Patrick Drum, the portfolio manager who heads up Saturna’s ESG research, says all the funds, which now include Saturna bond and equity funds, as well as the Sextant family of funds, share the same core principles (not necessarily Sharia, unless stated). The investors start with the clients’ personal values and appetite for risk. He points to Saturna’s “values matrix,” which encompasses personal values, philanthropy, faith, advocacy and other thematic interests.
“While Saturna Capital manages multiple asset classes and a variety of strategies,” Drum says, “the main principles of our investment process are cohesive. We abide by seven core values which guide our business and approach to asset management. These values include acting with discipline, limiting leverage and valuing accountability and transparency.
“Our process has withstood multiple business cycles and investment seasons, and we see it as one of our greatest strengths,” he adds.
In a discussion about impact and SRI at Financial Advisor magazine’s Inside Alternatives & Asset Allocation conference in September, Drum took the stage with Joe Levin from BlueStar Indexes, a provider of financial indexes rooted in the Israeli market. The two discussed almost the exact same challenges and opportunities involved in garnering large pools of capital that must adhere to a religious belief system (even if their funds are guided by different religions).
Even if investors share a certain set of beliefs with Jewish institutions, such as philanthropic organizations, the fundamentals of the investments have to make sense, Levin says. That means the return on investment has to be at or above the market’s return.
But the risk/return optimization is not the end all, be all. “When valuing a security, for instance, you use a discount rate made up of different factors like the risk-free rate, inflation risk, liquidity risk and, now, SRI risk. Technically, this could be graphed as an indifference curve showing the trade-off between the tracking error one is willing to accept versus the level to which a portfolio reflects one’s values,” Levin explains.
SRI, or socially responsible investing, is the banner under which faith-based investing often moves. The world’s biggest investment management concern, BlackRock, expects SRI to skyrocket over the coming years. Laurence Fink, the firm’s CEO, is betting assets under management in SRI exchange-traded funds will zoom to $400 billion from $25 billion in a decade.
That growth, of course, will likely stand on how well investors do in the markets using SRI investment vehicles. SRI funds have a mixed track record, which means they may have to start performing better to rake in billions more in assets.
Data show faith-based funds are on par with the overall mutual fund industry’s ROIs, and in some cases may even outperform. In the private markets, a “values” approach is now called impact investing, an asset class the Vatican, for one, has embraced, going so far as to hold an annual impact investing meeting at Vatican City. The conference brings together thought leaders, impact investors and religious leaders from all over the globe to promote human development by leveraging finance. Putting some teeth to it—the not-for-profit Catholic Relief Services has launched a program-related investment fund that invests in social and humanitarian programs to help lift people out of poverty and other trying circumstances. The fund’s first impact investment was in 2016 when it provided a $500,000 loan to an agricultural business in Madagascar.
Drum and Levin both say the specific religious values their funds adhere to are almost incidental to their investment process and performance mandates. “While religious values inform our drive and passion, BlueStar’s investment approach is purely designed to apply the best of institutional quality index construction to the Israeli capital markets,” Levin says, adding, “You don’t have to be Jewish to have Israel in your heart. In fact, a large and diverse group of Christian denominations actively support Israel and thus are adopting Israel equity allocations within their values-driven portfolios as well.”