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Portfolio > Mutual Funds > Bond Funds

Grace Under Pressure

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“There’s no SRI going on here at all,” George Schwartz, CFA and president of Schwartz Investment Counsel, bluntly stated at the outset of the interview. “We do MRI.”

For those wondering, SRI is obviously socially responsible investing, but MRI?

“Morally responsible investing,” Schwartz said.

Although Schwartz is the manager of the Ave Maria Mutual Funds, he gets quite a bit of input, much of it from notable names. The funds’ advisory board is a who’s-who of high-profile Catholics; retired football coach Lou Holtz, Larry Kudlow of CNBC, pundit Phyllis Schlafly and philosopher Michael Novak are just a few.

The direction they give is what you’d expect with a fund that invests according to religious prescripts.

“We screen for a narrow focus,” Schwartz explained. “Abortion is a big one, of course, so any company that performs abortions or donates to abortion providers is prohibited. That includes drug companies that make abortifacients, hospitals that perform them or insurance companies that pay for them. Investment is prohibited in any company that donates to Planned Parenthood, for instance.”

Investment in embryonic stem cell research is also prohibited, though Schwartz was quick to point out that adult stem cell research is not.

“Lastly, any company that makes and distributes pornography is screened out, so that includes some hotel chains and the movies they offer,” he added.

What about companies like HBO and some of the racier content they sometimes air?

“We have a number of screening service providers the board has approved that make those determinations.”

He noted that companies screened out account for around 150 companies out of the benchmark Russell 3000, so the impact is not great, but it’s nonetheless strict. The board’s direction provides less room for movement on the issue than even that allowed by the United States Conference of Catholic Bishops. That organization states no more than 5% of a company’s revenue can come from the mentioned topics in order to invest; for Ave Maria, it’s zero.

“Some might say it’s operating with one hand tied behind my back,” Schwartz argued. “I don’t see it that way at all. For me, it’s needed direction. And some of those companies we wouldn’t invest in anyway; they’re just lousy businesses with poor fundamentals.”

What about the ongoing argument that investors must sacrifice returns for their conscience when investing in SRI—er—MRI companies?

“We’ve outperformed the S&P 500 by 171 basis points over the past five years and 480 basis points over the past three years.”

The firm employs a bottom-up research process, one that combines an internal research team with analysis from Wall Street. What they really like, he noted, are dividends.

“We like to know what their prospects are for the future and whether or not the dividend payments are increasing. It’s an outgrowth of rising sales and earnings, with low levels of debt or no debt at all.”

“The importance of their role as capital allocators is understated,” added Executive Vice President Rick Platte. “If you’re trying to be a long-term investor, as we are, how good is the company at allocating their resources? Do they sit on cash for a while, which hurts their shareholders, or do they do everything they can to deploy it? So we really like dividends, strategic buybacks and any sort of reinvestment in the company.”

It’s ultimately a question of how well the management treats its shareholders, Schwartz countered.

“They have a fiduciary responsibility to their shareholders, as do we. It’s something we constantly remind the boards and the executives of the companies in which we invest. It’s not a fiduciary responsibility to the government, nor a fiduciary responsibility to the environment; it’s to the shareholders and shareholders alone.”

Other items of interest to which Schwartz pointed:

  • Ave Maria recently crossed over $1 billion in AUM, including the Ave Maria Rising Dividend Fund (AVEDX), which Morningstar has given five stars and which has experienced the most inflows in Ave’s fund group.

  • Ave Maria has continued to have strong inflows into equity funds month after month—counter to the industry with around $120 million in net inflows—for a fund family that is a little over $1 billion. With 10% internal growth in six months, they are bucking trends with their conservative, contrarian value investing approach.

  • The Ave Maria Bond Fund (AVEFX) had its 10-year anniversary in May. With interest rates increasing, many bond funds are down, but Ave’s bond fund is beating its benchmark by 415 basis points year-to-date and is in the first percentile for Morningstar year-to-date.

  • The Ave Maria Growth Fund (AVEGX) also reached its 10-year anniversary this May and is a four-star Morningstar-rated fund.


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