Putting Faith in Religious Mutual Funds

Socially responsible investing has become increasingly popular in recent years, with lots of mutual funds available for investors who want to keep their portfolios in line with their ethical beliefs. Most such funds avoid alcohol and tobacco stocks, but what they do beyond that varies quite a bit from fund to fund. Probably the fastest-growing subset of SRI funds is religious mutual funds, most of which are tailored to members of a specific denomination or religion, and some of which are associated with organized churches. Such funds have grown from less than $500 million in total assets 10 years ago to more than $17 billion today.

Like the broader category of SRI mutual funds, religious funds vary quite a bit in the screening criteria they use, though there are some broad similarities. They can be divided into three main categories: Catholic funds, Protestant funds, and Islamic funds. These funds won't necessarily perform better than their mainstream peers, and they can be pricier to boot. But they can give peace of mind to those who prefer not to own investments that conflict with their religious beliefs.

Catholic Funds
Arguably the most prominent Catholic-oriented mutual funds are the Ave Maria funds. The largest and oldest of these,  Ave Maria Catholic Values (AVEMX), was started in 2001, and four other funds (Ave Maria Bond , Growth (AVEGX), Rising Dividend (AVEDX), and Opportunity ) plus a money market fund have joined the lineup since then. The Catholic Values fund is comanaged by George Schwartz, who is also the president and CEO of the funds' advisor, Schwartz Investment Counsel. The funds' screening criteria are overseen by the Catholic Advisory Board, which includes such prominent Catholics as Domino's pizza founder Tom Monaghan and conservative activist Phyllis Schlafly.

All the funds follow what Ave Maria calls a "pro-family" investment philosophy that emphasizes attractively priced stocks with good profitability and cash flows but which avoids companies that violate certain criteria. Specifically, the funds will not invest in companies involved with abortion, contraception, or pornography or that offer nonmarital-partner benefits to their employees. The managers will quickly sell holdings that violate these guidelines; for example, in 2006, the Catholic Values fund sold  3M Company  (MMM) and  American International Group (AIG) when they started offering benefits to unmarried partners of employees. A smaller fund, Catholic Equity , was recently bought by Schwartz Investment Counsel and will be merged into Ave Maria Rising Dividend by the end of March 2007.

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 four funds (LKCM Aquinas Growth , Value (AQEIX), Small Cap , and Fixed Income ) uses a somewhat broader set of criteria than do the Ave Maria funds, more in line with many other socially responsible funds. They avoid companies involved with abortion, contraception, pornography, and weapons of mass destruction, but there's less emphasis on domestic-partner benefits and more on "gender and race discrimination, human rights, economic priorities, environmental responsibility and fair employment practices," as the funds' Web site puts it.

Protestant Funds
By far the largest family of religious funds in terms of assets are the Guidestone funds, which grew out of the retirement plan for employees of the Southern Baptist Convention. The family includes a main lineup of more than a dozen different funds, seven of them with more than $1 billion in assets, plus a series of five target-retirement funds rolled out at the end of 2006. 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.

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. Like the Guidestone funds, 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. In many respects, these funds are not too different from nonreligious SRI funds such as  Domini Social Equity (DSEFX), which follows similar principles and is now subadvised by Wellington.

The MMA Praxis funds-- MMA Praxis Core Stock , Value Index (MVIAX), International , and Intermediate Income --are under the umbrella of the Mennonite Church USA, designed for church denominations with Anabaptist roots. (MMA stands for Mennonite Mutual Aid.) These funds, like those in the above two families, are subadvised, with the Core Stock fund now being run by the talented Chris Davis and Ken Feinberg of Davis Selected Advisors. The subadvisers are subject to restrictions based on six core principles, 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.

In contrast to the ideas behind the MMA Praxis funds, which most people would consider politically liberal, The Timothy Plan funds are run according to principles of conservative evangelical Christianity, with many of these justified by specific Bible verses. There are now eight funds in the family, the largest of which, Timothy Plan Large/Mid-Cap Value (TLVAX), has about $100 million in assets. 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.) The funds shun companies 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, including some, such as  Microsoft (MSFT) and  Coca-Cola (KO), that are commonly held by nonreligious SRI funds.

Islamic Funds
Our final group of religiously oriented funds are those that invest according to Islamic principles. Some of these funds' screening criteria are similar to those used by many of the Christian funds we saw above, including prohibitions on alcohol, tobacco, gambling, and pornography. However, 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. Avoiding companies involved in pork production is not too hard, but avoiding interest is harder, given its ubiquity in the world financial system. 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  Amana Trust Growth (AMAGX) and Amana Income (AMANX), whose combined asset base has risen from $37 million in 2002 to around $450 million today. Both funds are managed by Nick Kaiser of Saturna Capital, who is aided by assistant manager Monem Salam and a panel of Islamic scholars. Not only does Kaiser avoid financials, he also avoids companies that have too much debt on their balance sheet or that get more than 5% of their revenue from any of the forbidden activities noted above. He also 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 Koran. None of this has hurt the funds' results; in fact, they have put up great numbers, with Amana Growth sporting one of the best records in the large-growth category over the trailing three-, five-, and 10-year periods. Kaiser was one of the finalists for Morningstar's Domestic-Stock Manager of the Year in 2006.

The Azzad funds--Azzad Ethical Mid Cap (ADJEX) and the large-growth Azzad Ethical Income --are much smaller than the Amana funds, with only $4 million apiece 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, but the Ethical Income fund has a significant stake in real estate investment trusts, which Morningstar classifies as financials. 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 Dow Jones Islamic 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 U.S. 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.

Investing Religiously
Whether or not to invest in a religiously oriented mutual fund is a very personal choice. Most of these funds tend to be somewhat expensive relative to their category peers, so you'll generally have to pay up for religious screening. And while some of these funds will do better than others over any given period of time, we haven't found 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. If you decide to invest in any of these funds, it should be because you agree with the moral principles underlying the fund.

But 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. 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 Amana Growth. Given the increasing popularity of such funds, investing choices for the religiously inclined are only likely to increase in the future.