There are more options than ever for investing in line with religious beliefs, writes Morningstar senior fund analyst David Kathman.
Mutual fund investors with strong religious beliefs have more options than ever these days. Faith-based mutual funds are one of the more interesting subsets of socially responsible mutual funds, which screen out investments that don't meet certain ethical criteria. The idea of investing according to religious principles has been around for a long time, and today there are dozens of U.S.-based mutual funds catering to a variety of faiths, with more than $30 billion in assets under management as of October 2012. Like socially responsible investing funds in general, religious funds are a very diverse group, using a wide variety of screening criteria.
Five years ago, I surveyed the landscape of faith-based mutual funds, and while the broad outlines remain the same, enough has changed that it's worth taking a fresh look. As before, the funds can be divided into Protestant, Catholic, and Islamic funds. (There are no specifically Jewish mutual funds, though there are some Israel-focused funds such as AMIDEX35 Israel AMDEX.) These are all open-end mutual funds domiciled in the United States. There are currently no faith-based U.S. exchange-traded funds; FaithShares gave it a try a few years ago with five ETFs (Baptist, Catholic, Christian, Lutheran, Methodist), but they were liquidated in the summer of 2011 after failing to attract enough assets.
This is the largest subgrouping of faith-based funds and also the most diverse in terms of ideology. Most of these funds are associated with specific religious denominations, and they vary dramatically in terms of the screening criteria they use. In fact, the largest church-connected fund family, Thrivent, doesn't use any social screening at all. This family of 23 funds, with $14 billion in assets, is owned by Thrivent Financial for Lutherans, a fraternal aid society closely connected with the Lutheran church, but the funds don't have any except the broadest mandate to invest in line with the church's principles, and they don't use social screens.
Of the Protestant fund families that do social screening, some look very much like nonreligious SRI funds such as Domini Social Equity DSEFX. The Praxis funds are under the umbrella of the Mennonite Church USA, designed for church denominations with Anabaptist roots. The funds are subject to restrictions based on six core values, including a preference for companies that respect the dignity and value of all people, build a world at peace and free from violence, demonstrate a concern for justice in a global society, and practice environmental stewardship. (You can read more about these principles here.) The firm uses shareholder advocacy to promote such causes as fair-trade coffee, HIV/AIDS prevention, and opposition to predatory lending.
The New Covenant funds, including New Covenant Growth NCGFX, Income NCICX, Balanced Growth NCBGX, and Balanced Income NCBIX, invest according to the principles of the Presbyterian Church. These funds are all subadvised, and the subadvisors include good shops such as Wellington and Sound Shore. The subadvisors are not allowed to hold companies involved in gambling, alcohol, tobacco, and firearms, and among the stocks they do hold, New Covenant uses shareholder activism to try to influence how companies treat their employees, how they interact with their communities, and their environmental records.
The Guidestone funds are more socially conservative than the Praxis and New Covenant funds. They grew out of the retirement plan for employees of the Southern Baptist Convention and are still sold primarily through Southern Baptist channels. The family includes a main lineup of more than a dozen different funds, three of them with more than $1 billion in assets as of October 2012, plus a series of six target-date retirement funds. These funds are run on a day-to-day basis by various subadvisors, subject to restrictions from Guidestone. They are not allowed to hold any companies involved with alcohol, tobacco, gambling, pornography, or abortion, or any "whose products, services or activities are publicly recognized as being incompatible with the moral and ethical posture of Guidestone Financial Resources," according to the prospectus. Guidestone has generally done a pretty good job of picking subadvisors, and overall this is a pretty solid-looking group of funds with reasonable expenses.
Finally, the Timothy Plan funds are run according to principles of conservative evangelical Christianity, with many of these justified by specific Bible verses. The largest of the family's 11 funds, Timothy Plan Large/Mid-Cap Value TLVAX, has about $100 million in assets; the newest, Timothy Israel Common Values TPAIX, was launched in October 2011 to support Israel, a cause near and dear to many conservative Christians. The Timothy Plan was founded by Arthur Ally because he considered mainstream SRI funds to be based on "New Age" principles not compatible with an evangelical Christian worldview. (You can read more about it here.) According to the Timothy Plan website, the funds shun companies that are "actively contributing to the moral decline of our society," including those involved with alcohol, tobacco, gambling, pornography, and abortion, as well as those perceived as supporting anti-family entertainment or alternative lifestyles. The firm's "Hall of Shame" lists many of the prominent companies that Timothy Plan funds won't invest in.
The most prominent Catholic-oriented mutual funds are the Ave Maria funds, with nearly $1 billion in assets under management. The oldest of these, Ave Maria Catholic Values AVEMX, was started in 2001, and five other funds (Ave Maria Bond AVEFX, Growth AVEGX, Rising Dividend AVEDX, Opportunity AVESX, and World Equity AVEWX) plus a money market fund have joined the lineup since then. The Catholic Values and Rising Dividend funds are comanaged by George Schwartz, the founder and CEO of the funds' advisor, Schwartz Investment Counsel. The funds' screening criteria are overseen by a Catholic Advisory Board that includes such prominent lay Catholics as Domino's pizza founder Tom Monaghan and conservative activist Phyllis Schlafly. All the funds follow a "pro-family" investment philosophy that avoids companies involved with abortion, contraception, embryonic stem cell research, or pornography, or those that contribute money to Planned Parenthood. The funds used to screen out any company that offers benefits to unmarried partners, but now this is a preference rather than an absolute prohibition.