There has been plenty written about ethical investing over the years, but little about the exact opposite. So what happens if you abandon the smug, goody-goody approach and look for those companies that exploit human failings?
A few years ago I managed to track down a US fund that did precisely that.
In 2002 USA Mutuals, as its name suggests a US mutual fund firm, launched the Vice Fund. From the outset not only did it not invest ethically, it only invested in industries and individual stocks that ethical funds wouldn't touch with a bargepole, notably in aerospace and defence, gambling, tobacco and liquor.
The rationale for vice investing is simple: companies in industries like this have a steady demand for their goods and services irrespective of the state of the economy, they participate in a global market (vice is a worldwide phenomenon); they tend to be in businesses that generate high margins and strong cash flow and they operate in industries with high barriers to entry for new competition.
Over the period since inception the Vice Fund has built up an enviable performance. According to recent data, it is up 70% since inception versus around 50% for the S&P500.
The fund was originally the brainchild of Dallas fund manager Dan Ahrens. Ahrens is the author of the book 'Investing in Vice: The Recession Proof Portfolio of Booze, Bets, Bombs and Butts' (St Martins Press). The current manager is Jeff Middleswart. Middleswart describes his investment process as focusing on large companies, with solid finances and good dividends, only looking at smaller companies where they might be takeover candidates.
Weightings in the fund change considerably. A few years ago the fund's portfolio had roughly equal exposure of 22-25% each in three sectors: defence, gaming and alcohol, with around 13% invested in tobacco. Now those figures are 35% in tobacco, 22% in booze, 14% in gambling and the balance in defence.
Porn is a notable absentee, perhaps because of a lack of publicly traded stocks through which to invest in it. Gambling stocks tend to focus on the gaming industry, and on companies that supply it.
In total the fund's manager reckons there is a universe of around 200 companies to select from. It is also considering adding nuclear power to its roster.
Not vice perhaps, but certainly not politically correct. The fund's current largest holdings are the likes of Altria, British American Tobacco, Lorillard, Lockheed Martin, Diageo, and Carlsberg.
Killjoys might argue that investors in these funds are condoning the activities of the companies it invests in, and responsible in a small way for the pernicious effects that their products produce.
Others might say that we are not our brothers' keepers, and these companies would exist whether or not we invested in them. Investors can always donate a portion of their profits to charity if they feel strongly about it.
The fund has a minimum investment of $2000, but is effectively only open to US residents. Foreign residents can invest in US mutual funds only via a US bank account or account with a US investment adviser, and have to complete a US W-8 tax declaration form. Earlier plans to launch a UK mirror image of the fund do not appear to have got off the ground.
So the evidence is clear: vice could be nice. But how has vice orientated investing been doing in the UK market? The results of late have not been inspiring.
Compared to prices a year ago, the beverage sector is up by 66%, tobacco by 34% and aerospace and defence by 38% compared to a gain in the FTSE 100 of 42%. There is no separate index for gambling stocks in the UK. But William Hill is up only 8%, Ladbrokes is down on a year ago and Partygaming up 33%.
That's not to say the concept lacks merit. Being worthy is all very well. But vice stocks are the epitome of defensiveness. And if the promises of tough times to come are borne out by events, these sectors could find themselves among the best performers 12 months from now.