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Richey used data from the Center for Research in Securities Prices covering the period from May 1995 to May 2015 and examined the performance of a vice portfolio consisting of 41 corporations against the market portfolio. These firms were in the alcohol, tobacco and gambling industries, and their stock was listed on the NYSE, NASDAQ or NASDAQ OTC. Richey added companies in the defense industry to complete his portfolio of vice stocks.
The following is a summary of his findings:
Richey’s findings are consistent with those of prior research. A study by Harrison Hong and Marcin Kacperczyk, The Price of Sin: The Effect of Social Norms on Markets, which was published in the August 2009 issue of The Journal of Financial Economics, found that sin stocks outperform benchmarks by roughly 30 basis points per month. And Frank Fabozzi, K.C. Ma and Becky Oliphant, authors of the study Sin Stock Returns, which appeared in the Fall 2008 issue of The Journal of Portfolio Management, found that sin stocks outperformed by wide margins. They warned: “Trustees or fiduciaries who develop institutional investment policy statements should fully understand the economic consequences of screening out stocks of companies that produce a product inconsistent with their value systems. In addition, institutional investors should question if the cost to uphold common social standards is worthwhile.”
Unfortunately for investors interested in pursuing this type of strategy, there is currently only one mutual fund available in this space, specifically the USA Mutuals Barrier Fund Investor Class Shares (VICEX). I say “unfortunately” because the fund carries quite a sinful expense ratio of 1.48 percent. According to MutualFunds.com, despite its sinful expense ratio, for the 10-year period ended June 8, 2016, the fund returned 7.60 percent, outperforming the large blend fund category, which returned 6.71 percent, and slightly outperforming the much less expensive Vanguard 500 Index Fund (VFINX), which returned 7.51 percent.
We can also analyze the performance of the fund by using the regression analysis tool available at Portfolio Visualizer. For the period from October 2002 through April 2016, VICEX produced a four-factor (beta, size, value and momentum) alpha of 1.60 percent (though it wasn’t statistically significant), which is amazing given the burden imposed by the fund’s 1.48 percent expense ratio.
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