Investments rooted in religious beliefs answer to a
higher authority while growing mighty big numbers.

Faith-based mutual funds are delivering a strong one-two punch: They are spiritually in tune and delivering solid returns. These funds have investment guidelines that tend to appeal to investors with specific faiths and beliefs, such as Catholics, Lutherans, Muslims, Christian Scientists, Mennonites and evangelical Christians.
Today, there are 50 faith-based mutual funds with $17 billion in assets, up from just a handful of funds with $500 million in assets ten years ago, according to Chicago-based Morningstar Inc.
"Probably the fastest-growing subset of socially responsible funds is religious mutual funds," says Morningstar analyst David Kathman. "These funds won't necessarily perform better than their mainstream peers. But they can give peace of mind to those who prefer not to own investments that conflict with their religious beliefs."
Faith-based funds are not all alike. Companies that support abortion and gay causes, for example, are objectionable to evangelical Christians and Catholics. Muslims, who are forbidden by the Koran to earn interest, won't invest in financial companies, or in companies with a lot of debt or in bonds. And they avoid companies that deal with pork. Sorry Oscar Mayer.
Most faith-based bond funds primarily invest in U.S. Treasury and government agency bonds. But the MMA Praxis funds invest based on the pacifist views of the Mennonites. So the funds avoid defense companies. This includes U.S. Treasury securities, because the U.S. government supports defense. Meanwhile, The American Trust Allegiance Value Fund, which caters to Christian Scientists, won't invest in medical or pharmaceutical businesses.    
Unlike most other faith-based funds, The Ave Maria Fund Group, a Catholic values investment company, will invest in gambling, alcohol and arms and defense stocks. But abortion and gay rights are off limits. Ave Maria has five funds with $550 million in assets.
George Schwartz, president of Schwartz Investment Counsel, Bloomfield Hills, Mich., the investment advisor of the Ave Marie funds, said that gambling and alcohol are venial sins, not mortal sins. "Alcohol is used in the sacraments of the Mass," he stressed. "There is a Catholic doctrine for just wars and self-defense. Defense and tobacco are not anti-Catholic."
The Roman Catholic Church does not endorse the fund group. But the fund group's Catholic advisory board includes Cardinal Adam Joseph Maida of Detroit, Schwartz says. "We don't try to be all things to all people. We are a fund for conservative Catholics. We don't invest in abortion, pornography-related companies or companies that contribute to Planned Parenthood."
Schwartz says that the Catholic value screening does not affect the fund's performance. The Ave Maria Catholic Values Fund, which invests in mid-cap stocks, has grown at an 11.5% annual rate over the five years ended in March 2007. In contrast, the S&P 500 has grown at a 6.3% annual rate during that period. Meanwhile, Ave Maria's Rising Dividend Fund and the Ave Maria Opportunity Fund have outperformed the market over the past 15 months.
Schwartz is a value investor who buys stocks selling well below their "intrinsic" or liquidation value. Currently, that puts him in the small-cap and mid-cap sectors. A recent purchase of Schwartz's is Chico's. The company flopped with a recent women's fashion line, and its earnings declined. But the company is well run. It has a high return on capital and has twice the sales per square foot of its competitors.
He also bought Gentex Corp. The company makes rearview mirrors that dim. The company has a 20% after-tax profit margin and no debt, and its earnings are growing at 12% annually. Select Comfort, which manufactures the Sleep Member Bed, is another favorite. It has a long history of increasing sales and earnings. There is little debt and a 35% return on equity. 
Evangelical Christians can look to funds like the Timothy Plan, based in Maitland, Fla., for investment choices. The group of 12 funds, founded in 1994, has $540 million in assets. President Arthur Ally says the stock screening is based on the Bible.
The funds avoid investing in companies that profit from or support things such as pornography, abortion, nonmarried lifestyles and what is defined as anti-family entertainment, as well as companies involved in promoting issues contrary to the teachings of the Bible. The funds, which are managed by outside advisors such as Westwood Capital LLC and Rittenhouse Capital Partners, invest in large-cap, mid-cap and small-cap growth or value stocks.   
"God is sovereign," Ally says. "But people tend to be over spiritual and think God will favor our funds. We had people leave (the fund group) when we started in 1994. They thought they were going to get rich. They were greedy. Our number one investment screen is not performance. It is not to lose money."
The Timothy Plan Large/Midcap Value Fund, with assets of $100 million, buys undervalued stocks based on a number of fundamental criteria. Over the past five years, the fund has grown at a 9.8% annual rate ended in March 2007 and outperformed the S&P 500.
The fund owns a solid portfolio of 49 stocks with an average market capitalization of $15 billion. The average holding has registered long-term earnings growth of 12%. Sales, cash flow and book value have been all growing at between 14% and 17% annually.
The largest holdings include Exxon Mobil, XTO Energy, Precision Castparts, Murphy Oil Corp. and Eaton Vance Corp. On the Islamic side, the Amana Income Fund and the Amana Growth Fund adhere to strict screening principles based on the Islamic Shariah codes. These principles require that investors avoid interest and investments in companies in the liquor, pork, pornography, gambling and financial businesses. The funds also avoid investing in bonds. As a result, neither fund invests in financial companies and restaurants. A large proportion of assets in both funds are in technology and health-care-related companies. Cash is invested in non-interest-bearing accounts.
Nicholas Kaiser, president of Saturna Capital, the funds' Bellingham, Wash.-based investment advisor, says a lot of non-Muslims are investing in the Income Fund and Growth Fund because of their track records. Both funds have top ratings by Lipper Inc., in New York, and Morningstar. The Amana Trust Growth Fund and Amana Trust Income Fund have grown at an 11.4% annual rate and a 12.5% annual rate, respectively, over the past five years.
"Money is coming in from individuals that are not of the Islamic faith through platforms like Fidelity and Schwab," he says. "Financial advisors are calling me because they are interested in the performance of the funds."
Kaiser uses a growth-at-reasonable-price strategy for the growth fund. Its average holding is growing earnings at about 15% annually. Earnings of the dividend-paying companies are growing at about 10% annually.
Kaiser cites several reasons for the Amana funds' attractive performance. The companies have little debt. He tends to invest in technology and health-care companies and avoids the interest-rate-sensitive financial sector.
Stocks he favors in the growth fund include Apple Computer, which is growing earnings at 20%; Hewlett-Packard, which is growing earnings at 15%; and SanDisk, which develops and manufactures flash storage card products. The company's earnings are growing dramatically. The largest holdings of the income fund include UPS, 3M, Procter & Gamble, Praxair Inc. and Idacorp Inc.
Presbyterians also have choices. The four New Covenant funds, endorsed by the Presbyterian Church Foundation, have assets of $1.5 billion and take a more liberal stance toward investment than other Christian groups. The fund group avoids sin stocks and companies in the arms business. The fund group also takes an active stance on promoting good working conditions for employees, the environment and the community. New Covenant Funds are sub-advised by companies such as Wellington Management, Sound Shore and Santa Barbara Asset Management.
Anita Clemons, the fund group's vice president of investments, says the group reviews the past three-year revenue performance of companies. The companies can't have more than 50% of their revenues derived from gambling, alcohol or firearms. But the fund group is not against national defense.
New Covenant also takes an active stance toward corporate citizenship. This year, the fund group was successful with its shareholder resolution requiring Time Warner to adopt a vendor code of standards for its worldwide factories.
New Covenant takes a diversified approach to investing. The New Covenant Growth Fund, with assets of $972 million, has grown at a 7.1% annual rate over the past five years, slightly outperforming the S&P 500. "We take an all-weather approach to investing," Clemons says. "Wellington manages a core portfolio tied to the broad market. The satellite managers bring in expertise in large-, mid-cap and small-cap value and growth."
Recent stocks purchased by the growth fund include:
Legg Mason: The securities firm is expected to profit from cross-selling products and expanding internationally. Earnings are expected to grow 20% in 2008, while the stock is selling at just 17.5 times next year's earnings.
Waste Management: The leading company in the waste disposal business is benefiting from the declining amount of landfill space. The company registered positive earnings surprises last year. Earnings are estimated to grow at 10%, while the stock is selling at about 16 times next year's earnings.
Stanley Works: This profitable tool company is branching into the securities business. Earnings are expected to grow 16% in 2008, while the stock is trading at 12.6 times next year's earnings.