Sin and Profit

Jason Zwieg at the WSJ provides interesting data today on the relative returns of ‘socially irresponsible investing’ (my own phrase).

I recently wrote that I could not recommend to a friend any ‘socially responsible’ mutual fund. My reasons:

smoking drinking1. Funds like this tend to have relatively high costs (especially compared to index funds, which I would generally recommend)

2. I find it impossible to match up the specifics of my (or anybody’s) moral code with the blunt instrument of equity investing.

Less emphasized in my post – but possibly most importantly of all – the ‘sin stocks’ such as tobacco, alcohol, gambling, weapons may have an inherent advantage when it comes to making money.

Zwieg cites the returns of a small mutual fund that invests only in these unfavored sectors of the economy, and has a ten year track record better than the S&P 500. Since few actively managed funds actually beat an index like this over a ten year stretch, the fund deserves attention. USA Mutuals Barrier Fund (previously named “The Vice Fund”) invests in tobacco, gambling, alcohol and defense, and returned 8.3% annually for the past ten years, compared to 7.9% for the S&P500 and 7.2% for the Vanguard FTSE Social Index Fund.

Now, one fund’s return does not imply any kind of rule about anything. But Zwieg provides more data.

London Business School economists showed that over the past 115 years US tobacco stocks returned an average of 14.6% annually, compared to 9.6% for all US stocks over that time. That’s a huge effect. Because of the magic of compound interest applied over long time periods, it’s the difference between $1 growing to $38,255 (at a 9.6% return) and $1 growing to $6.3 million (at a 14.6% return.)

Big obvious examples of persistently high returns – above adjusted risk – in efficient markets are extremely rare, and therefore notable.

And yet while markets are generally efficient, it makes some sense to me that the natural aversion of individual investors to certain companies, and the added preference of socially responsible investors against certain ‘sin’ sectors, would leave a persistent opportunity for outperformance investing in unlikeable companies and industries.

This follows the basic notion that if capital is scarce, the returns on that capital need to be relatively higher in order to attract and sufficiently compensate scarce capital. I’m enough of a contrarian cuss to smile at the irony/evil of capitalism, if this ‘sin investing’ strategy actually works in the long run.

I also appreciated learning from Zwieg that there’s a SINdex, which has tracked comparative returns since 1998, and has gained 16.1% annually vs. 5.2% in the S&P500. That’s probably not a big enough sample (there are only 29 companies in the SINdex) to prove anything yet, and 16 years is not enough time, but I’m intrigued by this possible market-beating approach in a Random Walk world.

Please see related post: Not A Fan Of Socially Responsible Investing

and Book Review: A Random Walk Down Wall Street by Burton Malkiel




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I founded Bankers Anonymous because, as a recovering banker, I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year’s budget – it is a weakness of our civil society. For reals. It’s also really fun for me.

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