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Vice is a recipe for investing success

By Euan Stuart Oct 31, 2005

Euan Stuart

Many of us will only admit to indulging in tobacco, alcohol or gambling on an occasional basis, but the success of these industries would suggest that more of us indulge more often than we like to think. Vice is big business, and that makes it a recipe for investing success as well. As an example, note that the best-performing sector in the UK since 1997 when New Labour was first elected has been the tobacco sector. And the sin sectors have been having a particularly good run of late. Over the last couple of weeks, beverages - wineries and distillers - and tobacco products have consistently been among the best performers in the US market.

It should come as no surprise then, says David Litterick in The Daily Telegraph, that one of the best-ranking funds in the US over the last quarter is a new launch based on the principle of “anti-ethics”. Driven by his distaste for the new craze of “socially responsible” investing, fund manager Dan Ahrens decided instead to look only at all those things good people are supposed to steer clear of - guns, fags, booze and gambling. The result is his Vice Fund, which has 90% of its assets invested in defence, gaming, alcohol and cigarettes. Investing, says Ahrens, should be about making money, not making a political or social “statement”.

Ahrens is certainly making money: in 2003, the first full year that his fund was running, it returned 34.3%, while last year the figure was 24.4%. This success makes complete sense, says Tim Price in his Ansbacher Wealth newsletter. The sustainability of the performance of the defence sector may be in question (it is very cyclical and currently on a high, thanks to George Bush’s “geopolitical posturing”), but the gambling industry appears to be one of the few benefiting from “the disruptive evolution of the internet”, while the world’s big tobacco and alcohol firms are “solid earners” with impressive long-term potential.

If you want to indulge your sinful side via the stockmarket, now is a good time to do so, says Barron’s. “Booze is back.” US hard-liquor consumption rose 4% in 2004 after a similar gain the year before. This is giving “fits to the beer makers like Anheuser-Busch”, but bolstering the fortunes of Diageo, Brown-Forman and the rest of the spirits industry, where revenues rose 6% last year. Enthusiasm for spirits is partly down to “flavour innovations”, increased advertising and diet concerns (there is no sugar in vodka but piles of it in beer), says Bill Pecroiello of Morgan Stanley, but it is also down to fashion. Carrie Bradshaw of Sex and the City fame and her girlfriends “made cocktails glamourous by drinking cosmopolitans and green-apple martinis in Manhattan clubs” and a recent survey showed that liquor is now the number-one alcoholic beverage among 21 to 27-year-olds. No wonder then that shares in Diageo, the UK-based spirits giant, recently hit a 52-week high, while those in Anheuser-Busch are near a 52-week low.

There’s obviously a cycle to this - beer and spirits go in and out of fashion all the time, says Barron’s, but there’s reason to think the spirits business has a way to go. The best brands - Johnnie Walker, Chivas Regal and Smirnoff - are increasingly popular in the West and they are among the few consumer products besides Marlboro cigarettes and Coca-Cola that have worldwide appeal. Whisky sales are rising fast in Russia, and one of the hottest drinks in Shanghai’s top clubs is a mixture of Chivas Regal scotch and green tea. China is going to a be a massive drinks market and that bodes well for the sector over the longer term.

Published in Investment-Advice | More articles by Euan Stuart

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