents – the whole sector took a hit. But since then shares have rebounded. To understand how the market is performing one need only look at the Van Eck Global Gaming ETF. This seeks to replicate, before fees and expenses, the price and yield performance of the S-Network Global Gaming Index (WAGRT), a rules-based, modified-capitalization-weighted, float-adjusted index intended to give investors exposure to the global gaming industry. The index has shown a very steady annual return since its inception amounting to 31.18% in the last three years.
Alcohol
The drinks industry has been going through a period of change. It was badly hit when countries began to ban smoking in bars, and the recession has meant that a growing number of people have decided to do their drinking at home. CNN ran a report on the sector in June 2011 in which it pointed out that: ‘Alcohol sales climbed with little interruption throughout the recent recession, and have continued to expand in recent months. This is in spite of, or maybe because of, the stagnant job market. So the old adage, that the booze industry survives in a recession because people drink even when they’re broke, appears to be true.’ Figures indicate that since the recession began alcoholic beverage sales grew by an average of 10% a year.
Aerospace and defence
If you visit a website called shareprices.com and search for its Aerospace and Defence Sector Index & Share Prices, you will see that the index has risen from c. 2300 to 3600 in the last three years. If you want further evidence of the sector’s stability then consider the share price and dividends of BAE – a company that regularly pays out an annual dividend of 7%.
Oh, and sex
I am reluctant to mention the ’s’ word, but without involving yourself in anything even remotely – ah – dubious there are ways to profit from ‘it’. Consider, for instance, investing in one of the growing number of firms to offer specialist pharmaceutical products such as Pfizer, Eli Lilly or Berlex; or one of the companies running fertility clinics; or maybe even manufacturers of a well known brand starting with the letter ‘D’ – SSL International plc – or one of their competitors. All these sectors have proved recession resistant.
In conclusion
If you are interested in investing in vice stocks then either you will need to do a considerable amount of detailed research – or ask a broker to assist you. Whichever route you opt for I would recommend visiting some of the different online investment sites including those that provide forums for shareholders to exchange information and ideas. One that I recommend is Yahoo Finance. If you keen to learn more about the Vice Fund I mentioned above their website is www.vicefund.com. Do bear in mind that this is a relatively high-risk fund and that you will be exposed to any fluctuation in the exchange rate between sterling and the US dollar. Remember, you should always take professional advice before making any financial decision.
Jim Storm’s articles on Alternative Investments appear regularly in The Schmidt Tax Report, a monthly newsletter aimed at showing UK taxpayers ways they can pay less tax.
Visit us at http://www.schmidtreport.co.uk to found out how we can slash your tax bill.
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