Leveraging Your Tobacco Knowledge

By E. Edward Hoyt III

Vice Fund offers the tobacco crowd an opportunity to “invest in what you know” and learn more along the way.

Interesting in “vice” stocks (also called “sin” stocks) is hardly new, and much analysis has been made of their underlying premise: despite market fluctuations, “vice” activities march on, regardless of their affordability. There are formidable barriers to entry in the tobacco industry and, despite growing regulation, consolidation and manufacturer’s ability to boost prices likewise has the potential to boost profits.

For tobacco retailers, putting industry knowledge to work in the investment arena is an intriguing proposition, precisely the pitch of USA Mutual Funds, a participant at the 2009 Tobacco Plus Expo (TPE) in New Orleans. Owner of such mutual funds as the Vice Fund (Ticker: VICEX)—a no-load fund that’s the first to invest only in tobacco, alcoholic beverages, aerospace/defense, and gaming companies—the firm’s belief is that people should their use instincts and knowledge when investing, rather than relying on complicated strategies and algorithms that they may not fully understand.

In other words, your knowledge of tobacco doesn’t have to be used just to select the most profitable merchandise or react to the latest regulatory changes. “You already invest your knowledge of tobacco by running a tobacco business,” says Eric Lansky, president of USA Mutuals. “So why not consider bringing that knowledge to the market?” Of the four sectors covered in the Vice Fund, portfolio manager Charles Norton, CFA is optimistic about the outlook for tobacco-related stocks.

Lansky says he was nearly overwhelmed by the synergy at TPE. After talking to attendees and asking them if they’d thought of using their knowledge of tobacco and the tobacco business, he says, “It was like light bulbs going off, and I had underestimated just how much of a mutual opportunity this really is.”

Lansky cites two compelling reasons why those knowledgeable about tobacco may find the Vice Fund of interest.

The first is access to business-crucial information. “Retailers are seeking an edge, especially when it comes to inventory management, anticipating future demand, and understanding potential supplier concerns and events,” says Lansky. “Our goal is to be a resource to our shareholders. For our shareholders who are tobacco retailers, our information and insights on our outlook can help them in those areas.”

USA Mutuals’ funds belong to a growing list of mutual funds that believe in transparency. Complete fund holdings (available at USAMutuals.com) are disclosed quarterly; also each quarter the fund’s portfolio managers provide commentary on such timely topics as where they see the greatest current investment opportunities. From tax increases to likely FDA-related news, regulations, or rulings, the portfolio managers provide forward-thinking perspectives.

Having perspectives on Wall Street’s take on how FDA regulation may impact future sales is very valuable and provides retailers a more unbiased perspective than suppliers. “At the conference, there were many questions related to likelihood of FDA restricting menthol sales,” Lansky explains. “Our portfolio managers’ perspective is that an outright menthol ban is highly unlikely, and the reasons why, were very appreciated.” In fact, Norton spent most of his presentation time answering questions and requests for his firm’s views and outlook on tobacco, says Lanksy.

“The bottom line is we become a source of information not found elsewhere, which can enable the retailer to plan accordingly,” says Lansky.

The second reason for the fund’s appeal to tobacco retailers is leverage. Many retailers are already invested in the stock market within the sector, but often with little underlying knowledge of their investments. Lansky says that nearly everyone his firm spoke to at Tobacco Plus Expo was invested in the stock market—either directly, through a 401k/ IRA, or perhaps a college savings plan. “But, for the most part, no one really fully understood their investments, knew what the strategy of the fund was, or even worse, didn’t know what their mutual fund was investing in or why,” he explains. Yet, they all knew a lot about tobacco and most said their business has been doing well despite the overall economy.

“When I asked, ‘How are you leveraging that beyond managing your store?’ I was met with blank stares,” Lansky recalls. In their defense, perhaps it’s because there are so few ways to leverage your knowledge for investment decisions. But that is precisely the goal of USA Mutuals, which currently has approximately $100 million in assets. The firm’s philosophy is to provide people with a way to use their knowledge to make informed investment decisions, offer investments which are logical, easy to understand, transparent, and professionally managed, say Lansky.

“People looked at our holdings, and they recognized what we had and understood why we had those securities, and why we didn’t have others,” he adds.

USA Mutual Funds, Plaza of the Americas, 700 North Pearl St., Ste. 900, Dallas, Texas 75201, Toll-free: (866) 264-8783, Web: www.USAMutuals.com.

SMOKESHOP - June, 2009