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A Sinner's Portfolio

We've talked about 'green' investing before, which lets you invest in companies deemed to be good for our planet and the people on it.

Not this time. Today, we take a walk on the wild side with the evil twin of socially responsible investing, sin stocks. Our focus: Funds that invest in stocks that give the moral majority a swift kick in their assets.

Sin stocks typically share one theme in common: The stocks they invest in are habit forming. That means tobacco, liquor and gambling stocks. To find funds for our sin portfolio, we scanned fund holdings looking for big gulps in companies like Anheuser Busch (NYSE: BUD), Circus Circus casinos (NYSE: CIR), Seagram Co. (NYSE: VO), Philip Morris (NYSE: MO) and RJR Nabisco.

"Sin" stocks tend to hold up better in down markets and may also rally with similar market-beating strength in good times. One exception to the upside in a raging bull market: tobacco companies, which have seen their profits go up in smoke. However, in the turbulent days of the past few weeks, tobacco stocks have screamed ahead of the pack. Reason: It's hard to quit the habits that many people use to de-stress in times of real stress. Sin stocks generally belong to that somewhat bogus class of investments called "recession proof," since even in the worst of times, people don't stop smoking and drinking -- and actually tend to increase consumption sometimes. So, if you can ignore the issue of someone else's definition of morality when it comes to your own investments, sinning can be good for you. The trick is get into the habit, rather than kick it -- and a few funds can help your portfolio get hooked on profits.

Our sinner's portfolio combines a core sin fund with three more diversified habit-forming focused ones. We like dividing assets equally into each fund (25 percent per fund). Together, they create a portfolio that is close to a fully invested, diversified ticket to the Sin World.

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Woody Allen would call our first fund "polymorphously perverse." We found that Morgan Fun Shares (MFUN), a closed-end fund, is the closest thing to a pure sin fund that we could find. Eighty-one-year-old manager Burt Morgan's habits (he doesn't smoke or drink) are squeaky clean -- but his fund makes the Dirty Dozen look like a chorus of choir boys. His holdings have run the gamut from Seagram's (booze and beyond), Carter-Wallace (maker of Trojans), Frederick's of Hollywood (perhaps the best annual report in the biz), to gambling houses that will leave you with less than you came in with. Just like this fund, which lost 3.6 percent in '99 and is down 7.4 percent so far this year. Of course, it's selling at a 7.5 percent discount, so it's actually about flat for the year against an S&P up a mere 2 percent (see my March 20 column for an explanation of closed-end funds selling at a discount). Moreover, in the past two weeks, the fund has fared well relative to the nasty Nasdaq. Of course, we don't advocate hitching your life savings to this one, volatile fund. Instead, take a more sensible, diversified approach to your sinning.

Enter Invesco Strategic Leisure (FLISX), which holds a small packet of tobacco stocks and a few brewmeisters in its fold. Delivering the goods is something this fund's shareholders have come to expect. This fund smoked the competition last year (up 65.6%) but is down 5 percent or so this year. Manager Mark Greenberg, who joined INVESCO in '96, lends domestic diversification to our portfolio, focusing his fund in consumer-sensitive sectors including entertainment, recreation, restaurants, retailers, toys, newspapers, cable, broadcasting. The fund has a new-economy buzz that's habit forming.

Fidelity Consumer Industries (FSCPX) helps level the habit-forming landscape, including such companies as Coca Cola (NYSE: KO), Philip Morris, and Sara Lee (NYSE: SLE). This fund also has a stellar annualized return record vs. the S&P 500, with a substantially lower level of risk. True, last year wasn't a barnburner (the fund posted a 10.1 percent return). And yes, like the other funds we've got here, it's down for the year -- but this is the environment where sin stocks should light up. The key will be to ensure that you're not left holding the butt end.

Finally, since it's as much fun to sin abroad as it is at home, consider AIM Global Consumer Products & Services (GPSAX) fund which seeks long-term capital growth by investing in companies throughout the world that manufacture, market, retail or distribute consumer products and services. It's a relatively new fund -- with some fees that would be described as sinful by pure no-load fund advocates -- but its broad reach into the world's merry-making markets means that you can have a portfolio where the sun never sets and the fun never stops.

So now you know, we're no angels. But at least we admit that we like the sound of filthy lucre -- so long as it's lining our pockets. The above portfolio will likely ensure that you can have your smokes, single malts, and gambling urges fulfilled in a way that would definitely get you kicked out of the confessional. But in tough times, these funds might help you net against-the-grain profits which, at the end of the day, will have you invited back to the holier-than-thou set, if only because you'll be able to kick in when the plate is passed.

-- Posted: April 10, 2000

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