Socially responsible investments, please step aside. Charles Norton, comanager of the Vice fund, has other ideas. Ironically, Norton doesn't think of the four pillars of his investment focus—alcohol, defense, tobacco, and gambling—in terms of "vices." And certainly not as "sin stocks." Here's how he puts it: "We don't really characterize them as vices—we just focus on four sectors that deliver long-term gains in a variety of different market environments. Consumers enjoy alcohol and tobacco regardless of what's going on in the economy." Here's the scoop on his outlook for each of the fund's four vices...er, sectors:
Booze. Emerging markets are the key driver for brewers; we're still focused on companies with the most exposure to these fast-growing beer marketing. The brewers have been weighed down as higher input costs, like barley and aluminum, have compressed their margins. Pricing power remains strong, though, and the brewers have been successful in recovering most cost increases by hiking prices. With barley prices now declining, we could begin to see some near-term margin relief. Distillers have been relatively less impacted by the same cost pressures, while spirits growth has remained robust. We're mostly focused large, multi-national players with the greatest distribution networks and brand portfolios.
Guns. Defense has historically done well in an election year. These stocks tend to outperform when budget authority on procurement and development is on the rise, and we expect it to increase for at least a year, regardless of the election.
Smokes. Tobacco companies have strong pricing power and are relatively insulated from inflationary cost pressures. Many cigarette-makers have pristine balance sheets with little or no leverage and are buying back stock. Internationally, emerging-market consumers continue to trade up to higher-priced, international brands, like Marlboro.
Slots: Gaming's had a tough time. The casino operators are facing the challenges of highly leveraged balanced sheets with declining cash flow as consumers curtail their discretionary spending. I don't see a near-term turn around in casino gaming. We've been pretty lean for a while, but we're still finding some opportunities. The Macau phenomenon is continuing, and we see a long-term trend of Asia opening up to casino gambling. We're also finding opportunities in slot makers—the equipment companies.