Values-Added Investing

Ross, who runs managed accounts at Nicholas-Applegate, believes such accounts are growing in popularity with investors, especially because of the ability to customize portfolios to improve their tax efficiency. “We believe we’re where mutual funds were 20 years ago,” Ross said, “and we’re growing at 25% each year.”

A new fund that puts a twist on socially responsible investing is the Ave Maria Catholic Values Fund. Ave Maria has become a brand name of sorts for Catholic institutions and activities that are created and sponsored by Thomas Monaghan. Monaghan is the founder and former owner of Domino’s Pizza, which he sold in 1998 to devote his full time and resources to Catholic philanthropy.

About a year ago, Monaghan approached Schwartz Investments, where he is a personal client, about the idea of creating the Catholic Values Fund. “He [Monaghan] believed there ought to be a mutual fund that would give Catholic investors, as well as investors that happen to share Catholic values, a way to invest in the market without having to compromise their religious convictions,” Watkins told the audience.

The firm saw promise in such a fund and decided to go through with its creation. Now, in accordance with the policies established for the fund by a Catholic advisory board, the fund avoid any companies involved in abortion, pornographic forms of entertainment, or companies that provide domestic partner benefits to unmarried employees.

A generation ago, none of these practices was common in publicly owned corporations, but obviously the world is different today. “Many companies today engage in these practices, and although they are legal and should be legal, many Catholics do not wish to participate as passive owners in businesses that conflict with core Catholic doctrine.”

The Ave Maria fund offers investors an alternative. Watkins notes there are nearly 64 million Catholics in the U.S. today. “I can tell you from personal experience,” said Watkins, “that very few of these Catholics are interested in investing in a Catholic martyrs fund. For our fund to succeed, we must provide a competitive investment return, and probably a superior return, in order to counter the natural skepticism people have of any fund that limits its investment universe for non-investment reasons.”

While socially responsible investing has always gotten knocked for the limitations that social screens create, Watkins says, “Let’s say there’s a universe out there of 2,000 stocks. Any actively managed fund is probably not going to have any more than a 100-stock portfolio. Any manager is picking one out of every 20 stocks through some process. There are about 200 companies that fail to meet our religious screens for one reason or another. So that leaves us with a potential universe of 1,800 companies.”

Watkins does admit that their screens do create a mid-cap value bias and virtually eliminate some sectors. “There are some sectors that are disproportionately screened out by us. Health care is obviously a big example. It makes up about 12% of the market, and half of that is pharmaceuticals. We buy almost no pharmaceuticals. We think we can compensate for that by adding medical equipment companies to the portfolio,” he says.

So far the fund is off to a strong start, up 2% in a market that has been down 6%. Watkins takes a realistic view and says he thinks his fund will have to beat the market by at least 200 basis points a year to make people take notice.