May 20, 2009 -- There are two things people tend to take very seriously: their money and their religion. It's no surprise, then, that Wall Street offers several ways to combine them.
Investing based on religious principles is one of the main branches of what is called socially responsible investing. Typically, this school of investing is more about what you won't buy than what you will. Investors generally avoid companies that manufacture or sell alcohol, tobacco or pornography; others also avoid investing in companies that make weapons or produce oil.
Investments screened in this way comprise about $2.7 trillion dollars of the $25 trillion invested in the United States, according to the Social Investment Forum, a nonprofit group. Morningstar currently tracks 91 mutual funds that it defines as faith-based, with a total of $22 billion in assets, compared with 33 such funds a decade ago.
While many institutions and endowments practice some form of social investing, the number of investors who screen companies for religious reasons continues to grow, says Lloyd Kurtz, a financial advisor with Wells Fargo who has worked in social investments for 15 years.
"Many people will not make any compromises in investing if something doesn't fit their values," he says. "If they believe tobacco is wrong in their personal life, they won't purchase any stock of a company that's in that business."
The easiest way to invest based on your faith is to buy a mutual fund or an exchange-traded fund. Because the holdings of faith-based funds can vary widely, it's impossible to pigeonhole their performance. Generally, however, they charge higher fees than index funds and historically have not performed as well.
They can also cause you to miss out on key financial drivers. Some faith-based funds, for example, shun drug companies because of their work on abortion-related treatments or stem cell research. Since these same firms tend to offer high dividends, however, a portfolio that lacks them can lag behind. Instead, faith-based investors might want to consider buying other dividend-paying stocks to make up the difference, says Kurtz.
Double-check that the fund's philosophy matches yours before purchasing shares, suggests David Kathman, an analyst at Morningstar who covers faith-based funds. "Some faith-based funds are more socially conservative than others, which may be a plus for some investors and a minus for others," he says. Some Catholic funds, for instance, won't invest in companies that offer benefits to unmarried partners of employees.
For investors who want to purchase individual stocks, several companies offer research that rates companies based on social screens. KLD Research and Analytics offers what Kurtz calls "a value line for social investors." Pro Vita Advisors, meanwhile, offers research regarding family and life issues from a conservative perspective, Kurtz says.
The two main Catholic mutual funds are the Ave Maria funds, launched in 2001, and the LKCM Aquinas funds launched in 1994.
The Ave Maria fund family includes Ave Maria Catholic Values (AVEMX), as well as a growth fund (AVEGX), a dividend fund (AVEDX), a bond fund (AVEHX), and a money market fund. The fund's managers generally adhere to a socially conservative bent that excludes companies involved with abortion, contraception or pornography, as well as companies that offer domestic partner benefits. It sold its share in 3M in 2006 after the company started offering these type of benefits, Katham says.
Holdings spread across the funds include Halliburton, Burlington Northern Santa Fe, Caterpillar, Kellogg Company, and Harley-Davidson, according to the latest annual report.
The LKCM Aquinas Funds do not restrict companies that offer domestic partner benefits, and instead focus on issues such as race and gender equality, environmental practices, and human rights. Aquinas offers a growth (AQEGX), value (AQEIX), small cap (AQBLX) and bond (AQFIX) fund. Holdings spread across the fund's portfolios include Apple, Goldman Sachs and Nike.
Mutual funds are available that adhere to the Baptist, Lutheran, Presbyterian, Mennonite and evangelical branches of Protestantism. The largest group in terms of assets is Guidestone Funds, which have more than $7 billion in assets spread across 23 funds, including five target-date funds. Guidestone avoids companies involved in alcohol, tobacco, gambling, pornography or abortion. Holdings across the funds include Alcoa, General Electric and Raytheon.
The New Convent Funds, meanwhile, invest according to Presbyterian principles and exclude companies involved in firearms, as well as those in the alcohol, tobacco, or pornography business. The MMA Praxis funds invest according to Mennonite beliefs, and focus on promoting causes like AIDS prevention and stamping out predatory lending.
FaithShares, meanwhile, recently applied to the SEC to launch a series of exchange-traded funds that would focus on Baptist, Catholic, Lutheran and Methodist principles.
Islamic funds are not allowed to own financial stocks, which helped some beat the S&P 500 by seven percentage points or more last year. The main Islamic funds include the Amana Trust Growth (AMAGX) and Amana Income (AMANX), which combined have $1.6 billion in assets. Like many Christian funds, they do not purchase companies involved in alcohol, tobacco, pornography or gambling. In addition, they do not invest in companies that are involved with pork production or that receive interest.
Holdings spread across the fund's portfolios include Apple, Amgen, Hewlett-Packard, and Hansen Natural.