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Forget socially responsible; this fund cashes in on sin

Socially responsible investing has become one of the hottest trends in finance, with trillions of dollars flowing into ethically aware funds. But on the other side of the coin lies the Barrier Fund — formerly known as the Vice Fund.

"If you have this fund that makes you feel good, those good-feels often come with slightly off-the-market performance. We're the only fund out there that sells sin, so there's a lot of growth potential to it," the fund's manager, Gerry Sullivan, told CNBC. "The average person that owns our fund doesn't feel good about owning it, but they hold on for the diversification and the returns."

Indeed, the Barrier Fund has risen 92 percent in the past 10 years, easily besting the S&P 500. And after a weak 2014, the fund has nearly tripled the mega cap index's meager performance this year.

As an investment mandate, "vice" is a bit abstract. So the fund centers in on a few classic so-called vices: gambling, smoking, drinking and warmongering. (When asked why defense stocks qualify, Sullivan quips that going to war is "a vice of Republicans, at least" — before explaining that many large funds will not invest in defense stocks for moral reasons.)

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While the mutual fund has been around for 12 years, some recent academic research has lent credence to the belief that the wages of sin are not death, but outperformance.

"We hypothesize that there is a societal norm against funding operations that promote vice and that some investors, particularly institutions subject to norms, pay a financial cost in abstaining from these stocks," write professors of finance Harrison Hong and Marcin Kacperczyk in a 2009 paper published in the Journal of Financial Economics.

"Sin stocks also have higher expected returns than otherwise comparable stocks, consistent with them being neglected by norm-constrained investors and facing greater litigation risk heightened by social norms," the academics found.

So what's next for Sullivan and his vice fund? Actually, the manager just spent some time in Colorado touring marijuana facilities, as he believes that pot could be the next frontier for vice investing.

And this weekend, he will watch American Pharoah race in the Breeders' Cup.

"It's job-related, of course," Sullivan made clear.


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Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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