Liddle on unethical investing

It's said that the mark of a good popular science writer is that he makes his readers feel like geniuses. By this standard, Rod Liddle is a great writer, because it's difficult to read him without getting a sense of one's intellectual superiority.
His latest effort is the idea of an unethical investment fund.
What he doesn't say is that such a fund has been running for over four years in the US, and has hugely beaten the market. And its managers probably know how to spell the name of tobacco stock  Gallaher.
The interesting question is: why does the Vice Fund do so well?  One view is that ethical investment is inherently costly. But this is controversial; this paper says it is, and this one says it ain't.
Another view is that the fund benefits from the defensive anomaly. Low-volatility/low beta stocks do better than they should. And tobacco and alcohol stocks have low volatility, and the Vice Fund invests heavily in these.

Comments

[Alex]

I remember using this joke at school. It's arguable that the businesses in such a fund do well just because they are good businesses. Tobacco manufacturing and brewing both have great cashflow and reasonable margins, low macroeconomic gearing - what's not to love? Arms - whoo! government cost-plus contracts! Mining - well, if you get the cycle right it's almost pure profit on those mines that are already developed. Porn - hardly any overhead, high margins. Casinos - licenced robbery.

[james higham]

That's an interesting point about low volatility stocks. They're no fools, are they?

[Acad Ronin]

Before getting too excited about the Vice Fund, please note that it charges shareholders 12-b marketing fees (i.e., part of your investment goes to advertising for more investors), a 1.75% management fee, and a 1% churn fee for shares held less than 60 days. Still, I like the idea if not the fee structure. What we need is a good vice index so that Vanguard could offer a Vice Index Fund.

[dsquared]

what I don't understand is why an organic, non-GM crop grown on a sustainable basis by some of the poorest farmers on earth (often on family farms that look to me like they would meet the Fairtrade standards) is counted as "unethical".

[Maynard Handley]

Of course one could reasonably retort that this is no different from investing in, I don't know, maybe Ivory Coast right now. Sure for a few years the returns look great, but the whole point is that there is the risk of massive upsets in the future. The massive upsets may or may not occur, but one does not prove low-probability high risk events aren't going to occur by saying "well they haven't occurred over the last three years".