Gerry Sullivan has an eye out for the sins of tomorrow, but he's no puritan.
Since taking the helm of USA Mutuals' iconoclastic Vice Fund in 2011, Sullivan has scored big gains spotting trends in tobacco, guns, alcoholic beverages and gambling. Now he's seeing new ways to make money on human transgression.
"Sin is evolving," the 53-year-old former bond trader said, before rattling off a slew of investment ideas that would make the God-fearing cringe: Buy e-cigarettes because teens will love them; predict which tobacco company will become the "Budweiser of marijuana" as states loosen anti-pot laws; and get into coffee and smartphones because they are addictive.
Vice Fund - formed in 2002 in utter rejection of the "socially responsible investing" trend - has its share of critics. But few can argue with its results.
Since taking over, Sullivan has roughly doubled the fund's assets under management, to $218 million, thanks to a combination of industry-leading returns and increased interest from investors.
For the 12 months ended November 15, the fund was up 27 percent, a point ahead of the Standard & Poor's 500-stock index and better than 67 percent of rivals, according to Morningstar Inc. And for the 36 months ended on the same date, it was in the top 1 percent of its category, returning an average of 20 percent per year, 3.3 points better than the S&P 500.
Some of those gains were made with bets some would call unsavory, including one that gun manufacturer stocks would rise, instead of fall, as a result of the school shooting in Newtown, Connecticut, last December in which a gunman killed 26 people.
According to the gamble, which Sullivan placed on Smith & Wesson and Sturm Ruger, there was little chance of tighter gun control laws despite the tragedy, since the public already tolerated significant urban gun violence. Meanwhile, talk of such controls would trigger a rush of gun buying.
The strategy has drawn some objections.
Vice Fund "strikes me as an extremely cynical form of investing," said Adam Kanzer, general counsel of Domini Social Investments, a family of socially responsible investment funds. "We believe that addicting and killing your best customers is a terrible long-term business model, and they either disagree with that or don't care because they see profit in the meantime," he said.
But some investors don't mind Vice Fund's approach. Data from Thomson Reuters' Lipper unit shows investors added $66.5 million to the Vice Fund this year through early November, up from $15.1 million for all of 2012.
Vice Fund's top holding is aerospace and defense contractor Boeing Co,, which Sullivan started buying in early 2012 and grew to 95,000 shares as of September 30. He bet Boeing's civilian aircraft business left it less exposed than other defense contractors to budget wrangling in Washington.
The shares have risen from the mid-$70s to above $130, helped by new plane orders, dividends and buybacks.
THE FUTURE OF SIN
Sullivan said he's planning to increase his stake in tobacco maker Lorillard Inc by the end of the year because of its business making electronic cigarettes, devices that vaporize nicotine instead of burn it.
Sullivan expects they will become popular with young people looking to avoid more odorous traditional products. "If you don't smell like tobacco, you don't get busted by your parents," he said. (Lorillard did not respond to requests for comment).
Regulators are torn over whether to restrict e-cigarettes as "gateway" products to nicotine addiction or to embrace them to help smokers quit. Lacking long-term scientific evidence on their safety, some critics, such as the British Medical Association, have warned of the dangers of their unregulated use.
Sullivan also expects to maintain shares in other tobacco companies like Altria Group Inc - his third-largest holding, with about 5 percent of his assets - in part because of a trend among states to loosen anti-marijuana laws.
"Who's going to be the Budweiser of marijuana? My guess - they would all deny it - would be cigarette companies," he said. An Altria spokesman said the company has no plans to sell marijuana.
Sullivan also has mulled adding stocks that many would consider the most powerful addictions of all: companies involved in smartphones, or coffee pushers like Starbucks Corp.
A Starbucks spokesman referred questions about health concerns to the National Coffee Association. A spokesman for the trade group, Joe DeRupo, said coffee consumption does not fit the definitions of addiction offered by medical organizations.
Sullivan said the Vice Fund's mission fits both his quantitative-investing background and his libertarian views. He said he owns a handgun but drinks and smokes rarely. Asked if he gambles, Sullivan said, via e-mail, "I understand the odds at games of chance and avoid them, and would rather bet on horses if I had to gamble. You can always blame the jockey."
Vice Fund's own prospectus once confessed to holding the makers of products "often considered socially irresponsible." But, says Sullivan, if the government can benefit from heavily taxed vice industries, why shouldn't his fund?
"Of the sectors I cover, every single one of them is exploited by the government," he said. "You could make the argument the government is a willing partner."
(Reporting By Ross Kerber; Editing by Richard Valdmanis and Douglas Royalty)