Seven profitable sins

Nasty falls on money markets over the past decade have prompted many investors in Germany to grab a smoke or down a beer to ease the pain. Now they have an opportunity to invest in vices like these and others by joining the "Prosperia Mephisto 1" fund.

The fund, the brainchild of veteran German investor Conrad Mattern, invests in businesses generally viewed as politically incorrect or socially irresponsible. These include adult entertainment, tobacco, weapons, gambling and luxury goods.

The idea, however, isn't entirely new. Several years ago, Dan Ahrens successfully launched the Vice Fund in the United States - believed back then to be world's first pooling of investments in businesses considered bad for society. And after making millions with the "sin" fund, the US investor later cashed in by writing a book: "Investing in Vice: The Recession-Proof Portfolio of Booze, Bets, Bombs and Butts."

'Blind pool' investment

How many bombs and butts - if any - are in the German vice fund is anyone's guess.

Mephisto 1, which hopes to raise 20 million euros, is a "blind pool" that requires investors to pay into the fund without knowing where the fund's managers will invest their cash. It is also a "closed-end fund," which means the fund does not accept fresh capital after it begins operating, and that investors can only sell their stakes on secondary markets rather than redeeming them directly with the fund prior to liquidation.

The combination of the two is certainly enough to scare away conservative investors used to regulated trading systems and transparency.

But they aren't the primary target of the German vice fund. "Our clients don't necessarily want to know what companies are in the fund," said Mephisto spokesman Michael Oehme. "They're not investing in companies per se; they're investing in our strategy."

That strategy includes maintaining a web of contacts to enterprises in potentially lucrative "sin" businesses that need capital but often aren't known well enough to raise it on their own.

Mephisto 1 targets young and private companies that may someday go on the stock market or be acquired by a larger rival but now need capital to launch their business or expand it. The fund buys stakes in these companies in the hope of selling them later for a profit.

"Private investors often can't invest in many of these companies because they don't know of them or don't have enough money to invest directly on their own," Oehme told Deutsche Welle.

Do the math

Interested parties must invest at least 5,000 euros and keep their money in the fund for five years. They also have to pay handful of fees that amount to 18.1 percent in the first year and roughly 5 percent for each subsequent year.

In return, they receive a slice of the profits made by the fund's investments – if all goes well. Of course, they can also lose their money if the investments fail.

German business newspaper Handelsblatt blasted Mephisto 1 for charging exorbitant fees that would eat up about 43 percent of the initial investment, adding that the fund would need to achieve annual profits of 10.5 percent for investors to break even.

But Oehme said the editor responsible for the criticism couldn't do the math. "Her numbers simply don't jive," he said, adding that the fees Mephisto charged were comparable with other financial products such as closed-end shipping funds.

Buyer beware

Investors interested in Mephisto should certainly check the numbers for themselves before they sign up.

"Basically, when you invest, you look at the rate of returns and the level of risk," said Karin Baur from Stiftung Warentest, an independent German foundation that tests consumer goods and services.

Baur warned that areas like "tobacco and alcohol may have been good performers in the past but don't have to be in the future" and that establishing risk is difficult if the names of the companies in the fund are not known.

That and the fact that companies in the fund make up a type of "sindex" could arguably turn off plenty of investors, but there are plenty who see opportunity.

One former US banker and private investor based in Germany, who asked not to be named, said he would "invest in vices any day" and often has.

"I did well on my Philip Morris investment years ago and actually wish I had hung on to it," he said. "There are more smokers today in China than there are people in the United States. Vices will never go away."

Author: John Blau
Editor: Sam Edmonds