Photographer: Billy H.C. Kwok/Bloomberg

Fund Formerly Known as Vice Still Favors Guns, Booze and Sin

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After trailing his benchmark for a second year, this asset manager is sticking to his guns.

And cigarettes, and beer. Even casinos, despite a crackdown on corruption in China that sent Macau houses into a tailspin.

Gerry Sullivan, who runs $238 million in what was formerly known as the Vice Fund, buys defense contractors, big tobacco, liquor and gambling. He calls them the four legs of his stool. That one of them fell off is no reason to panic, he says, after the fund handed investors a loss in the 12 months ended June.

The Barrier Fund, as it’s named today, matters less for its size than its strategy of buying so-called sin stocks, at the other end of the spectrum to ethical investing. For years this spurred debates on whether vice paid, with academics saying it did. As Xi Jinping’s anti-graft campaign calls that into question for now, Sullivan says it’s an inevitable risk of whittling down the investment universe to just a few industries.

“We’ve been doing poorly over the past 12 months with the evisceration of the gaming sector,” Sullivan, 54, said in a phone interview from Summit, New Jersey. “It’s hard to make up with one sector down 25 percent. The key is, you don’t want to say, oh gosh, we need to revamp the strategy.”

Gross gaming revenue in Macau fell 36.2 percent in June from a year earlier as President Xi’s drive to eradicate corruption kept high-rollers away and a dimming mainland growth outlook compounded casinos’ woes.

Shares in Galaxy Entertainment Group Ltd. plunged 45 percent in the 12 months through Thursday, the worst performer on Hong Kong’s Hang Seng Index. Galaxy slid 0.3 percent at the lunch break in Hong Kong Friday. Wynn Resorts Ltd. and Las Vegas Sands Corp., which each get more than 60 percent of revenue from Macau, sank at least 26 percent over the past year.

Macau Hit

“We’ve had an event in gaming that’s taken it well beyond what would be considered a proper correction,” Sullivan said.

In his four years as manager, Sullivan’s fund delivered a 11.6 percent total return, short of the 14.2 percent for the Standard & Poor’s 500 Index. It posted a 4 percent loss in the 12 months through June, versus a 7.4 percent gain for its benchmark. Since inception in August 2002, the fund has an average annual return of 9.9 percent, beating the 8.7 percent for the S&P 500.

Pedestrians walk in front of the Bank of China Ltd. building, left, and the Casino Grand Lisboa, in Macau, China, on March 12, 2015.  
Pedestrians walk in front of the Bank of China Ltd. building, left, and the Casino Grand Lisboa, in Macau, China, on March 12, 2015.  
Photographer: Billy H.C. Kwok/Bloomberg

The Macau slump isn’t the only turbulence Sullivan experienced after swapping quantitative investment for vice.

“The first interview I ever did as portfolio manager was a radio interview from Park City, Utah,” he said. “A woman named Miriam told me and the host we were both going to hell.”

The fund’s name change last year was requested by its distributors, Sullivan said. They wanted something that wouldn’t scare investors.

Double-Edged Sword

“It was a double-edged sword. Being called the Vice Fund we got a lot of publicity, but on the flip side the name may have made you believe the methodology and intelligence employed wasn’t as professional as something with a less novelty name,” he said. “Vice was a great name. People loved the name, people hated the name, and now nobody hates or loves the name.”

“We’ve had an event in gaming that’s taken it well beyond what would be considered a proper correction,” Sullivan said
“We’ve had an event in gaming that’s taken it well beyond what would be considered a proper correction,” Sullivan said
Photographer: Marco Schmidt/Getty Images

The fund, which owns about 50 stocks, counts three tobacco companies as its biggest holdings: Reynolds American Inc., Philip Morris International Inc. and Altria Group Inc. The top 10 also includes Las Vegas Sands, MGM Resorts International and Honeywell International Inc. Sullivan’s open to adding other vices to the list.

“Since marijuana is illegal on the federal level, we wouldn’t invest in a distributor,” he said. “But it’s possible that we could invest in a company that provides a service, like security to dispensaries, or some form of business that you would say would be a legitimate business.”

High Barriers

Sin stocks typically have high barriers to entry and are often capable of delivering profits in any economy. According to one study, they outperform the market because institutional investors neglect them, so the shares are initially undervalued.

There was more than $32 trillion in environmental, social and governance-focused investment strategies in 2012, according to data compiled by Northern Trust Corp., a U.S. money manager. Many of those shun the stocks that Sullivan owns.

Sullivan won’t be adding to Macau’s casino revenue himself: He only bets on horses, and only occasionally. He doesn’t smoke, though he likes a drink.

“I only gamble on things with four legs,” he said. “On casinos, I know the odds.”

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