One of the interesting developments in investment markets in recent years has been the emergence of so-called "ethical funds," which only invest in companies meeting certain moral criteria.
They avoid firms making profit from human weaknesses such as addiction to legal drugs (tobacco, alcohol), gluttony, gambling and promiscuity, as well as activities stigmatised by popular opinion or vocal minorities genetically-modified seeds, nuclear power, armaments, animal testing of new products, abortion, involvement in countries with nasty governments.
According to one source, in the US investment limited to businesses classified as "socially responsible" burgeoned from $40 billion in 1984 to $2.16 trillion in 1999, by then accounting for more than a tenth of all professionally-managed funds in the country.
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I have no problem with investors allowing their political or religious views to shape the pattern of their own investments. After all, it's their money to do with what they wish. Although I am uncomfortable about how often definitions of "social responsibility" are restricted to left-wing concerns (investing in Burma is evil, but doing so in China is OK).
However, there is a case for taking advantage of the market distortions that arise from subjective bias.
Three years ago an American portfolio manager, Dan Ahrens, courageously did so by launching his Vice Fund, which invests nearly all its money in gambling, defence, alcohol and tobacco stocks.
It's been spectacularly successful. The rating service Lipper now ranks this the fifth best of 751 mutual funds in its class in the top 1 per cent of American funds. Since its launch it has delivered an average annual return of more than 19 per cent.
Ahrens argues that "sin stocks" thrive "no matter what happens to the economy." People are "always going to drink alcohol smoke gamble." And national security will always be a concern.
His fund's success has motivated a British company to seek regulators' approval to launch a similar one in the UK. "The bottom line is: vice is nice," says spokesman Richard Craven.
If you prefer a more selective approach, you can invest directly in listed companies operating in "sinful" sectors. Here are a few ideas:
Tobacco stocks have performed consistently well over the years, despite increasingly hostile regulation, thanks to stable cash flows, rationalisation and expansion in emerging economies. Ones to consider include Altria (formerly Philip Morris) in the US, British American Tobacco in the UK and Swedish Match in Sweden.
Liquor, the other legal drug, is fortunate in having avoided entirely the ignominy heaped on tobacco. Markets are generally mature and slow-growing, or intensely competitive. But valuations look reasonable for moderate, low-risk growth prospects. Stocks to consider include Anheuser-Busch (US), Diageo and SABMiller (UK), and Foster's (Australia).
Gambling is another sector that has escaped political attack despite its social costs, and is now generating a lot of investor interest because of the proliferation of casinos in the US and the emergence of large-scale international betting over the internet.
In London there are several newly-quoted companies riding this bandwagon, such as the spectacularly-successful PartyGaming, only five years old and recently listed at £5 billion. In the US, opportunities include Harrah's Entertainment (casinos), Multimedia Games (software and equipment) and Kerzner International (resorts).
Armaments manufacture is enjoying a resurgence as major nations upgrade their forces, moving away from the traditional model of lots of metal and foot-soldiers towards electronics-based integrated weapons systems.
There are lots of big defence companies to invest in such as Northrop Grumman, Lockheed Martin and Raytheon in the US; BAE Systems, Thales and Finmeccanica in Europe. However, individual investors would probably do better to look at smaller specialists such as London-listed Ultra Electronics, supplier of battlefield infotech equipment; Chemring, which makes military flares and counter-measures such as decoys; or Cobham (missiles and ejector seats).
Genetic modification is a very controversial concept strongly opposed by the green lobby in Europe, but largely welcomed elsewhere for boosting agricultural production, reducing usage of chemicals and raising the nutritional quality of food crops. Two big listed companies supply genetically-modified seed worldwide: Monsanto (US) and Syngenta (Switzerland).
Nuclear energy is another controversial sector. But it's starting to come back into fashion as the only realistic alternative to carbon-fuelled power stations producing greenhouse gases, and as a way to reduce dependence on imported oil and natural gas. Investment possibilities include Areva, a French firm that builds nuclear power stations; USEC, an American producer of fuel rods; uranium miners such as Canada's Cameco and Denison, and Energy Resources of Australia.
If you agree that "vice is nice," there are plenty of investment opportunities
By Martin Spring in On Target, a private newsletter on global strategy
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