From the August 2004 issue of Investment Advisor • Subscribe!

Keeping the Faith

Since its earliest colonial days, America has had a complicated and often ambiguous relationship with matters of religious faith. A number of the first colonies were established so Puritans or Quakers or Catholics could live according to the tenets of their faiths without government interference. The Founding Fathers, many of whom were Deists rather than members of a particular church, acknowledged the role of a Creator but stood firmly against the establishment of an official state religion.

The debate about the role of religious belief in American life continues to this day as illustrated by the recent court challenge to the words "under God" in the Pledge of Allegiance. In recent polls, some 80% of Americans profess to believe that Jesus was and is the Son of God, while more than 30% say they consider themselves Evangelical Christians.

Although the various Christian denominations claim the majority of those Americans who profess religious belief, they by no means have a monopoly on the revival of religious fervor. In recent years, this reawakening of religious spirit has manifested itself in moves to put faith into practice, ranging from antiwar protests and corporate activism to the home schooling and anti-abortion movements. For those striving to live their faith, it's not surprising that what they do with their money has also become an important issue. Sparked somewhat by the socially responsible investing (SRI) movement in recent years, momentum has been building for what can be called faith-based or morally responsible investing.

Like religious faith itself, faith-based investing is an intensely personal issue, and followers of Judaism, Hinduism, and Buddhism are no less likely to make investments that mirror their beliefs than Christians or Muslims, although their actions are often less overt. That said, the movement seems to have three primary components that often overlap: individual and institutional investors who only want to invest in companies that reflect their core values; faith-based mutual funds that screen out certain companies according to morally determined values; and investment advisors who attempt to make their spiritual beliefs the foundation of their businesses.

"Without question this is a growing movement," says Jeff Chinery, senior financial advisor with the National Planning Group of Ronald Blue, a fee-only financial planning and investment management company based in Atlanta. "If a Christian couple needs counseling, they're going to go to a Christian marriage counselor, because that's important to them. But when it comes to finances, that same mindset doesn't exist, although we're starting to see a real shift. It is becoming more and more important to more people." Chinery's firm's Web site describes its mission as providing "personal financial advisory services within a biblical framework to those who desire to live life purposefully."

"All our services are couched in a biblical framework, but that doesn't mean we tell our clients specifically that the Bible says you have to go and do this or do that," Chinery explains. What the firm's mission statement does do is let clients looking to follow biblical precepts know that their financial advisors share a similar mindset. "We spend a lot of time looking at what the Bible has to say about a lot of different things from debt to investments, diversification, and generational wealth transfer."

International Wealth Management in Grapevine, Texas, is another firm that says it offers "biblically based" financial planning, which President Dennis Carpenter explains as helping clients see that their investments are in concert with their beliefs and values. While noting that he is very much in favor of socially responsible investing, Carpenter sees the faith-based approach as something different. In the hereafter, Carpenter expects not to be asked to justify what kind of return he got on his and his clients' investments, but what he did with the gifts he was given in this life.

The option of using moral screens is part of the process in Carpenter's consultations with his clients, but it's not something he pushes. He sees his role as presenting the possibilities, but as in all matters, the final decision is the client's. "You don't want to do it from a preachy perspective, or from an 'I'm better than thou' perspective."

But Carpenter says he's surprised by how little most investors, including some churches and pastors, know about the investments they own. He blames that on the industry, which he feels hasn't done enough to educate the investing public or to find out how important this issue is to them.

"I think advisors have been slow to move in this area" of mixing investments and faith, Carpenter says, and points to the National Association of Christian Financial Consultants as one of the organizations helping to expand the movement among advisors. Despite its biblical orientation, Carpenter says his firm does not specifically market its services to a religious audience.

As a believer in socially responsible investing, Carpenter is open to the idea of faith-based mutual funds, but doesn't cut them any extra slack due to his own beliefs. "Some of them have great programs. Some are well screened and some are cost efficient, but not all. You have to look at these like any mutual fund," he points out. "If the expense ratio is too high, even though the goal is admirable, you need to bring things into line with the competitive world. They need to be judged on the same criteria as mainstream funds.

"That's the beauty of the products that are out there today. Clients can invest in concert with their beliefs and not sacrifice performance. There just aren't enough of us out there--meaning advisors--who are trained to provide this type of service."

"I think it is unwise to try to separate faith from any part of one's life," observes Dan Moisand, a principal with Spraker, Fitzgerald, Tamayo & Moisand, in Melbourne, Florida. "Spirituality is part of who we are. Planners should certainly incorporate this part of a client's life into the planning process," Moisand says, though it's not as easy as it sounds. "We planners have our own ideas when it comes to faith," he acknowledges, but argues that "it makes perfect sense to me to try to incorporate client wishes" regarding such an approach when it's appropriate.

Funds of Faith

Over the last decade, a number of mutual funds have been created that avoid companies and industries that are in businesses or take social positions that conflict with the religious beliefs of certain groups. Whereas a decade ago an investor looking for funds that mirrored a specific moral doctrine was severely limited in his choices, today there are funds with a variety of denominational dispositions.

One of the early players in the faith-based investing sphere was Christian Brothers Investment Services, which was founded in 1981 by the Brothers of the Christian Schools because the Catholic religious order sought a way to balance the needs of faith and finance. The idea resonated with a variety of other Catholic institutions, including schools, hospitals, and dioceses. Today, CBIS operates as a for-profit company--donating a portion of its profits to support Catholic educational and social ministries--and manages more than $3.5 billion in assets for more than 1,000 Catholic institutions worldwide.

CBIS acts as a manager of managers in its investments and uses a number of screens that represent the core values of the firm's participants, says executive VP Frank Coleman. CBIS employs a "life ethics" screen to weed out companies involved in contraception and abortion; a "violence" screen to eliminate companies involved in "the spread of militarism" (weapons of mass destruction), land mines, and retail handguns; a tobacco screen; and a pornography screen.

Coleman also points out that CBIS operates very much as part of the SRI movement and takes an activist role with the companies in which it has an ownership stake. "The Catholic approach is that no one is perfect. We're all on the road to getting better," he says. "We try to add a reasoned voice to the conversation with the goal of helping to bring about change. For example, we're very concerned about environmental degradation, which has both a financial and a moral impact. We look to bring about board diversity, which is also a big issue for us."

In the years since the launch of CBIS, a number of other funds based on Roman Catholic, Evangelical Christian, and Islamic beliefs have appeared. All use screens based on religious doctrine, but despite their similarities, each has its own particular spin. That's not surprising, since the existence of one universal moral screen set is no more likely than one universally agreed-upon true religion.

Pornography is the one major no-no that cuts across all faith-based funds. For the Christian funds, opposition to abortion is also universal. After that, it gets a little more murky. Unlike CBIS, not all the Catholic funds have violence or tobacco screens, although the Islamic and a number of Christian funds screen out tobacco, and the Dow Jones Islamic Index fund also eliminates defense companies. Christian funds like the Timothy Funds and the Noah Fund join the Islamic ones in eschewing alcohol. Gambling and entertainment companies are also commonly excluded. Sharia (Islamic law), which prohibits Muslims from profiting from interest, means that Islamic funds also eliminate conventional financial services companies as well as those that make pork products.

All styles of funds are included in the faith-based mix--large cap, small cap, mid cap, value, growth, bonds, index. Ultimately, what they all have in common is that in addition to the strict investment criteria the fund managers use, a series of additional screens is applied that comes not from performance or P/E ratios or asset valuation but from a specific religious belief.

"There are a lot of alternatives in the investment field and we wish to provide an alternative for people who feel like we do-- who wish to place their money with companies that are upstanding, Christian, and biblically based, or at least pledge to be," says Bob Gualtieri, VP of marketing for the Noah Fund, which currently has $10 million in assets. Like most large-cap equity funds, it was hit hard in 2001 and 2002, but managed to retain about 65% of its assets. The fund was started in 1996 with five screens (alcohol, tobacco, gambling, abortion, and pornography) that, says Gualtieri, only screened according to the business a firm was actually in, not the corporate values it espoused. The fund recently expanded the list to include companies that support Planned Parenthood and that offer spousal benefits to unmarried couples. "We have added those two screens and are in the process of removing those stocks from the portfolio," Gualtieri explains. "That will change us from a large-cap growth fund to all-cap growth."

The degree to which these faith-based funds have caught on in the marketplace varies, as does the participation of the advisor community. The Ave Maria Catholic Values Fund reached $170 million in assets in its first three years through an ad campaign in Catholic magazines and newspapers and word-of-mouth referrals. Fund manager Schwartz Investment Counsel, based in Bloomfield Hills, Michigan, has now begun a more aggressive campaign to market the fund and two others to the advisor community. (See Mutual Fund Spotlight beginning on page 56 for more about the Ave Maria Catholic Values Fund.)

Does It Work?

While most observers applaud the motives behind these faith-based mutual funds, not everyone is convinced, from an objective viewpoint, that they work as well as traditional investments. "It's important for people to realize when looking at these funds that the performance may or may not be attributable to the screens being applied," says Greg Carlson, a Morningstar analyst. "The same two variables apply to every fund--the talents of management and costs."

"The conventional wisdom--that if you do this sort of activity you're giving up return--has not been our experience, and it has not been the experience of many others," says Frank Coleman, VP of Christian Brothers Investment Services. "Our performance is competitive, and in areas where it may not seem competitive, that has less to do with SRI than with market issues or manager issues." In the years CBIS has been active, Coleman says, "we've discovered that there's enough breadth in the capital marketplace that you can always find companies that are good investments."

"Our organization has been wrestling with this issue for more than 20 years, and we came to the conclusion that screening a portfolio from a moral perspective is really not possible because you end up chasing your tail," counters Jeff Chinery of Ronald Blue. "Creating a 'pure' portfolio is very hard to do, because as the Bible teaches us, we live in a fallen world. Inside the church, outside the church, you're always going to be able to dig deep enough to find problems and issues. Where do you draw the line? You can say 'I'm not going to put any of my money into any of the companies that are out there.' But if you put it in the bank, the bank can turn around and lend out that money for things that you find objectionable. We don't take a screening approach with our clients for the most part. We try to do a good job managing diversified mutual fund portfolios, but we don't think you can get there and have a portfolio that's truly morally clean."

Recognizing that there are still going to be clients who feel strongly about applying a morally based screen to their investments, Chinery suggests that these individuals pursue those objectives on their own. "It's a personal position or a matter of prayer. We've taken a certain position as a company, but that doesn't mean that we're right. In the research that we've done, we've not been terribly impressed with the investment choices that are out there. For us, the biblical framework is more about attitudes and ideas toward the portfolio as opposed to the actual components of the portfolio." Chinery does admit that as interest in faith-based investing has grown, the number and quality of the options have improved and are likely to continue to do so.

He's not alone among Christian planners in his lack of enthusiasm for faith-based funds. "I have no clients who specifically own either faith-based or socially conscious funds, for a number of reasons," says Dan Moisand of Spraker, Fitzgerald, Tamayo & Moisand. "There's the whole issue of broad diversification, which naturally leads us to mutual funds for the vast majority of client equity holdings. One of the problems with the mutual funds is that the fund's definition of what is a 'responsible company' to invest in may not match up with that of the client. In this [geographic] area, for example, we have many retired military people, and when they see in a prospectus that a fund doesn't invest in defense companies because that's not 'responsible,' they take offense."

Moisand says he attempts to conduct his business according to his Christian beliefs, but avoids recommending faith-based funds. "It has nothing to do with the consciousness [behind the fund]. It has to do with the fact that we don't put a lot of faith in stock pickers. If the stock-picking function is so suspect, why would it be any easier if you have to screen not only on your prospective investment merits, but also on these other criteria? We try to take a more market-based approach."

The Size of the Niche

Virtually everyone involved in faith-based investing agrees that it is a niche market, but how big is it? Jerry Wade, president of Wade Financial Group, a fee-only advisory firm in Minneapolis, admits that he doesn't know how big the market is for "morals-based investing," but thinks it's large enough that he's set to launch a separately managed account product aimed at the niche. Wade notes that 10 years ago, he put together a portfolio of socially responsible investments because people had told him they liked the idea. Much as the restaurant industry discovered with low-fat meals and no-alcohol cocktails, Wade found that what people say they want and the things they actually buy are not always the same. "Our socially screened portfolios died an uneventful death," he says.

Despite that experience, Wade is still a proponent of socially screened portfolios, but says that when he looked around, there weren't enough morally screened choices available, and those that were available lacked diversification and were saddled with high fees and poor performance (see table on page 50 to see how some of these funds have performed). "That's what led me a year ago to see how we could put together our own morally screened portfolios. We view this as a marketing opportunity to a niche market of what I'll call conservative Christians.

"I don't know how big it is, but I do know the mutual fund market is well over $1 trillion. My assumption is that there's a slice of that market that is probably interested in a product like this."

George Schwartz, manager of the Ave Maria Funds, recognizes that he is aiming at a niche market, but has a pretty good idea of the niche's size. "This [fund] is not for everybody. All Catholics are not pro-life and all Catholics are not conservative. This is a fund for conservative, pro-life Catholics. It's a niche market, but it's an awfully big niche.

"We figure there's something over 60 million Catholics in the country. Maybe half are adults, so you're down to 30 million. Then we say 20% are probably conservative Catholics, so you're down to 6 million. Of them, maybe only 10% would invest in a mutual fund, so you're down to 600,000 adult, conservative Catholic potential investors. These are all very conservative numbers, I think. Of the 600,000 potential investors, so far we've got 3,000. We're just scratching the surface."

"While we're not investing for [individuals], we get a ton of inquiries daily," says CBIS's Coleman. "We've gotten more hits to our Web site in the last six to 12 months from individuals who are looking for this type of investing than we've ever had. They're looking for alternatives. From our [anecdotal] experience, there are a lot of individuals who are trying to find ways to blend their values [with investing]. I think all of us want to do that. I think, intuitively, if there's an opportunity out there, we feel much better about having our investments reflect what we believe than not."

"I think it's a very big opportunity," says the Noah Fund's Gualtieri about faith-based investing. "You pick up the newspaper every day, and there are more reasons to invest as your faith indicates than ever before."

The faith-based investing movement will likely continue to grow over the next few years, fueled both by the demand from individual clients and by the growing number of financial advisors who are making their religious faith an increasingly prominent part of their businesses.

"My faith is part of who I am," states Dan Moisand simply. He points out that there is much to learn in the Bible about being tactful, respectful, and effective, but that the most important lesson comes not from what one says, but what one does. He takes offense when he sees businesses that appear to represent that God somehow endorses their businesses and doesn't think that anyone should automatically be trusted just because they are religious. "I don't ask people to trust me because of my faith," he says. "But because of my faith, I work hard to be worthy of the trust."

Staff Editor Robert F. Keane can be reached at bkeane@ia-mag.com.

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