An article in the Wall Street Journal’s recent Wealth Report covers investing in the so-called “sin stocks,” i.e. shares of companies in the alcohol, tobacco, gambling and weapons industries. The article features the USA Mutuals Barrier Fund (with an apt ticker VICEX; Investor Class shares), which specializes in such investments. This $200 million fund has a 1.44% expense ratio and 78% turnover. According to the article

The fund saw a total return of minus 5.7% for the year ended Jan. 25 […] compared with a decline of 6.5% for S&P 500 Total Return Index. Over the past five years, the index is up about 10%, while VICEX has grown by around 11%.

The prospectus benchmark for the fund is the S&P 500® Index. One of the long-lived and low-cost implementations of this index is the iShares Core S&P 500 ETF (IVV). Alpholio™’s calculations show that since inception the fund returned more than the ETF in about 65% of all rolling 36-month periods, 71% of 24-month periods and 66% of 12-month periods. The median 36-month (non-annualized) outperformance was 6.4%.

While the comparison of periodic returns is instructive, it does not take the fund’s risk into account. To accomplish the latter, let’s employ Alpholio™ patented methodology. One variant of this methodology constructs a reference portfolio of ETFs with fixed membership but variable weights. This allows the portfolio to more closely track the fund’s return than if the weights were constant. Here is the resulting chart of cumulative RealAlpha™ for the USA Mutuals Barrier Fund from late 2004 through 2015:

Cumulative RealAlpha™ for USA Mutuals Barrier Fund (VICEX)

The fund produced 0.45% of the regular and minus 0.06% of the lag annualized discounted RealAlpha™ (to learn more about this performance measure, please visit our FAQ). In 2015, the lag cumulative RealAlpha™ curve was below the regular one, which indicates that not all new investment ideas in the fund performed as well as expected. At 15.1%, the fund’s standard deviation, a measure of volatility of returns, was about 2.4% higher than that of the reference ETF portfolio. The fund’s RealBeta™ was 0.84. The median rolling 36-month correlation of the fund’s returns to those of IVV was approximately 0.9.

The following chart illustrates changes of ETF weights in the reference portfolio for the fund over the same analysis period:

Reference Weights for USA Mutuals Barrier Fund (VICEX)

The fund had major equivalent positions in the Vanguard Consumer Staples ETF (VDC; average weight of 32.2%), Vanguard Consumer Discretionary ETF (VCR; 9.7%), iShares Select Dividend ETF (DVY; 9.2%), iShares MSCI Hong Kong ETF (EWH; 7.7%), iShares MSCI United Kingdom ETF (EWU; 7.6%), and PowerShares Dynamic Market Portfolio (PWC; 6.2%). The Other component in the chart collectively represents additional six ETFs with smaller average weights.

Overall, the USA Mutuals Barrier Fund added little value on a truly risk-adjusted basis. From the cumulative RealAlpha™ chart, it follows that, despite the “defensive” nature of its holdings, the fund may not always outperform during market downturns, such as in 2008-09. In addition, its significant exposure to particular industries can lead to a substantial underperformance, as was the case with gambling in Macau in 2014. Despite a relatively high turnover, in recent years the fund did not produce any capital gains, which made is suitable even for taxable accounts.

To learn more about the USA Mutuals Barrier and other mutual funds, please register on our website.

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