In the aftermath of the Newtown, Conn., mass shooting, mutual fund manager Gerry Sullivan scooped up shares of Smith & Wesson Holding Corporation. After gunman Adam Lanza opened fire in a Newtown school, shares of Smith & Wesson, the U.S.-based gun manufacturer, took a hit. As investors yanked money from the company, Sullivan saw a buying opportunity.
For Sullivan, this purchase was hardly unusual. Sullivan manages the aptly named Vice Fund. The fund's investing strategy is premised on the notion that vice—or at least owning shares of companies in "vice" industries—pays. As such, the fund's portfolio is loaded up with shares of companies in the alcohol, tobacco, firearms, gaming, and defense industries.
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Though Sullivan is open to investing in companies across the vice spectrum, the fund currently has a tobacco bias. Indeed, as of the end of 2012, its top three holdings were Altria, Philip Morris International, and Lorillard. Together, they account for more than 15 percent of the portfolio. Companies with ties to the gaming industry, such as Penn National Gaming, MGM Resorts, and Wynn Resorts, also enjoy prominent spots in the fund.
As for firearms, the fund has exposure to Sturm, Ruger & Company in addition to Smith & Wesson. So far, both companies have added value to the portfolio. For instance, when Sullivan bought Smith & Wesson, the stock was trading at $8.03. On Wednesday afternoon, it closed at $9.04.
Despite its post-Newtown dip, Smith & Wesson has been on a tear, with growth fueled largely by increased sales stemming from concern among gun owners that future gun-control regulation will hurt their ability to purchase weapons. In 2012, for instance, the company's share price grew by upwards of 93 percent. "What's definitely going to be interesting is to see the next quarter sales," Sullivan says. "Without a doubt, it's beyond anecdotal to know that significantly more guns have been sold [recently]."
As for the other industries in his portfolio, Sullivan is optimistic about tobacco and alcohol. Looking ahead, he is skeptical about the health of the economy. That, in turn, leads him to favor those two industries, which tend to hold up fairly well during rough periods. "The good news is that tobacco and alcohol tend to be defensive," he says. "They're somewhat less influenced by economic [conditions]. [Regardless of the state of the economy, people] tend to smoke ... and they tend to drink."
By contrast, one of the wildcards in the fund's portfolio is its exposure to defense contractors. With yet another looming sequestration battle, it is conceivable that some of the companies the fund is invested in will see their government contracts scaled back. "Defense is a crapshoot," Sullivan says.
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Overall, the past few years have been profitable for Vice Fund's investors. As of the end of last month, the fund's trailing three-year returns landed it in the top 2 percent of Morningstar's large-blend category. Over that period, it beat the S&P 500 by an average of around 5.5 percentage points per year.
Meanwhile, in each of the past three years, the fund has beaten the cumulative return of the MSCI Global Socially Responsible Indices—an irony that is not lost on Sullivan. "It's ironic that an anti-socially responsible fund would [outperform] where a lot of these socially responsible [investments] don't," he says.