Today’s politics tend to evoke strong reactions from people, both positive and negative. The same can be said for the Ave Maria Growth Fund’s strict adherence to the tenets of the Roman Catholic Church, a policy that eliminates companies that are “engaged in activities that are not pro-life or pro-family.”

This “morally responsible investment” mandate eliminates many drug companies, hospitals and health insurance companies because of their involvement with abortion, abortion-related drugs and embryonic stem cell research. It also weeds out some retailers, tech companies, media companies and hotels because they distribute pornography or contribute to Planned Parenthood. 

While its religious policies may not appeal to many individuals, the small roster of faith-based mutual funds managed by Schwartz Investment Counsel has gained a loyal following among individuals, church groups, hospitals and other institutions with religious affiliations. The Plymouth, Mich., firm has about $2.5 billion under management, mostly from Catholics and individuals from other denominations with strong religious views.

Brian Milligan, who manages the $695 million Ave Maria Growth fund with co-manager Richard Platte, has done an admirable job of earning shareholder loyalty on the investment end as well. While Milligan hasn’t been the lead manager that long, the returns during his tenure at the helm have been notable.

In 2016, the year he joined Platte as co-manager, the fund’s 12% total return was nearly double that of the average Morningstar mid-cap growth fund. In 2017, when he took over as lead manager, the fund’s 27% return beat its average peer’s by 3.45 percentage points. And last year the fund was down just 1.8%, while the peer group’s return fell an average of 6.65%. Over the longer term, the Ave Maria fund was among the top 17% for performance over five years, and in the top 31% over 10 years.

The fund also tends to lose less than others in the mid-cap growth category when the stock market falls. For example, for the three years ending December 31, the Growth Fund captured 105.7% of the market’s upside and only 86.90% of its downside. The peer category, meanwhile, captured 102.27% of the upside and 123.45% of the downside.

But it hasn’t always been smooth sailing. In 2014 and 2015, the fund’s heavy presence in the industrial sector led to a bout with underperformance against the S&P 500. The fund’s religious screens, which eliminate about 5% of companies in the Russell 3000, also restrict its investment universe to some degree. A number of tech stocks don’t make it through those screens for reasons that are not outwardly obvious. For example, Amazon’s vast retail universe, which allows nudity in its media content, violates the fund’s pornography restriction. Several other notable tech names contribute to Planned Parenthood.

Practicing What He Preaches

Milligan says he doesn’t find the religious restrictions cumbersome, however, and he appreciates the opportunity to work at a place that reflects his core values and beliefs. Religion didn’t dominate the discussion five years ago at his interview for a position as an analyst with the firm, he recalls. Most of the talks centered around investment strategy and philosophy. Still, he was asked if he had problems with the firm’s screening process.

He didn’t. After all, his family is active in their church group, and he attends Mass four to five times a week. “I was born and raised Catholic. I am pro-life and pro-family values,” he says.

He’s also a stickler for investing in companies that have the potential for above-average earnings growth and sound balance sheets. They must have a sustainable competitive advantage, such as a patent or scalable product or service, and a leading position in their respective markets. Valuation is also important, which is one reason the fund sometimes establishes a position after negative news about a company or industry brings a stock down. Milligan also likes to see a strong capital structure at a company that will allow it to weather tough times—a characteristic he learned to identify after working as a corporate fixed-income analyst at Standard & Poor’s for four years.

Stocks typically stay in his fund for several years; its annualized portfolio turnover has ranged from 29% to 33% for the three years beginning in January 2016. He may decide to sell a stock, however, when its price moves beyond the estimate of the company’s intrinsic value, when the company’s financial results are disappointing or when the company violates the fund’s religious screens. The portfolio is concentrated in 35 to 40 names, and because the top 10 holdings account for 40% to 50% of assets, they have a strong hand in its performance.

Milligan says the Ave Maria Growth Fund is more price-sensitive than many growth funds. “But under the right circumstances, we are more willing to pay for higher quality companies,” he says. “That’s especially important in a rising rate environment, when [a company’s] quality and [its] ability to grow earnings at a faster rate than the market becomes important to investors.”

The fund’s sector allocations reflect its manager’s requirement that companies have a distinct market advantage. The portfolio has no allocation to the consumer staples sector because Milligan believes even the biggest players no longer have the stranglehold on the market they once did. “With online advertising, it’s much easier for smaller, more local brands to gain recognition,” he says. “That’s where buyer preferences are migrating.” Banks don’t fit the fund’s strategy because they have trouble differentiating themselves from one another in a competitive marketplace. Then there are the religious screens, which explain the fund’s small allocation to pharmaceutical companies and to the health-care sector in general.

Still, there are plenty of tech companies that fit the bill. One of them, fund holding ANSYS, specializes in simulation software for many end markets, with technology, aerospace and defense, and automotive accounting for roughly two-thirds of the company’s revenue. Mega-trends like 5G, autonomous vehicles and electrification are radically changing the product development landscape. In addition to field-testing self-driving cars, several major auto companies in the U.S. are using ANSYS’s software as a cheaper way to simulate road conditions for driverless cars.

“While it is difficult to estimate the total market for simulation software, it has the potential to become very large,” says Milligan. “ANSYS software not only expands engineering capabilities and reduces product development time lines, but it also saves money for customers by eliminating the cost of physical prototypes. We see exponential growth once adaption ramps up.”

Another fund holding, Ecolab, is in the more pedestrian business of providing equipment such as soap dispensers and water filtration and purification systems to companies in energy, food and health care, among other industries. Milligan says Ecolab’s firm grip on its niche gives it a solid revenue base and the ability to maintain mid-single-digit earnings growth over the long term. Its businesses have an estimated 11% market share and are well-positioned to benefit from favorable trends in food safety, clean water, energy usage and infection control.

“Ecolab has pricing power because the cost of its products and services are a small portion of its customers’ budgets, and failure in areas such as food safety or infection control can cause significant damage to the customers’ businesses,” he says. “Customer switching costs are high, and the company enjoys a sustainable cost advantage over local and regional competitors in highly fragmented markets.”

A newer addition to the portfolio is S&P Global. The company, which became part of the fund late last year, is part of a ratings duopoly with Moody’s that accounts for most of the ratings market. Because time-constrained issuers typically meet with no more than a couple of ratings agencies, S&P is in an excellent position to remain a credit ratings leader.

S&P is also well-positioned to grow its other businesses, including a business unit that creates and markets indices that are used for a growing roster of investment products. As the largest index business in the world, it has nearly $14 trillion of assets tied to its benchmark indices. Another business segment, S&P Global Market Intelligence (Capital IQ), is a provider of financial research, and its mission is to capture an entire generation of financial professionals the way Bloomberg did in the 1980s. “Two-thirds of financial professionals are millennials,” says Milligan. “They like Capital IQ’s potential to create more intuitive natural-language search capabilities, following S&P Global’s acquisition of Kensho Technologies.”

Although Milligan doesn’t like to make economic calls, he is keeping a close eye on trade talks and believes they are likely to be a driver in stock market returns going forward. “I’ve noticed a bit more uncertainty from management on corporate conference calls over the last year or so because of concerns about trade,” he says. “A lot will depend on where things go on that front.”