From the November 2007 issue of Wealth Manager Web • Subscribe!

November 1, 2007

In God They Trust

Investors have always prayed for profits, but a growing number are now making sure their fund managers, too, seek the guidance of a higher power. Faith-based mutual funds, which employ various religious beliefs in the pursuit of profits, comprise one of the fastest-growing investment categories of the past decade. What was a tiny niche with only $500 million under management in 1997 has ballooned to a $17 billion business, according to fund tracker Morningstar. And as the field expands, so does the definition of faith-based investing.

For some, following principles of faith means getting into mutual funds that steer clear of defense stocks; for others, it means exactly the opposite. For financial advisors, an unusual investing universe is unfolding to create opportunities to serve clients on multiple levels--but first they need to become familiar with this highly varied and subtly nuanced universe.

Why mix faith with investing? A couple of factors help explain why believers are putting their money where their moral values are.

First, they have a range of options. Some 14 fund families now cater to the faithful, according to a July 2007 analysis by Mennonite Mutual Aid (MMA), a fund family that also tracks the field of religious investing. Over the past decade, social conservatives with a religious mission have increasingly put their own stamp on what it means to invest ethically. Their products claim to be "morally responsible" or "Biblically responsible," as opposed to "socially responsible," which for some implies the liberal left.

Second, investors have discovered that sticking with companies that pass a "holy sniff test" can make them feel richer--at least morally, and sometimes materially as well.

"People are becoming more assertive about their beliefs, and more people are also investing in mutual funds in general," says David Kathman, a mutual fund analyst at Morningstar. "Those two factors intersect so you have more demand for these religious mutual funds."

At this point in history, observers say, Americans often want to integrate faith into areas of life where it hasn't always been front-and-center. Kathman points, for instance, to politics where today's presidential hopefuls are expected to answer questions about how faith shapes their values and visions for the country. In education, Christian colleges struggled to stay afloat in the 1960s and 70s, but since 1990, enrollments have soared by 71 percent at the 102 evangelical schools that make up the Council of Christian Colleges and Universities. In this cultural milieu, investing seems to provide one more important arena where the faithful can make their voices heard.

Advisors, meanwhile, are finding that there's more than one way to make religious funds a part of their practice. At one end of the spectrum, Southfield, Mich., financial planner John Vleko embarked on what he calls a personal "crusade" 11 years ago to plug fellow pro-lifers into investments that shun donors to Planned Parenthood, a provider of abortion services, as well as companies that make products for use in abortion procedures. His persistent speaking efforts at anti-abortion gatherings have helped grow his practice into one where 60 percent of clients now have socially screened portfolios--up from just 15 percent four years ago.

"Millions of people who feel so fervently about the causes that touch their hearts are helping to fund the enemy," Vleko says. "When people find out they possess this kind of moral leverage, I think we will see an increasing tsunami of taking money away from companies that are promoting the culture of death and spewing all this garbage that's coming out of the entertainment industry."

At the spectrum's other end, financial planner Doug Wheat caters largely to a left-of-center clientele in his Northampton, Mass., practice where social responsibility is a specialty. Until recently, he was a fan of Calvert Funds and Pax World Funds, two of the oldest and largest families of socially responsible mutual funds. But this year, when Pax did away with its 35-year ban on alcohol stocks, and Calvert hinted that it might eventually follow suit, Wheat grew more convinced that religious funds might be the best fit for any investor--religious or otherwise--who is concerned about the damage alcohol does to families and societies. Now he finds that Mennonite Mutual Aid (MMA) Funds and the Presbyterian Church (U.S.A.)'s New Covenant Funds basically reflect the same moral concerns--no tobacco, gambling or defense stocks--as the original Pax and Calvert offerings.

"As religious funds, they're more likely to stick with their basic beliefs than other funds might," Wheat says. "You can be a little surer that they're going to stay with what they intend or what they've told you in the past about their social mission and guiding principles. If they're following a religious mandate, those don't change very often."

To figure out if, when and how to utilize faith-based mutual funds, advisors need to know the terrain, which includes both investment options and clients' social goals. What a particular client wants to achieve in terms of social impact and financial returns may be more important considerations than denominational affiliation.

Consider, for example, Amana Mutual Funds based in Bellingham, Wash. Its Amana Growth Fund and Amana Income Fund cater especially to the nation's roughly six million Muslims by adhering to principles of sharia, or Islamic law. But the funds' strict moral codes and strong financial performance are attracting many non-Muslim investors as well. Combined assets under management in the two funds ballooned from $30 million in 2003 to $700 million in 2007.

Amana avoids not only the stocks of such forbidden industries as casino operation and alcohol manufacturing, but also shuns makers of food products in order to steer clear of pork production. This last criterion--an unusual one among socially screened mutual funds--makes Amana appealing to vegetarians of various religious traditions who choose to avoid meat products for moral reasons.

Walking the moral high ground hasn't hampered Amana's returns. The Amana Income Fund won a Lipper Award earlier this year for outperforming all 180 equity income funds--both screened and unscreened--in its category. The fund's moral standards deserve some of the credit, according to deputy portfolio manager Monem Salam. Its guidelines keep the fund from engaging in frequent trading, which Muslims regard as a form of gambling, and--since Muslims regard the payment of interest as usury--also prevent it from investing in lenders or companies with hefty debt on their books. All this has enhanced the fund's bottom lines.

"It keeps us out of trouble," Salam says. "Our debt criteria allowed us to purchase and sell Enron right before the blowup happened... So being forced to look at debt considerations is a positive [for performance] rather than a negative."

MMA funds are also striking a resonant chord with investors beyond their religious tradition. Begun by Mennonite evangelicals in 1994, these seven funds--with about $900 million under management--tow a socially conservative line on issues such as abortion. MMA refuses to invest in firms like Pfizer, for example, that make products to eliminate pregnancies. But their broad "pro-life" position also makes them anti-war to the point that they don't invest in defense contractors or purchase U.S. Treasury Bonds. And when they do invest, they take an active role as shareholders by lobbying management on issues such as curtailing pollution and treating workers fairly.

This approach makes them tough to categorize in American political terms, yet it dovetails with the sensibilities of individual Protestants from various traditions and Roman Catholics, whose church advocates a "seamless web" of support on life issues by opposing abortion, euthanasia and the death penalty alike.

"The entirety of what we do isn't exactly what you'd think of as evangelical Christianity" as it is commonly understood, says Mark Regier, stewardship investing services manager for MMA. "But what we're finding is that increasingly, even folks in those sectors are saying, 'I want more. As an evangelical or conservative Christian, I do care about the environment. I do care about human rights. I do see the sense in being engaged with companies and encouraging them to move to more positive positions on social issues.'"

Other fund families cater more specifically to members of a particular religious tradition. For example, the six-year-old Ave Maria Funds court the nation's nearly 70 million Roman Catholics with an all-Catholic advisory board and a focused three-pronged agenda. The funds screen out firms with any connection to abortion products or services. They also avoid distributors of pornography--including hotel chains that make adult films available in-room--and companies such as Microsoft, Google, Intel and others that extend benefits to unmarried couples.

The net effect of this screening is to put about 400 of the stocks in the Russell 3000 off limits according to Bob Schwartz, director of marketing for Ave Marie Funds. Though the funds tend to tilt towards value rather than growth, he says, they're still diversified across industry sectors such as health care and technology.

Social conservatives with a broader set of concerns, or with a desire to ground an entire investing philosophy in Biblical verses, sometimes find what they want in the Timothy Plan. With an evangelical mission to "restore traditional American values," this Florida-based family of nine funds won't touch "securities of any company that is actively contributing to the moral decline of our society." This includes companies affiliated with pornography, abortion, gambling, tobacco, alcohol and non-married lifestyles. Portfolios also exclude companies that support homosexual organizations or provide gay couples with any type of financial benefits.

Advisors should not assume, however, that all Protestant Christian funds share these values or approaches. New Covenant Funds, for instance, invest not only individual nest eggs but also the endowments of the Presbyterian Foundation and of local churches with a link to the socially liberal Presbyterian Church (U.S.A.). To invest here is to finance advocates who have urged Wal-Mart to reduce its carbon footprint. They've also exhorted chief executives to manage their Middle East dealings with an eye toward lifting the plight of Palestinians. And with 35 years of shareholder activism under their belts, they've become the equivalent of elder statesmen in the domain of corporate cage rattling.

Agitating as investors with a social agenda "is not something new, and it's not something faddish for us," says George Rue, chief investment officer for New Covenant Trust Company, advisor to New Covenant Funds. "It's part of our core belief system."

Like religious enterprises of all stripes, faith-based mutual funds have their share of critics. Some say religious funds are distinct in name only.

"To a large extent, for religious mutual funds--or funds that say that they are--it's a marketing situation," says Bobbie Munroe, an Atlanta financial planner. "They might hold the very same things that other funds do."

Other planners urge clients to think about maximizing returns, not integrating moral values during the wealth-building process so they can be more generous with their favorite causes in the future.

"When I hear of a faith-based mutual fund, that's kind of a 'beware' sign for me because there are so many other places where you can do better" in terms of return," says Doug Neal, a Houston financial planner. To support a cause, he says, "You're better off buying a piece of real estate and having it grow tremendously and gift the whole thing instead of trying to buy a mutual fund that has your particular value structure and doesn't produce half of what another fund would have."

Yet despite detractors, faith-based mutual funds continue to attract investors who want it all--handsome returns plus a clean conscience before their God--and are willing to take a few risks to get there. And for advisors inclined to help them do so, an arguably rich and varied landscape awaits.

A Broader Perspective

Not all religious beliefs are channeled into mutual funds. Jews in America and elsewhere, for example, may invest according to their religious values, and they also may put money into Israeli companies, mutual funds holding Israeli companies and Israeli corporate and government bonds. However, there are no mutual funds that invest specifically according to the principles of Judaism.

The situation with Mormons is similar. The presidential campaign of former Massachusetts Gov. Mitt Romney has led many to wonder if there are any Mormon investing guidelines. In fact, although Mormons also may invest according to religious principles, it's not a cut-and-dried issue. Efforts to launch Mormon mutual funds have fizzled in recent years in the absence of sufficient demand for unique Mormon screening criteria. Although the Church of Jesus Christ of Latter-Day Saints (LDS) teaches followers to provide for themselves and to shun alcohol and gambling, its official teachings don't frown per se on profiting from the stocks of Anheuser-Busch, for example, or a Las Vegas casino. In fact, the dichotomy was a plot line in recent episodes of the HBO series "Big Love," when three Mormon businessmen competed to buy into the video poker industry.

"For whatever reasons, Mormons don't seem to express their Mormonism through investing decisions," says Steven Thorley, a finance professor at the Marriott School of Management at Brigham Young University in Provo, Utah.

Individual Mormons who are concerned about avoiding certain stocks can easily find Christian mutual funds that steer clear of problematic vices, according to Michael Smart, spokesperson for Brigham Young and a Mormon investor himself.

In the meantime, practicing Mormons seem to feel justified in deciding for themselves what constitutes a righteous investment. "They don't exactly give out that kind of information in General Conference," where the LDS Church communicates its policies, says Juliann Reynolds, a board member of the Foundation for Apologetic Information & Research (FAIR), a Mormon advocacy group in Redding, Calif. "Being wise is about all we get. The rest depends on a good broker."

-- GJM

G. Jeffrey MacDonald, who holds a Master's of Divinity from Yale University, has covered religious issues extensively.

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