What if Jesus were> a stock picker?
It s a question more investors seem to be asking these days. At a time when investors confidence in the markets has been shaken even after the big rally of 2009 experts say a growing number of Americans are integrating their faith with their finances. The number of religious mutual funds has tripled over the past decade, to more than 90 with one now available for almost every flock, from evangelical Christians to Mennonites and Muslims.
Religious funds now control more than $27 billion in assets, up from $10 billion in the late 1990s, making it one of the hottest sectors in the broader category of socially responsible funds. People are waking up and saying, What I do with my money ought to reflect my values, says David Miller, a scholar at Princeton University s Center for the Study of Religion.
Socially responsible funds have been around for years, of course, attracting both diehard followers and critics who see their stock-screening methods as a drag on returns. But the faith-fund boom is part of a growing hunger among religious people for financial guidance. While some financial planners specialize in estate planning and others claim an expertise in taxes, more and more are claiming the label of Christian financial adviser. Churches are also getting into the act, setting up workshops that dispense financial advice. And just this month, five new religion-based exchange traded funds were launched.
While most mutual fund managers place a laser-like focus on financial measures such as earnings per share and balance-sheet debt, managers of faith-based funds first check whether they think a company violates scriptural teachings. But injecting morals into financing is not without its share of controversy. Catholic funds typically draw a line at companies they believe support abortion or contraception; the evangelical Timothy Plan bans stocks of companies deemed supportive of a gay lifestyle.
Personal beliefs aside, each fund s interpretation of scripture is open to criticism. Why single out companies that provide same-sex benefits when they also provide benefits to employees who are greedy or venal or in other ways immoral according to biblical teaching? asks Gary Moore, an investment adviser and founder of the nonprofit Financial Seminary in Sarasota, Fla.
Of course, just because a fund claims to have God on its side doesn t mean investors will be blessed with top returns. Diversified U.S. religious stock funds are up an annual average of 2.27 percent over the past five years, just below the 2.34 percent return for all diversified equity funds, according to Morningstar. Religious funds tend to have expenses above the industry average, and because they often screen out certain sectors, they can be handcuffed when market sentiment shifts to an industry they ve excluded. To find the best options, we looked for funds with solid long-term records and managers who have been at the helm for at least three years.
Manager: Westwood Management
Five-year average annual return: 3.2%
Assets: $90 million
Expenses: $226 per $10,000
Johnson & Johnson might seem like a stock a minister could own. After all, it sells Band-Aids, baby shampoo and other products as wholesome as apple pie. But Art Ally, president of the Timothy Plan funds, won t invest in the health care giant because he says it supports Planned Parenthood and conducts research on embryonic stem cells. They re the baby company, Ally says, and they help kill them. (Johnson & Johnson says it provides discounted birth-control products to Planned Parenthood and follows the highest ethical and scientific standards on stem-cell research.)
With talk like that, it s no surprise that the funds in Ally s Timothy Plan are some of the most socially conservative on the market. Ally says he has zero tolerance for companies that contribute to the moral decline of America. That rules out tobacco, gambling and alcohol stocks. But Ally, who teaches adult Sunday-school classes at Northside Baptist Church in Apopka, Fla., also publishes a Hall of Shame that includes less obvious names like Pepsi-Co and American Express. Ally says PepsiCo supports gay-rights groups, and American Express advertises on what he sees as antifamily TV shows. (Both firms declined to comment.) In fact, some 600 companies fail Ally s sin test.
Ally, a former financial planner who founded the Timothy Plan in 1994, says he got the idea for the first Timothy fund after a friend challenged him to develop a retirement plan for church groups. The only way to do it, he realized, was to create a fund that would screen out companies that violated his religious beliefs. I m a Bible-believing Christian, he says, and nothing out there addressed my convictions.
Placing his convictions into mutual funds has been good business for Ally. The Timothy Plan has grown to nine funds with $520 million in assets. And even though it rules out some of the best-known companies in America, Timothy s Large/Mid Cap Value beat 92 percent of funds in its category over the past five years. The fund is managed by a team at Westwood Management, the fund s subadviser since early 2005. The big pharmaceutical companies are off limits, as are hospitals, media companies and many large banks. But David Spika, who comanages the fund, says he isn t hamstrung for good ideas. He says picks like Occidental Petroleum and Union Pacific have rock-solid balance sheets, strong free cash flow and earnings potential that the market has undervalued.
Despite its strong long-term record, the fund has been erratic over shorter periods. The 2.3 percent expense ratio is above average for actively managed stock funds, partly because Ally has to cover expenses for his firm and its subadviser. Still, he makes no apologies for the fund s approach or the high fees. Christ runs this place, he says. We look to his word for guidance on all decisions.
Manager: Paul Dietrich
Five-year average annual return: 4.6%
Assets: $8 million
Expenses: $199 per $10,000
Paul Dietrich has been a high-powered Washington lawyer, edited the Saturday Review and spent four years as a representative in the Missouri General Assembly. But his passion these days is picking stocks for his small Christian mutual fund. A practicing Catholic who lives on a 33-acre horse farm in Virginia, Dietrich started managing money professionally in the late 1980s. Some clients wanted portfolios screened of sin stocks, and he created what was then called the Shepherd fund out of an ailing tech fund he d taken over after the dot-com crash.
Dietrich won t touch companies involved in alcohol, gambling, tobacco or abortion since they violate the fund s guidelines. And he broadly excludes firms whose practices could be found offensive to Judeo-Christian ethics.
Dietrich s conservatism extends to his view of the overall market. He uses technical indicators to gauge stocks direction, and when his indicators turn negative, he moves into bonds and cash. That led him to load up on cash in July 2008 before returning to stocks a year later. The strategy held losses to 16 percent in 2008 but also kept the fund from posting big gains in 2009.
He isn t just a market timer, though. From his days working in international corporate finance, Dietrich learned to look beyond financial reports. Instead, he studies long-term trends for assets like commodities, tech stocks and real estate; if those areas have outperformed the S&P 500 in the past 12 months, chances are the trend will continue, he says. And he relies on volatility charts to determine if a sector is overheating and to sell before it blows up.
Dietrich is generally bullish on commodities and agriculture, which he figures are in the middle of a long upward trend, fueled by the growth of the middle-class in India and China. Demand for protein-rich diets is growing at a healthy clip in those nations, he points out, benefiting low-cost agricultural exporters like Brazil. This will be a huge boom, he predicts.
With a fund as small as Foxhall, one thing Dietrich doesn t want to screen out is investors. He recently decided to eliminate the fund s 4.75 percent sales charge and trim the fund s annual fees from 2.25 percent to 1.99 percent.
But he s keeping the religious screens because they still fit the beliefs of his longtime clients.
Manager: Nicholas Kaiser
Five-year average annual return: 8.0%
Assets: $920 million
Expenses: $132 per $10,000
Nicholas Kaiser can t take credit for shrewdly avoiding financial stocks while the sector was crashing in 2008. His fund, Amana Income, based on Islamic principles, isn t allowed to hold financials because they violate Islam s prohibition against charging interest. For similar reasons, he can t own companies with heavy debt, which also got whacked in the bear market. But that doesn t explain how Kaiser a Yale graduate and Vietnam-era Army veteran has crushed the market for the past decade, beating the S&P 500 by an average of six percentage points a year.
Kaiser starts with a healthy fear of losses. Always on the lookout for signs of trouble in the economy, he checks global shipping rates to see how world trade is faring and noticed that freight rates were declining in 2008. That reinforced his view that stocks were headed for trouble, and by the end of the year, he had 36 percent of the fund in cash. That helped keep its losses to 28 percent in 2008, beating the market by nine percentage points.
Sticking with quality companies has also helped. Kaiser looks for undervalued stocks with solid earnings and cash-rich balance sheets that can weather economic downturns. We own few stocks that blow up, he says. Stocks must pay dividends, too, leading to top holdings like ConocoPhillips, 3M and Colgate-Palmolive.
Yet the Islamic screens can limit the fund s options. Kaiser, who as an Episcopalian doesn t personally follow Islamic principles, can t own companies that derive more than 5 percent of their revenue from prohibited activities, such as alcohol sales, gambling and pork processing. That eliminates big chunks of the economy major grocery chains, restaurants and retailers like Costco, which Kaiser says he d like to own but can t because of its hefty sales of wine. It s like working with one hand tied behind your back, he says.
With his fund up 22 percent this year, Kaiser is trailing the overall market; the fund has been hurt by its lack of financial stocks and highly leveraged companies, which have led the market rally, notes Morningstar analyst David Kathman, and it could be in for a tough slog if speculative stocks continue to shine. Still, Kaiser isn t changing his strategy. All kinds of financial things scare us, says Kaiser, a history buff who lives outside Seattle. We re sticking with basic businesses.
Managers: Paul Greenwell, Jim Orser
Five-year average annual return: 1%
Assets: $34 million
Expenses: $150 per $10,000
The Aquinas family of funds may be a bit of a mystery outside the Catholic investing world. They re small, with $87 million in assets among four funds, not widely marketed and owned by Luther King Capital Management, a Fort Worth, Texas, asset manager that bought them from the Dallas Catholic Foundation in 2005. Still, Aquinas Growth has racked up a solid record; it beat 94 percent of large-cap growth funds in 2008 and ranks in the top 25 percent over the past three years.
Its formula? Sticking with companies that have solid growth and are using their capital internally instead of shopping for acquisitions. Firms that do that usually have good organic growth, says comanager Paul Greenwell, and pose less risk than companies trying to grow through takeovers. Stocks trading at a reasonable valuation to their growth rate make it in, and the fund emphasizes sectors in line with the economic cycle; tech stocks are now a big part of the fund, says Greenwell, because the sector should fare well in the early stages of an economic recovery.
Of course, religion plays a role too. The fund named after Thomas Aquinas, the 13th century priest and scholar uses guidelines issued by the U.S. Conference of Catholic Bishops to screen out companies it sees as violating church teachings. It excludes companies involved with abortion, stem-cell research and contraceptives. But beyond that, the forbidden list can get a bit squirrelly, says Greenwell, a practicing Catholic who sometimes wrestles with a stock s growth potential versus its moral standing with the church.
Sex and violence pose particular conundrums. Firms that make adult-oriented video games aren t permitted. But GameStop, which sells those products, made it in. Greenwell says the fund s Catholic advocacy committee struggled with the stock and ultimately allowed it because the offending games account for a small percentage of GameStop s sales.
Companies that make weapons of mass destruction are supposed to be excluded too, but the fund holds Northrop Grumman, a firm that makes support systems for nuclear missiles. Greenwell says most of Northrop s business doesn t involve WMD. But he acknowledges it s a balancing act. The idea is to make money and do it in an honorable way, he says, but that doesn t mean everything is lily-clean.
Like other religious funds, Aquinas could be at a disadvantage if certain parts of the market take off. Some of the biggest stocks in the S&P 500 are pharmaceutical firms that the fund can t own, and it could have a tough time beating the index if those stocks outperform. That means Greenwell will have to work harder finding bargains among the stocks he can own. At the end of the day, people invest with us to make money, he says.
As a group, the 151 socially responsible funds tracked by Morningstar have a mixed record, trailing the Standard & Poor s 500 over the last five years. Three that stand out:
Neuberger Berman Socially Responsive (NBSRX)
Assets: $1 billion
Five-year annual return: 1 percent
Expenses: $89 per 10,000 invested
One of the largest socially responsible funds, Neuberger Berman Socially Responsive avoids vice stocks like alcohol and tobacco, along with nuclear power and weapons firms. But unlike many rivals, it doesn t shy away from energy or industrial stocks if they have solid environmental records. The fund holds around 30 large-cap stocks, chosen for their durable business models, strong balance sheets and ability to take market share, says comanager Ingrid Dyott.
Portfolio 21 (PORTX)
Assets: $321 million
Five-year annual return: 4.5 percent
Expenses: $150 per $10,000 invested
The world is running out of natural resources, and the most efficient users of those resources will be the winners of the 21st century. That s the thinking, at least, behind Portfolio 21, a fund that looks for growth stocks with an eco-friendly twist. The fund seeks out innovative companies with above-average growth potential and then analyzes their environmental-impact practices; Novartis and Nike make the cut, for example, because they ve made strides to use more earth-friendly chemicals, says comanager Tony Tursich.
Assets: $98 million
Five-year annual return: N/A
Expenses: $90 per $10,000 invested
One of the newer socially responsible funds, Appleseed focuses on midsize stocks that the managers believe are making a positive impact on the environment or society. The fund looks for stocks trading at least 35 percent below intrinsic value, says comanager Adam Strauss, who steers the fund with his father, brother and two other managers. Appleseed holds just 25 stocks, a portfolio that could suffer if one or two holdings blow up. The fund launched in late 2006.