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.
The LKCM Aquinas funds, which were founded in 1994 and bought by Luther King Capital Management in 2005, offer a slightly different approach to Catholic investing. This lineup of three funds (LKCM Aquinas Growth AQEGX, Value AQEIX, and Small Cap AQBLX) invests according to the United States Conference of Catholic Bishops' Socially Responsible Investing Guidelines. That means they avoid companies involved with abortion, contraception, pornography, and weapons of mass destruction and prefer those that promote human rights, gender and race equality, environmental responsibility, affordable housing, and fair employment practices.
Finally, there are the Epiphany funds (Epiphany FFV EPVNX, FFV Strategic Income EPINX, and FFV Latin America ELAAX), which invest according to a Faith and Family Values Scorecard. While the funds don't explicitly identify themselves as Catholic, the FFV Scorecard is based on the above-mentioned U.S. Conference of Catholic Bishops' guidelines, and the funds' advisory board is drawn entirely from Catholic organizations and universities. According to the prospectus, the FFV Scorecard excludes companies involved with abortion, contraceptives, embryonic stem cells, pornography, or weapons of mass destruction, or which have been in trouble for employee discrimination or health, safety, environmental, or human rights abuses.
Our final group of religiously oriented funds are those that invest according to Muslim principles. Some of these funds' screening criteria are similar to those used by many of the Christian funds we saw above, but they also feature some restrictions based on Islamic law and not found in most Christian denominations, notably prohibitions against pork and paying or receiving interest. That means that these funds generally avoid financial companies, where interest is central to the business, and try to minimize the importance of interest in the rest of their portfolios.
The largest and most successful Islamic mutual funds are the Amana funds. The combined asset base of Amana Trust Growth AMAGX and Amana Trust Income AMANX has risen from $37 million in 2002 to $3.5 billion today; Amana Developing World AMDWX was added to the lineup in 2009. All three funds are managed by Nick Kaiser of Saturna Capital, aided by comanager Scott Klimo and a panel of Islamic scholars. Not only does Kaiser avoid financials, but he also avoids companies that have too much debt on their balance sheets or that get more than 5% of their revenue from alcohol, tobacco, gambling, pornography, or pork. He doesn't trade much, partly because of his long-term investment perspective but also because excessive stock trading would be considered a form of gambling, which is forbidden by the Quran. None of this has hurt the funds' results; in fact, they have put up great numbers, with Amana Growth and Amana Income both sporting 10- and 15-year returns in the top 10% of their categories.
The Azzad funds--Azzad Ethical ADJEX and Azzad Wise Capital WISEX--are much smaller than the Amana funds, with a combined $60 million in assets, but they are based on similar principles. Manager Omar Bassal uses proprietary software to screen out companies that get significant revenue from alcohol, tobacco, any meat products, gambling, pornography, interest, "unethical forms of entertainment," and weapons of mass destruction. The screens also explicitly eliminate all banks, financial services, and insurance. Azzad also uses shareholder advocacy to advance its views and contributes to charities such as the Arab Orphan Committee and the Boston Police Relief Association.
Finally, the Iman Fund IMANX is advised by Allied Asset Advisors, a subsidiary of the North American Islamic Trust. At least 80% of the fund's assets are invested in stocks from the Dow Jones Islamic Market Index and the Dow Jones Islamic Market US Index, with the rest chosen by manager Bassam Ossman from companies that are also compliant with Islamic principles. These indexes are determined by a Shariah Advisory Board using principles similar to what we have just seen: They eliminate companies whose primary business involves alcohol, tobacco, pork, interest, weapons, and all entertainment, including gambling, movies, hotels, and pornography.
Whether or not to invest in a religiously oriented mutual fund is a very personal choice. Many of these funds are somewhat expensive relative to their category peers, so you may have to pay up for religious screening. And while some of these funds will do better than others over any given period of time, there isn't any good evidence that SRI funds in general, or religious funds in particular, do any better (or worse) than the broader universe of mutual funds over the long term. (See this article for more details.) Religious screening in and of itself neither helps nor hurts fund returns over time.
Of course, you don't have to be a member of a given religion to invest in its funds; adherents of other faiths might find the screening criteria in some of the above funds attractive, and non-Muslims might be tempted by the stellar long-term performance of the Amana funds. It should be clear from the descriptions we've seen that religious mutual funds can't be pigeonholed into a single narrow group. Like SRI funds in general, they vary widely in their philosophies and the criteria they use to choose or eliminate stocks, giving religiously inclined investors a lot of options.