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DEBBIE ELLIOTT, host:

This is ALL THINGS CONSIDERED from NPR News. I'm Debbie Elliott.

This week was not a good one on Wall Street. The Dow Jones Industrials had their worst weekly performance in more than four years. The new issue of Business Week declares volatility is back. So where should you invest your money during volatile times?

One mutual fund advertises it's a good bet, that's the Vice Fund. Yes, it's actually called the Vice Fund, and it concentrates its investments in four types of industries.

Mr. CHARLES NORTON (Portfolio Manager, Vice Fund) The alcoholic beverages sector, tobacco, gaming and aerospace and defense.

The Vice Fund's portfolio manager is Charles Norton. And he doesn't exactly reek of vice.

Mr. NORTON: I don't smoke. I drink only on occasion, rarely gamble.

ELLIOTT: The Vice Fund, which started in 2002, is much smaller than the socially responsible or virtue funds we've heard about before. Even so, the fund attracts considerable attention, and it's not all good attention. In fact, Norton says the fund might change its name because it gets a bad rap.

Mr. NORTON: Even though it's called the Vice Fund, it's really a misnomer. We're not making a political statement. We're not advocating these activities in any way. It's not that we're trying to select vices and then invest in them.

ELLIOTT: But clearly something called the Vice Fund has a certain tone about it; it sounds like that's what you're doing.

Mr. NORTON: It does sound like that, but the fact of the matter is that whether a company is selling a sneaker, a hamburger or any other good, if it's legally manufactured and sold, my job is just to analyze it, just to wear my analyst hat and look at the fundamentals. And when I do that with these four sectors, it's - it makes a very compelling case to focus on them.

ELLIOTT: Explain to me when you're looking at these four sectors why you think excluding others is a wise choice. Why is your fund attractive? What can it give me that, say, a much more broad-based fund - I mean a lot of mutual funds include tobacco stocks, for example.

Mr. NORTON: That's right. We just happen to focus on these four sectors. And there are really five common threads that tie investments in these sectors together. One is there's unvarying demand for their goods or services, regardless of economic activity. They are global in nature. You know, people smoke and drink and gamble all over the world. They're extremely profitable. There are high barriers to entry in these businesses.

In the tobacco industry, advertising for cigarettes is illegal in most markets. And so there's a powerful advantage to brands that have been around since the '60s and '70s and '80s. And one of the most important things that we like about these is that the government is a large beneficiary, particularly in gaming and tobacco. What that means is that the government has a financial incentive to make sure that these industries flourish.

ELLIOTT: You know, we heard so much in recent years about the so-called virtue funds or social responsibility funds. Was this in any way a counter to those?

Mr. NORTON: It's not right now. We don't perceive socially responsible funds as our competitors. Socially responsible funds need to do what's in the best interest of their shareholders, which is all we try to do as well.

ELLIOTT: But don't you ever feel bad or even guilty about investing in products that do take such a toll on society, and in the case of tobacco, even kill people?

Mr. NORTON: No, because when you're a serious investor, you have to check your emotions at the door. Emotions are the enemy when it comes to making sound investment decisions, so we don't come with this with any personal biases. We come at this just as a purely objective analyst, and in our perspective those types of judgments have no place in the investment process.

ELLIOTT: You know, you've said that investors should leave their conscience at the door when they're making these decisions. But I'm curious, is there anything that you would not invest in?

Mr. NORTON: Well, in terms of what? I wouldn't invest in companies that don't have strong fundamentals. But if you ask me that question, my answer will be based on the fundamentals in the business.

ELLIOTT: The financial fundamentals.

Mr. NORTON: That's right. It will be based on the financials and not my moral judgment on it.

ELLIOTT: How do you do that? How do you just put your moral judgment over there on the shelf?

Mr. NORTON: Well, that's what I'm trained to do. I'm a professional money manager and I have to remain objective at all times, because emotions will interfere with making a smart investment decision. You know, when you're investing, all sorts of emotions come into play. Do I sell this stock? I'm way down on it. I'm scared. You're hopeful. You're over-eager. You can't have those emotions enter your investment process or you're doomed from the beginning. So we come at this from a purely objective standpoint.

ELLIOTT: Charles Norton is the portfolio manager of the Vice Fund. Thank you for speaking with us.

Mr. NORTON: Thank you, Debbie.

ELLIOTT: And in case you were wondering, vice does pay. During the past three years, the Vice Fund has produced an average return of nearly 19 percent. Compare that to the S&P index, with earned about 10 percent each year. It has also performed better than some of the major virtue funds out there.

Tony Plath, a professor of Finance at the University of North Carolina, says the reason the fund has done so well recently is that the market has been in flux.

Professor TONY PLATH (University of North Carolina): When the market rises, people celebrate. They consume more alcoholic beverages, and they smoke more. At the same time, when they market deteriorates, people commiserate. So in commiserating, they drown their sorrows and they smoke more. So around periods of economic change, companies that are typically thought of as being vice companies tend to outperform the market.

ELLIOTT: Even so, Plath says, for most investors the Vice Fund is not a good bet.

Mr. PLATH: No, I wouldn't buy it.

ELLIOTT: The problem, Plath says, with the Vice Fund or any fund that focuses on a narrow sector of stocks is that they're usually no match for the market.

Mr. PLATH: It's really difficult to outperform the market on a consistent basis. And that's the key, to do it consistently over time after adjusting for fees and transaction costs. And you're just not going to do it with a strategy that's as superficial as buying stocks in vice-oriented companies.

ELLIOTT: Tony Plath doesn't endorse investing narrowly in virtue funds either. He says turbulent weeks on Wall Street such as this one should serve as a reminder of the most important investment advice: diversify.

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