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.