The Vice Fund went on sale to the public this month, billing itself as a "socially irresponsible fund" that will put investors' assets into tobacco, gambling, liquor and defense.
The Vice Fund's founder, a Texas research and investment outfit with $240 million in assets under management, says the industries it has singled out for the Vice Fund are easy for the public to understand and largely recession-proof.
The economy could boom or slump, but a cigarette still gives smokers a jolt of nicotine that keeps them hooked.
"I would suspect that the large fund houses would not do this because it would be viewed as politically incorrect," Dan Ahrens, 36, Vice Fund portfolio co-manager, said. "We did not create the fund to be politically incorrect but for investment performance."
Mutuals.com Inc., which sells and manages the Vice Fund, was started in 1994. It also has four so-called funds of funds, mutual funds that invest in mutual funds.
Mutuals.com has made the regulatory filings with the Securities and Exchange Commission to sell the Vice Fund to the public, Ahrens said. Investors bought Vice Fund shares for $10 per share in a subscription, or initial offering, period that began Aug. 15 and ended Aug. 30. The company is seeding the fund with less than $100,000, he said.
The value of Vice Fund shares will fluctuate daily with its holdings. It does not have a ticker symbol but expects one soon.
The Vice Fund is likely to split its holdings evenly among liquor, tobacco, casinos and defense, Ahrens said. But that could change, depending on the economy and world events.
"If we go to war with Iraq next year, we might want to put more money into defense," he said.
According to the fund's prospectus, only stocks in tobacco companies - which have been under legal attacks by state governments, the federal government and class-action attorneys - did worse than the Standard &Poor;'s 500 index over the past five years. The largest gainer was alcoholic-beverage stocks, which include beer stocks. They gained 62.57 percent over the five years, compared with an 11.8 percent gain for the S&P; 500.
Companies the Vice Fund might invest in include Brown-Forman Corp., Adolph Coors Co. and Anheuser-Busch Cos. Inc. in liquor; Philip Morris, UST Corp. and Swedish Match in tobacco; Penn National Gaming Inc., Harrah's Entertainment Inc., Mandalay Resort Group and GTech Holdings Corp. in gaming; and Boeing Co. or Lockheed Martin Corp. in aerospace-defense.
Ahrens said there are "hundreds" of companies that the Vice Fund would find appropriate for its theme.
'Lots of flexibility'
As for management, "we gave ourselves lots of flexibility," Ahrens said. The Vice Fund might invest in Harley-Davidson Inc. because its motorcycles could be associated with drinking, smoking and gambling, he said.
The fund also might invest in Carnival Corp., which operates cruise ships. "A guy in our office recently got back from a cruise, and there was a lot of drinking, smoking and gambling going on there, so that would fit with our fund," Ahrens said. But "we are trying to focus 90 to 95 percent of the assets on the big four categories we are talking about," he said.
Theme funds are nothing new. There have been golf, race-car and funeral funds, and Catholic, Islamic and Lutheran funds. "Socially responsible funds" - the inverse of the Vice Fund - have been around for decades and gained some respectability in the 1990s for solid returns.
"There are plenty of them, and they have been around for years," Ahrens said. If they allow investors to "sleep at night, then that's a good investment for them," he said.
Some are appalled
Upon hearing of the Vice Fund, ethics and mutual-fund experts were either bemused or appalled at its investing strategy. Most believed it was a clever idea and was poking fun at socially responsible funds, which have struck a chord with baby boomer sensibilities.
"My first reaction ... is to laugh," said Michael Kerlin, a professor in the philosophy department at LaSalle University in Philadelphia. "It's sort of like a right-wing political joke that is making fun of liberals."
People could enjoy the products of those companies in moderation, he said. "I don't want my kids to work in casinos, even if they make a lot of money. But I think they're OK," he said.
Kerlin said he would probably "feel foolish" investing in the Vice Fund because it seemed more of a "cultural or political statement than an economic thing."
Terry Halbert, a professor of legal studies who teaches business ethics at the Fox School of Business at Temple University, said she was aghast at the idea of investing in a mutual fund that focuses, in particular, on tobacco stocks.
She said tobacco and liquor companies prey on vulnerable consumers such as teen-agers. "These vice businesses are exploiting vulnerable populations of our society," Halbert said. "I would feel that I was living on tainted money, and I would not feel like I should retire more comfortably, or buy a house at the shore, on their backs."