August 19, 2022

Strategies: The Wages of Virtue and Vice

But how reassuring it is to see virtue beating vice in at least one statistically verifiable contest — mutual fund performance.

There, at the top of the charts for general domestic mutual funds published in Sunday Business last week, was a fund that wears its virtue on its sleeve: the Virtus Small-Cap Sustainable Growth fund. The Virtus fund gained 8.43 percent in the three months through June, making it No. 1 for the second quarter of 2011.

If your Latin is rusty, “virtus” is a form of virtue, specifically the “kind of integrity and strength” that was prized in the ancient Roman republic, according to Joe Fazzino, a spokesman for Virtus Investment Partners, the fund’s parent company, a 2008 spin-off from the Phoenix life insurance group in Hartford, Conn. “When we rebranded, we chose the name ‘virtus’ to emphasize those qualities.”

But if mutual fund branding is a kind of morality play, this is no time to be complacent. Vice is nipping at virtue’s heels.

Second on the mutual fund list stood the Vice fund, which was founded in 2002 with the proud intention of devoting itself to “socially irresponsible stocks,” specifically those in the tobacco, alcohol, gambling and military industries. Dan S. Ahrens, the firm’s first manager (he’s now executive vice president of AdvisorShares, a sponsor of exchange-traded funds) said he realized that these “vice stocks” were “nearly recession-proof.”

The strategy has been working. The Vice fund gained 6.64 percent in the second quarter. Over the 12 months through June, it returned 39.32 percent, compared with 39.39 percent for the Virtus fund. Over five years, Vice edged out Virtus, with an annualized return of 3.44 percent vs. 3.28 percent for the Virtus fund.

In August 2002, in a brief report on the fund’s creation, I noted the Vice fund’s cheeky slogan: “When it’s good, it’s very, very good … and when it’s bad, it’s better.”

After a series of management changes, the fund’s approach remains much the same. “The name suggests some salacious options, but we don’t invest in all vices,” said Gerald Sullivan, manager since June 1. “We don’t invest in bordellos; for one thing, they’re not publicly traded,” he said. Its definition of vice is actually quite limited. It doesn’t invest in jewelry, furs or reality television shows either, for example.

Top holdings include Philip Morris and Altria, which make cigarettes; General Dynamics, Raytheon and Northrup Grumman, which build weapons; Carlsberg, Diageo and SABMiller, which distill alcoholic beverages; and the Galaxy Entertainment Group, which owns Macao casinos.

The fund has thrived despite the legal problems of its original adviser, and several executives, including Richard Sapio,’s former chief executive.

In a 2008 settlement with the Securities and Exchange Commission, Mr. Sapio said that he had helped to “facilitate improper trading practices” like market timing that hurt mutual fund shareholders and enriched hedge funds and other deep-pocketed investors. The Vice fund was not implicated.

Mr. Sapio remains a major shareholder of Mutual Capital Alliance, the holding company that controls USA Mutuals, the fund’s current adviser, according to Jerry Szilagyi, the president of USA Mutuals. The settlement barred Mr. Sapio from involvement in the mutual fund’s operations for five years. Mr. Sapio could not be reached for comment.

The fund’s core stocks are often shunned on ethical grounds, a stigma that tends to depress prices, Mr. Sullivan said, but that gives the stocks some immunity from volatile swings induced by manias and panics. “These stocks are really never entirely in fashion,” he said. Over the long run, he added, “these companies just aren’t going to go away. They are very solid, very reliable, and they produce very good returns.”

So vice investing has a formidable record. As for the Virtus Small-Cap Sustainable Growth fund, how much virtue is in it? As far as corporate governance goes, the Virtus family appears to be solid, although Morningstar has not graded it. Communications to shareholders seem to be models of candor. One recent report said that the fund’s performance was hurt by “poor stock selection,” a straightforward admission. “We’ve been doing well lately, but sometimes we’ll make a bad choice,” said Jon K. Christensen, one of the fund’s managers.

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