In this recession, sin is a loser

By Brett Arends, The Wall Street Journal

Sin has been a remarkably poor investment over the past year.

But Catholic values, by at least one financial measure, have done well.

The Vice Fund (VICEX), a mutual fund that invests in the so-called "sin" industries like distillers, casino operators and cigarette companies, has lost 42% over the past 12 months. That's actually 4 percentage points worse than the Standard & Poor's 500 Index ($INX) overall.

Meanwhile the Ave Maria suite of mutual funds, which invest only in companies that comply with certain Roman Catholic values, have done better. The Ave Marie Growth (AVEGX) fund is down only 33%. It's beaten Vice by 9 points and the S&P by 5.

It's hardly a miracle -- but maybe enough to raise eyebrows on Wall Street, a secular place where the usual invocation is "let us prey."

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Conventional wisdom there says that "sin" stocks are safe places to park your money during a downturn. Such companies often enjoy strong cash flow, a terrific advantage in a tough economy, as well as pretty resilient businesses.

This time around, however, those factors haven't helped.

Charles Norton, who manages the Vice Fund, says the stocks have simply been dumped overboard along with everything else in the great tsunami of panic and distressed selling.

"If you look at the operating performances (of many of these companies), especially in international tobacco, they've been very strong," Norton says.

Yet sin, on the market, has actually done even worse than the Vice Fund's performance would suggest. Norton says his fund sold shares early from the worst-hit sector: gambling.

Many Las Vegas casino stocks have done so badly in the past 12 months, investors look like . . . well, like suckers leaving Las Vegas.

Wynn Resorts (WYNN, news, msgs) stock has crashed 72%. MGM Mirage (MGM, news, msgs) is down 91%. Las Vegas Sands (LVS, news, msgs) is off 95%. You thought your portfolio looked bad.

The reason? Many of the companies had simply borrowed too much money during the boom, and engaged in building sprees, including huge new ventures in Macao.

I hope I can be forgiven for suggesting that certain sin stocks today look pretty attractively valued. Not merely some of the international tobacco stocks, which are Norton's top picks, but also the London drinks giant Diageo (DEO, news, msgs), whose American depository receipts have fallen about 45% in the past year.

Diageo's brands include Guinness beer, Smirnoff vodka and Baileys Irish Cream as well as a large tranche of the Scotch single malt whisky market.

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As for the Ave Maria funds: These were launched earlier this decade by Schwartz Investment Counsel, and they are Catholic not in what they own but in what they avoid. The funds eschew stocks that breach a variety of precepts, mostly around things like involvement in abortion or giving money to Planned Parenthood.

The irony? Their rules have steered them clear of such disasters as American International Group (AIG, news, msgs), Bank of America (BAC, news, msgs), Citigroup (C, news, msgs) and General Motors (GM, news, msgs).

The original Ave Marie Catholic Values (AVEMX) fund has lost 38% in the last year -- logging a performance far better than Vice's, and coming pretty much in line with the S&P.

But the real standout in the group is the Ave Maria Growth Fund, which is managed by stock market veteran Jim Bashaw at JLB & Associates. Not only has it beaten Wall Street handily in the past year, but it has done so by a wide margin since it was launched about six years ago. During that time investors have made about 23%, compared with average losses of about 7% in the S&P 500.

Stocks that have helped the outperformance in the last year, says Bashaw, include veterinary services company VCA Antech (WOOF, news, msgs), down 13%, and clothing chain Ross Stores (ROST, news, msgs), up a remarkable 32%. The fund also had a big stake in Exxon Mobil (XOM, news, msgs), down 20%.

Over the longer period, Bashaw's best picks include electrical motors company Ametek (AME, news, msgs), which has nearly tripled since 2003.

Stock market "sin" and Catholic values are not mutually exclusive, incidentally, and Bashaw's fund is not prohibited from owning defense companies. Alliant Techsystems (ATK, news, msgs), a defense contractor, is among Bashaw's long-term gainers. Shares in the Minneapolis company are up 218% over the past decade.