Investing in vice
Late one night, over a cigar and a 1958 Armagnac in the craftily hidden Garden Bar of the Lanesborough Hotel, I was told of a great investment opportunity. The Vice Fund, a mutual fund that had outperformed its benchmarks by “an order of magnitude.”
As a rule, investment tips exchanged in bars where billionaires lurk darkly should be ignored. But the appeal of a fund that invests in industries that are automatically excluded from corporate responsibility indices, ones that appeal to self-destruction and the destruction of others (smoking and arms manufacturers), as well as addiction (gaming and alcohol), tickled my fancy. Philip Morris is its biggest holding, along with Lockheed Martin and Carlsberg, among others.
The reality did not stand up to scrutiny. Vicex had an average annualised total return over 1 year to March 31st of 35%. Impressive. Until compared to the S&P 500, which returned 49%. The numbers were no better over 3 or 5 years.
Does the plummeting euro stand up as an investment opportunity?
At one point this week the euro was at a four-year low against the dollar at $1.2235 amid ongoing worries as to the unity behind the single currency. The reality is that at these levels it provides a great boost to European exports. Ironically, Germany, the most efficient export machine in the EU, looks set to benefit.
So much for French Finance Minister Christine Lagarde’s call on the front page of the FT in mid-March for Germany to become less competitive. It was astonishing, cheeky and offensive. France, and much of the rest of what US vice president Dick Cheney called the “old” EU, have done an abysmal job of holding down wages and, to make matters worse, have failed to incorporate much needed labour reform into economic policy.
That is the problem – not the fact that “clearly, Germany has done an awfully good job in the last 10 years or so, improving competitiveness, putting very high pressure on its labour costs,” in Minister Lagardes’s words.
She said she did not think this model of good housekeeping was “sustainable” in the long term. What is in fact unsustainable in a global economy is early retirement, expensive firing policies and above-inflation salary increases, all policies prevalent in “old” Europe.
Of course, the politically unpalatable but effective solution would be for the departure of Germany – rather than Greece or the Mediterranean countries – from the euro. It could return to the deutschmark while the rest of the EU benefitted from the weak euro.
Meanwhile, the chance of the £750 billion rescue package for the euro succeeding without a restructuring of Greek debt is unlikely.
But it is likely that the new UK coalition government will last the five years, according to a well-informed political strategist. He notes that the painful decisions on budget cuts and increased taxes will be taken over the next couple of years, with the hope that by the end of the full term the electorate will see some benefit. That is why it is in the interests of both the Conservative and the Liberal Democrats to hold out until 2015 before calling a general election.
At the Saxton Bampfylde Annual Chairman’s dinner in mid-May, guest of honour Sir John Bond spoke about China – an investment opportunity where the unwary have suffered much – amid speculation about what the future held for the UK with a new government taking power.
The dozen chairs were ardent on the need to reform the visa process, which allows the brightest foreign students to attend UK universities but then stops UK companies from hiring them. There was also despair at the lack of long term infrastructure planning.
The one certainty, with a new government labouring under a debt mountain, is best encapsulated in a topical reading from the Gospels according to Luke: “And it came to pass in those days, that there went out a decree from Caesar Augustus, that all the world should be taxed. And all went to be taxed, every one into his own city.”
Surely a couple of structured finance whizz kids could come up with an investment opportunity based on tax rises?
Tags: Christine Lagarde, Greece, Lockheed Martin, Philip Morris, Saxton Bampfylde, Sir John Bond, UK, Vicex