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Funds with a Religious Bent

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March 24, 2005 — Easter Sunday represents one of the holiest days of the year for observant Christians. Churches around the country report much higher attendance for services on Easter than for any other Sunday in the year.

Even as many Americans who identify themselves as Christian neglect their weekly churchgoing obligations, they are finding other ways to express their faith. One way is through their investments.

“People are learning that it really does matter where you invest your money,” says Art Ally, president of The Timothy Plan family of mutual funds, which screen out companies that do not follow biblical precepts.

The Timothy funds are among a growing number of funds that use religious principals to select investments. Such funds are proving a popular choice among some investors. “Our assets are growing faster than the overall industry,” says Ally. “We understand why. Just look at all the corporate scandals that have broken in recent years. We never invested in any of those companies.”

“We have seen studies that suggest that 56% of people incorporate their moral principles into their investing decisions,” says Bob Leech, president of the Presbyterian Church U.S.A. Foundation, which runs several mutual funds under the New Covenant name. “We serve those people.”

Here are profiles of three mutual funds that use religious teachings as an underpinning of their investment process.

Ave Maria Catholic Values Fund (AVEMX)

The “values” in the name of this fund is a play on words, according to its president, George Schwartz.

“The Ave Maria Catholic Values fund is a value-oriented fund. It is a value fund in its investment outlook, but we also screen according to several parameters set up for us by a board made up of Catholic lay professionals, incorporating Catholic values,” explains Schwartz.

Specifically, this means the fund never invests in companies involved in abortion or pornography, nor does it invest in any company that contributes to Planned Parenthood. The fund also screens out those companies that offer non-marital partner benefits.

“These screens eliminate about 400 companies from the Russell 3000,” says Schwartz. “Then we look for companies that are selling for less than our estimate of their intrinsic value. We keep a well-diversified portfolio, across all capitalizations and in 16 different industries.”

The fund currently has assets of $250 million, up from $144 million in assets under management at the end of 2003. Since its inception in May of 2001 through the end of February, 2005, the fund has put up an average annual gain of 11.9%. It is a no-load fund with a minimum initial investment of $1,000 and an annual expense ratio of 1.5%, in line with peers. The fund has a 4-Star ranking from Standard & Poor’s.

“Our most recent purchases include the largest of the large caps and also a tiny micro-cap,” says Schwartz. “ExxonMobil (XOM, NYSE) is the biggest company in the world, and is in the portfolio. Input/Output Inc. (IO, NYSE), another holding, has a market cap of less than $200 million. Lots of large-cap stocks pass our screens. We have positions in Caterpillar (CAT, NYSE), 3M (MMM, NYSE), and Automatic Data Processing (ADP, NYSE).”

He says the fund pays no mind to sector weightings.

“Our approach is completely bottom-up,” says Schwartz. “We don’t care if we are underweight or overweight any benchmark. In fact, we have almost nothing in technology. We have been overweight energy, and that’s done well for us. We have also been overweighting retailers. We think opportunities in the next 12 months will be in specialty retailers. We have set ourselves up with positions in Brookstone (BKST, NASDAQ) and Dollar Tree Stores (DLTR, NASDAQ). We’ve been adding selectively in defense and aerospace, names like Rockwell Collins (COL, NYSE) and General Dynamics (GD, NYSE).”

New Covenant Growth Fund (NCGFX)

This fund is operated by and for members of the Presbyterian Church.

“The New Covenant Growth fund is invested in a way that is consistent with Presbyterian values,” says Leech. “The church takes a strong moral position against companies that are involved with gambling, alcohol, or firearm sales. We think we screen out about 500 stocks. We think that we can still put up competitive returns, beating the indices, even as we screen out certain companies.”

Over the past three years, the fund beat the S&P 500, with an average annual gain of 4.8%. The no-load fund has an expense ratio of 1.13%, below peers, and an initial minimum investment requirement of $500. Standard & Poor’s gives it 4 Stars.

“As for our investment thesis, we still like the financial services sector,” said Leech. Bank of America (BAC, NYSE) and Citigroup (C, NYSE) are both in the top ten list. “Both are premier banking organizations with international franchises,” says Leech. “We know there are concerns about rising interest rates, but we think these two banks are well positioned to operate well in any interest rate environment. We are still fairly bullish on both of them.”

Leech also likes the energy sector, specifically because he expects oil prices to stay high. The fund owns ConocoPhillips (COP, NYSE) and ExxonMobil (XOM, NYSE). Consumer products companies are also in the fund.

“Procter & Gamble (PG, NYSE) is a top ten holding,” says Leech. “We think this is a recession-proof company. We think the acquisition of Gillette was a good move.”

Timothy Plan Large/Mid-Cap Value Fund/A (TLVAX)

The Timothy family of funds was one of the first to use biblical principles as a part of the investment process. The Large/Mid-Cap Value fund was launched in 1999 and now has about $50 million in assets under management.

“We are very strict,” says Ally. “We do not invest in companies that are involved in abortion, companies that contribute to Planned Parenthood, companies involved in pornography, companies that promote non-traditional lifestyles or a homosexual agenda, companies that market alcohol, companies that sell tobacco, or companies involved in gambling. We really do have zero tolerance for these types of behavior.”

The fund has an average annual return since inception of 5.4%. The front-end load is 5.25% and the expense ratio is 1.5%. In February, the fund’s ranking was downgraded to 1 from 2 Stars by Standard & Poor’s.

Some of the top holdings at the end of 2004, the last period for which the fund has published this information, include International Rectifier Corp. (IRF, NYSE), CVS Corp. (CVS, NYSE), Dean Foods (DF, NYSE), and Union Pacific (UNP, NYSE).

Contact Bob Keane with questions or comments at:[email protected].


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