American Investment Services, Inc.

Disciplined, Diversified, & Cost Effective

Jul. 2005 – Sinners and Saints

This month we assess so-called “socially responsible investing” (see article within), one of the fastest-growing sectors of the money-management industry. As our research unfolded, we came across a unique fund family that takes the opposite approach. Though we do not recommend it for serious investors, the fund drives home the point that the fund industry is, if nothing else a creative marketing machine., a Dallas based fund company, manages the socially retrograde Vice Fund (VICEX). The fund invests exclusively in so-called “sin stocks” and is dominated by defense, alcohol, tobacco and gaming issues.

Curiously, since inception the Vice Fund has outperformed the Domini Social Equity fund and the S&P 500 handily. The sinners have no doubt benefited greatly from war time spending in the defense sector. The Vice Fund’s management appears unscrupulous with regard to fees as well as stock selection. Investors in the fund, which has an expense ratio of 1.75%, will find that that they have to pay to be bad. The chart below compares the fund with the Domini Social Equity fund. To repeat, we do not recommend either fund.

What Conundrum?

The failure of long-term interest rates to rise with increases in short-term rates has befuddled the Federal Reserve’s Board of Governors, a situation that Chairman Alan Greenspan characterized as a “conundrum.”

Mr. Greenspan should hardly be puzzled. After all, inflationary expectations have enormous impact on future interest rates, and it may well be a tribute to the Fed’s own Open Market Committee that these expectations have been held at bay. The Fed for many years has consistently tightened monetary policy at the slightest indication of price inflation, so stubbornly low long-term rates may simply reflect the fact that the capital markets have come to respect the Fed’s commitment to controlling price inflation.

Though for now it appears under control, inflation is not dead. The Fed cannot affect those policies and practices—namely a fiat dollar and federal spending—that are the ultimate engines of inflating. We caution readers to confine their fixed-income allocations to bonds with less than five years until maturity, and to include inflation-resistant assets among their holdings.

Also in This Issue:

Quarterly Review of Investment Policy
“Social Responsibility” and the Investor
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield