Wednesday, 11 February 2009

A tough market for vice --- In current recession, gambling, booze, sex aren't doing so well

Wall Street Journal

By Jason Corcoran of Financial News

Vice has historically been a virtue in turbulent investment times, but the current recession might stretch the patience even of the Devil.

In previous downturns, tobacco, gambling and alcohol could almost always be relied on to beat the index. Analysis released in November by Merrill Lynch shows that, during the six recessions since 1970, alcohol, tobacco and casino stocks have, on average, returned 11%, compared with a 1.5% loss for the S&P 500.

However, this recession appears to be different with booze, cigarettes and gaming wobbling as never before.

Socially responsible funds and ethical investments, on the other side of the spectrum, seem to be holding their own.

Penny Shepherd, chief executive of Uksif, a 200-member responsible investment forum, said: “In the last recession in the early 1990s the green and ethical issues disappeared off the agenda pretty quickly.

“Today, climate change and the need to recycle are underlying issues that aren’t going away.”

Shepherd points to the performance of the Ecclesiastical Amity International fund, which tops Citywire’s universe of 160 global growth funds over three years. The fund has produced a return of 24% against a sector average of minus 11%.

However, a study in December by French business school Edhec of 62 SRI funds found no evidence that socially responsible funds produce outperformance.

The results showed that none of the funds produced positive and significant outperformance of the market over a six-year period. Most of the funds generated negative or insignificant outperformance.

Hugh Wheelan, editor of online magazine Responsible Investor, said measuring the performance of SRI funds is problematic because of the variety of funds and the fact many do not screen stocks such as alcohol and gambling.

He said: “Responsible investment or sustainable investment is such a broad church now, including the integration of environmental, social and governance research into investment, best-in-class strategies and new areas such as human capital, governance, activism or clean tech/renewables, that its singular association with sin stocks and the old vice/performance debate is old hat and somewhat meaningless.”

Clearly, investors have different requirements which can affect performance.

Steve Waygood, head of research and engagement at Aviva Investors, said SRI funds within the same group could have different criteria on vice. He said: “The Norwich Union SRI fund would ban alcohol, but the sustainable fund has a different view.”

Jane Goodland, investment consultant at Watson Wyatt, believes a high level of negative screening can hamper performance.

She said: “Funds with extensive negative screening are not well positioned to respond to changing markets. More opportunistic sustainable investment funds that we favor tend to be more adaptable.”

While a little vice can go a long way to improving performance, the overall appetite for sinful stocks appears to be flagging.

A much-anticipated $460m (€358m) initial public offering on the New York Stock Exchange by the publisher of top-shelf Penthouse magazine is rumored to have been delayed by big investors demurring.

Parent company FriendFinder Networks registered with the US Securities and Exchange Commission for a listing of up to $460m on December 23. A spokesman for its sole underwriter Renaissance Capital declined to comment, but a US banker said the sleazy nature of some of the company’s operations made it a tough sell. He said: “These offerings are off limits for most mainstream investors, but the nature of some of these sites is putting off even the hardcore vice investor.”

Hard times have also hit the listed Australian brothel and lap-dancing group Planet Platinum, which last week appealed to its government for fiscal support.

Planet Platinum’s chief executive, John Trimble, said: “We’re an essential service, you know.” He argued in the Australian press that taxpayers should help fund the adult services sector just as it helps ambulance and fire-fighting services. The group’s share price remained flat at 11 cents over the past five months, a fraction of its listing price of $2.05 in May 2003.

In the US, the chief executive of adult entertainment group Girls Gone Wild, Joe Francis, and Hustler magazine founder Larry Flynt appealed to Congress to provide a $5bn aid package to the sector. Francis said: “Just to see us through hard times.”

Charles Norton, portfolio manager of USA Mutuals’ Vice Fund, believes the credit crisis is swamping previously recession-resistant sectors.

He said: “These sectors have historically acted as a sort of investment levee that could withstand most storms, but starting in the summer of 2007, an economic hurricane developed that drowned all corners of the equity market.”

The Vice Fund, set up in 2002 to invest in companies with a compelling gambling, alcohol, arms or sex business, has been having a tough time lately. Previously a top-decile performer, its value has dipped by 42% over the past 12 months, only narrowly beating the S&P 500’s decline of 45%.

Norton said recent share price movements have been driven by macro factors and bear little relation to companies’ fundamentals. Over a longer term, he believes vice stocks remain strong and will rebound more quickly.

He said: “International tobacco is a classic example. Consumers around the world have continued to enjoy cigarettes – even in this global economic crisis – and have even been trading up to higher priced international brands.” The fund’s top two picks are cigarette manufactures Lorillard and Philip Morris. The two stocks have fallen by about 20% and 25% respectively over the past 12 months.

While investment banks have been quietly cutting their ethical investment research teams, the buyside are retaining staff and investors appear to be rewarding them. At the peak of the banking crisis in November, outflows from European managed funds reached €154bn, or 0.11% of total funds.

By contrast, outflows from green funds totalled €835m or 0.05% of total funds, and SRI funds lost €496m, or just 0.01% of their total.

It remains to be seen whether investors will stick to their ideals in a prolonged downturn. Will they be spooked into dumping their principles in favour of the old reliables if markets get tougher?

Penny Shepherd of Uksif said ethical purchasing of Fairtrade products was holding up despite belt-tightening. A survey last week by grocery researcher IGD showed the number of people buying Fairtrade products rose 23% last year from the year before and almost three times more than in 2006.

Shepherd said: “There is an underlying shift in values taking place. A whole range of people are concerned about being responsible and expecting companies they invest in to be so too.”

(Copyright (c) 2009, Dow Jones & Company, Inc.)
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