Dan Ahrens and investors in his Mutuals.com Vice Fund, the top performer the past 12 months among growth-stock mutual funds with less than...

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Dan Ahrens and investors in his Mutuals.com Vice Fund, the top performer the past 12 months among growth-stock mutual funds with less than $500 million of assets, have been rewarded for pursuing a socially irresponsible strategy.

Ahrens targets shares of companies that run casinos, sell beer and cigarettes, and make weapons. His philosophy contrasts with the approach taken by so-called socially responsible funds, which shun the stocks.

“No matter what the market is doing, people are going to continue to drink, continue to smoke and continue to gamble,” Ahrens said.

His fund rose nearly 20 percent in the past 12 months (through March 2), the biggest advance of 84 funds tracked by Bloomberg that have less than $500 million of assets and concentrate investments in companies that generate above-average earnings growth.

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The performance surpassed the Sierra Club Stock Fund, a leader in the socially responsible category, which gained 6.7 percent.

The Vice Fund’s holdings include Harrah’s Entertainment, the No. 2 U.S. casino operator; Anheuser-Busch, the world’s largest brewer; and Altria Group, parent of the maker of Marlboro cigarettes.

Ahrens’ investment approach is risky because he has fewer investment options than most of his competitors, said Christopher Traulsen, an analyst at Morningstar, a fund industry research firm in Chicago.

“I’m not sure why you’d want to limit yourself to vice stocks,” he said.

“People need cigarettes and booze and gambling, but they also need health care. I would rather have a manager that would invest in them when it’s opportune.”

Ahrens started the Vice Fund in September 2002. According to the fund’s prospectus, it usually devotes at least 80 percent of assets to companies that derive “a significant portion of their revenue from products often considered socially irresponsible.”

The Vice Fund was opened after Ahrens did an analysis of the stock markets over three- and five-year periods.

“I simply noticed that alcohol, tobacco and gaming were popping up near the top,” he said. “That led to some serious research and back testing, and then we made a conscious decision to focus on four industries,” the other being defense and aerospace.

Ahrens’ biggest winners have been in the casino industry.

Shares of Harrah’s, which is buying Caesars Entertainment to become the largest U.S. casino company, more than doubled in the past two years. He also owns shares of Las Vegas-based Shuffle Master, which makes card-shuffling equipment.

Gambling stocks are recession-proof, he said.

The Bloomberg Las Vegas Index, which consists of companies based in Las Vegas, outperformed the Standard & Poor’s 500 Index in each of the past six years.

It notched gains every year since 1999, avoiding the 2000-to-2002 bear market. Casino-related companies account for 84 percent of the Bloomberg index’s value.

“Gaming was doing fine while the rest of the market was in a serious downturn,” Ahrens said. “It’s such a fast-growth industry and there seems to still be more potential just because of demand.”

Bud and Marlboros

Ahrens is adding to his holdings of St. Louis-based Anheuser-Busch, whose earnings increased every year since 1995. He said the stock is cheap after dropping 11 percent during the past year.

“I balance the portfolio by putting new money into areas that may be undervalued versus the rest of the portfolio,” he said.

Shares of Altria, formerly known as Philip Morris Cos., have climbed 32 percent since the company said on Nov. 4 that it may split into two or three units after tobacco litigation dragged down the stock. Altria has helped the nine-member Amex Tobacco Index outperform the S&P 500 every year since 1999.