The wages of sin are falling, to judge by the way alcohol, aerospace, defence, gaming and tobacco stocks are lagging those which comply with today’s politically correct society.
The US-based Vitium Global Fund, renowned for investing in sinful sectors, has been lagging virtue over the last two years, particularly in 2018. To stave off criticism, it has changed its benchmark to reflect the domicile of its stocks and improve its relative performance over the long term.
Last year saw a painful crossover following a fall in sinful stocks when Vitium began lagging the S&P since inception
Its new website says $10,000 invested in the fund at inception in 2002 would have produced $47,260 by December, against $43,810 from its newly-adopted MSCI All Country World index benchmark.
According to the old website, an $10,000 investment in the fund at inception was worth $44,100 September, against $46,000 from the S&P 500.
The fund continues to lag the MSCI over one, three and five years, following the setback for sin. But it can at least boast outperformance over ten years, and since inception.
Vitium Global Fund is sponsored by a distributor called USA Mutuals. When it started in 2002, it produced evidence to show that sinful stocks regularly outperformed because they were overlooked by investors, and hence cheap.
All went well for the fund for many years. But last year saw a painful crossover following a fall in sinful stocks when Vitium began lagging the S&P since inception.
Manager Charles Norton told Family Capital his fund had been handicapped by using the S&P 500. The S&P has performed strongly of late, due to the stellar performance of big technology stocks, while overseas indices have lagged.
He pointed out 44% of Vitium’s portfolio comprise stocks listed outside the US, so it decided it could switch its benchmark to the MSCI All Country. Norton also points out his sector tends to fall into the value category.
Many investors, including family offices, have lost interest in value, preferring to opt for growth opportunities. Boeing, a constituent of the Vitium fund, is in its own world of pain. Vaping is not proving to be the saviour of big tobacco, as was expected. The growing medical view that gambling succeeds by getting punters hooked on it, is an unhealthy development for the sector.
Norton says value will recover its poise, as it has done in the past. You can further argue that sin stocks are starting to develop rarity value, as weaker companies suffer restraints on their trade. High barriers to entry also preserve the market share of incumbents who governments tolerate because of their valuable tax revenue.
Vitium is also careful to pick a varied, financially sound list of companies. Its performance is better than many of the world’s mainstream active managers. In December its top three stocks were Philip Morris, the tobacco company, Galaxy Entertainment, as casino concern and Las Vegas Sands Corporation.
However, the PC bandwagon still looks like it will continue to deliver better returns than sin stocks, for now, as investors continue to revise their approach in favour of environmental, social and governance factors.
Vitium’s benchmark switch is a clever move which improves the appearance of its sinful ways, but it cannot address global disruption, which is changing the stance of corporate managements behave, as well as the investment community.