Faith-based mutual funds a $17.5 billion industry

   A lot of investors look at several factors before sinking their money into a mutual fund: What's its performance over time? Is it large cap or small, blue chip or emerging market? What's the fund manager's experience? What fees are involved?

   These days, a small but growing group of investors is asking another question: Are these funds consistent with my religious beliefs? They're the force behind the growth of faith-based mutual funds, where a company's moral standing is as important as its performance on Wall Street.

   Since 1997, the number of religion-based mutual funds in America has increased from a handful worth nearly $500 million to about 40 worth $17.5 billion, according to investmenttracking firm Morningstar Inc. While that's small compared with the trillions of dollars invested on Wall Street each year, it still represents significant growth in a short time.

   Faith-based investing, also called morally responsible investing (MRI), falls within three main categories: Christian funds, Catholic funds and Islamic funds. All screen out companies engaged in activities contrary to their moral and religious beliefs, such as tobacco, gambling and pornography.

   "Our investors like the fact that they can invest with us and know that their money won't be invested in companies that violate their principles," said Stephen Ally, vice president of the Timothy Plan, a Christian evangelical group that oversees eight successful funds.

   MRIs are considered a subset of socially responsible investing (SRI), which has been around for decades and today accounts for $2.2 trillion in hundreds of funds. The two overlap in some of the companies they screen out, but there are differences. SRI funds are sensitive to general social issues, including environmentalism, energy efficiency and human rights, while faith-based funds are grounded in interpretations of holy books.

   So, for example, evangelical funds wouldn't include firms with ties to abortion and gay rights, but may include companies with poor environmental track records. And Catholic funds might screen out companies that offer domestic partner benefits, while many SRI portfolios include those companies. Islamic funds avoid financial services and pork producers, neither of which are a concern to SRI investors.

   Because of the additional screening, faith-based funds are a little more expensive to invest in than secular funds, but many also have impressive returns.

   The Islamic Amana Income Fund, with $436 million in assets, gained 25 percent over the past year, nearly triple that of the investment benchmark, the S&P 500. Over the past five years, the Catholic Ave Maria Mutual Funds have risen 8.7 percent, more than 1 percent above the benchmark during the same period.

Christian funds

   Morally responsible investing in America goes back to the 18th century, when Quakers boycotted companies that made profits from the slave trade. Some mainline denominations have avoided investments in alcohol since the 19th century.

   While many Christians embraced SRI funds, which had arrived on the scene about 10 years earlier, others yearned for portfolios more in line with biblical values. Ally said the Timothy Plan was founded in 1992 as an alternative to the "New Age" ideals of SRIs.

   Although mainline churches and small denominations like the Mennonites have their own faith-based mutual funds that exclude companies for a wide range of reasons, the majority of Christian funds are evangelical. These managers spend much of their energy screening out firms tied in some way to abortion and gay rights.

   Companies that make contributions to Planned Parenthood, such as Nike, United Parcel Service, Wells Fargo & Co. and Nationwide Financial Services, are excluded from evangelical portfolios. Evangelical funds also avoid companies offering domestic partner benefits, which can cover same-sex partners. Such companies include Ford Motor and Prudential, and account for half the companies on the S&P 500.

   "We do not underwrite any company that supports adverse lifestyles," said Frank Backe, head of Summit Financial Solutions, an evangelical fund based in Frisco.

   An offshoot of the MRI philosophy is shareholder activism, in which investors raise objections about non-Christian practices at company board meetings. Confronting corporations directly, rather than trying to change the culture through political activism, is a growing trend, some evangelicals say.

   Tom Strobhar, an Ohio stockbroker, has been involved in about 160 shareholder resolutions, mostly involving companies donating to abortion clinics or offering domestic partner benefits.

   "As a shareholder, you have a legal claim to the company and can stand up and speak at company meetings," Strobhar said. "They have to listen to you."

   Strobhar said he's had the most success persuading companies - including American Express and AT&T - to stop donating to Planned Parenthood. Neither company returned calls to confirm Strobhar's claim.

   "We are here to be salt and light and change the world," Strobhar said, "and if we make a lot of money on activities contrary to the Bible, we will have to answer to that."

Islamic funds

In contrast to evangelical funds, Islamic funds are not trying to change the world's moral landscape through investments, said Nicholas Kaiser, president of the Amana Income Fund in Bellingham, Wash. Instead, they're selected based on whether they remain true to the teachings in the Quran. Beside avoiding typical "sin stocks," Islamic funds will screen out companies involved in financial services because of the Quran's prohibition on paying or receiving interest.

   "Any business that is making significant profits from interest is not allowed," said Kaiser, who is not Muslim.

   The prohibition turned out to be a blessing in the wake of the U.S. credit crunch, in which many banks and other financial companies were hit hard and devalued on Wall Street - which is one of the reasons Islamic portfolios have been performing so well.

   The most curious aspect of Islamic funds is that many of its investors are not Muslim. "Only about 10 percent in our funds are Muslim," said Kaiser, adding that most investors choose Amana simply because they like the companies in its portfolios.

Catholic funds

   Catholic funds follow a "pro-family" investment criteria, managers say, screening out firms linked to abortion, contraception and employee domestic partner benefits. In 2006, the Catholic Values Fund sold its holdings in the 3M Co. and American International Group when they offered benefits to unmarried partners, according to Morningstar.

   But not all Catholic funds follow that criteria. The LKCM Aquinas Funds, made up of four funds, de-emphasize the domestic partner issue to focus on excluding firms involved in human rights violations and environmental degradation, according to its Web site.

   And, in contrast to evangelical and Islamic funds, some Catholic funds have alcohol companies in their portfolio because of the use of wine during Mass and in the Gospels.

   Robert Schwartz of the Ave Maria Mutual Funds, which handles four funds and has more than $600 million in assets, predicts continued growth in faith-based funds.

   "We just need to educate investors to make them aware that we are out there and you can have good performance and still adhere to core beliefs," Schwartz said. 

CONTACT THE WRITER: 636-0367 or mark.barna@gazette.com

SOME LEADING FAITH-BASED INVESTMENT FUNDS

Catholic
LKCM Aquinas Funds P.O. Box 701 Milwaukee, Wis. 1-800-423-6369 www.aquinasfunds.com

Catholic
Ave Maria Mutual Funds Bloomfield Hills, Mich. 1-888-726-9331 www.avemariafund.com

Presbyterian
New Covenant Funds 200 E. 12th St. Jeffersonville, Ind. 1-877-835-4531 www.newcovenant funds.com

Evangelical Christian
The Timothy Plan 1055 Maitland Center Commons Maitland, Fla. 1-800-662-0201 www.timothyplan.com

Islamic
Amana Income Fund P.O. Box N Bellingham, Wash. 1-888-732-6262 www.amanafunds.com sOuRCE: gAZEttE REsEARCH