Taking stock in religious investing

Mel Gibson is perhaps the most visible investor who has put his money where his beliefs lie, but the Australian actor and director is far from the only one. A rising number of companies are setting up mutual funds to invest according to faith, and - as with Gibson's blockbuster 2004 film, "The Passion of the Christ" - many of the funds have enjoyed eye-watering returns. The problem is finding one that meets both spiritual and material needs. According to the Social Investment Forum, a Washington-based group that promotes socially responsible investing, about $1 of every $7 invested in the United States is done so with social objectives. No figures are available to show how much of that is invested along faith-based lines, but it is a small slice of the cake: The average fund has less than $50 million in assets. By comparison, Pax World, one of the oldest and biggest socially responsible funds, has more than $1 billion. Religious-oriented funds are not designed to capture the broader market. Most grew out of religious institutions and were set up to allow members of the congregations to invest according to their religious values. Product marketing tends to be confined to religious magazines and newsletters. But as religion assumes a more public place in daily life in the United States, the number and size of faith-based funds are growing. Other factors contribute to growth, from demographics to disillusionment with "business as usual." Frank Rauscher, president of the Aquinas range of mutual funds, which base their investments on the teachings of the Roman Catholic Church, suggested that many funds owed their formation to the Interfaith Center on Corporate Responsibility, a coalition of Christian and Jewish organizations that was set up in 1970 to promote shareholder advocacy. Members "gradually came around to the view that it would be worth setting up mutual fund arms to manage donations and to give individuals a voice," Rauscher said. "The movement is growing," he added, "not just on the back of shareholder scandals and declining moral values. It tends to be the elderly who go to church more often. As the American population ages, many more individuals will decide to align their investments with their beliefs." Faith-based investors tend to be more tenacious than most. Mark Reigler, stewardship investment services manager for MMA Praxis, the mutual fund arm of the Mennonite church in North America, said that during the bear market of 2000 to 2003 the funds did not experience any significant capital outflows. He added that the recent spate of mutual fund scandals had made faith-based funds more appealing to mainstream investors. Although MMA primarily serves groups linked to the Anabaptist faith, its products and services are open to other denominations. The funds have about $230 million in assets. It is not just the faith-based funds for individuals that are on a roll. Religious institutions had plenty to celebrate last year. The British Church Commissioners, who manage assets of £3.9 billion, or $7.09 billion, on behalf of the Church of England, achieved a return of 13.6 percent in 2004, placing them in the top 3 percent of about 700 British pension funds. Over the past 10 years, the commissioners have averaged returns of 11 percent a year, compared with 7 percent for the benchmark WM All Funds, which tracks all British pension funds. The commissioners aim to avoid investing in anything connected with the military, pornography, gambling, tobacco and the media, which excludes more than 10 percent of the FTSE 100 index. Although many European religious institutions employ faith-based screening in their investments, the concept has yet to catch on among the rank and file members of church congregations. Apart from a handful of Islamic funds that are concerned about following Shariah law and the need for Muslims to avoid investments linked to alcohol, tobacco, gambling, pornography and pork, there does not seem to be much demand for faith-based retail funds in Europe. One exception is the Real Life fund, part of Banner Investments, an ethical investment house based in London. The fund avoids companies linked to abortion and embryonic stem cell research. The portfolio manager, Nicola Day, also screens out companies that derive profit from gambling and armaments. Since its inception in September 1998, the fund has gained 40 percent, compared with 27 percent for its benchmark, the IMA UK index. "We tend to be overweight in the noncyclical consumer sectors, such as support services, leisure and transport," Day said. Core holdings include Care UK, which operates nursing and residential homes, and Holiday Break, which runs environmentally friendly vacation trips under the motto, "Leave the smallest footprint possible." There are as many as two dozen faith-based mutual funds in America alone, including those that reflect Presbyterian, evangelical Christian, Islamic, Lutheran, Roman Catholic and Mennonite values. Unlike so-called ethical funds, which tend to favor a broad-based investment agenda, many of the faith-based funds are based on just a handful of issues. Hot topics that concern ethical funds, like the environment and armaments, may not even be on the radar screen of faith-based funds. Gogerty said that many investors confused faith-based investing with socially responsible investing. "There are overlaps, but issues such as pornography, pro-life and indecency are a hallmark of religious funds," he said. "Investors have to dissect the funds carefully to find out exactly where their money is going. They should also be aware that some of the screening methods employed can result in perfectly good companies being excluded from the mix." Pharmaceutical companies that make contraceptives and promote the RU-486 abortion pill are excluded by Catholic funds, like the Catholic Values fund managed by Ave Maria, a foundation set up by Thomas Monaghan, the former owner of Domino's Pizza. Ave Maria, whose assets have risen to $300 million from $140 million at the end of 2003, also takes a dim view of companies that provide health benefits to unmarried or homosexual partners. PepsiCo was dropped from the portfolio last year after the company introduced health benefits for unmarried couples. As Gogerty pointed out, not every Roman Catholic would necessarily support this stance. The fund's manager, George Schwartz, screens out 400 stocks from his benchmark, the Russell 3000 index. Many are drug companies, as well as insurers who pay for elective abortions. Although this investment approach is in keeping with Catholic teaching, many investors might also want traditional "sin" stocks like armament suppliers and alcoholic beverage companies excluded from their portfolio. Catholic Values has no argument with these sectors. Recent purchases included ExxonMobil, the scourge of many environmental campaigners, and the defense contractor General Dynamics. The Aquinas Growth Fund excludes stocks linked to the armaments industry, as well as companies that make money from abortion and contraception. Aquinas Growth also avoids tobacco and gambling. The Aquinas range of four equity and fixed-income funds is one of the largest fund families in the faith-based universe, with $750 million in assets. Evangelical Christians are targeted by the Timothy Plan family of 11 mutual funds. Set up in 1994 to offer "a biblical choice when it comes to investing," the funds shun companies linked to alcohol, gambling and tobacco. Timothy Plan managers also refuse to invest in companies linked to issues like abortion and anti-family entertainment. Weapons manufacturers and companies with links to the military can, however, be included in portfolios. One criticism of faith-based and ethical funds relates to performance. Gavin Oldman of the Share Center in London, an online brokerage firm, said he believed that by screening out certain stocks, ethical and faith-based funds were probably forgoing gains of about 0.5 percent a year. "It may not sound much, but if you compound the losses over 10 years, it really does make a difference," he said. The published figures do not seem to support Oldman's views. The Amana Growth Fund, which follows Islamic principles, returned 18 percent in the year to April 31. The Amana Income fund did even better with a 25 percent gain over the same period. In comparison, the S&P 500 index was up 6 percent. Aquinas Growth, Catholic Values and Timothy Large Cap Value all delivered returns in double digits. Another criticism relates to investment approach. Some funds have been criticized for being too conservative and marginalizing more liberal elements of the faith. Others are criticized for being too liberal in their investments. Reigler said that he found it ludicrous that faith-based funds were criticized for not being perfect. "We make compromises in so many areas of our lives," he said. "Why should investing be any different? Many of us depend on cars, but we know this contributes to environmental pollution. Some of us disagree with stem cell research, but if the same company involved in this research produced a wonder drug for cancer, would we boycott this product?"