Socially Responsible Investing and Faith-Based Investing
Religious Mandates do not have to Conflict with Investment Strategies
While the stock market declined back in the days of the Global Financial Crisis of the last decade, Mark Minella’s clients had been spared the negative impact of the most drastically fallen sector – financial services. That’s not because Minella, then and still president of Integrity Investors in Creve Coeur, MO, saw the plunge coming. Minella invested using Christian principles. Consequently he never bought shares in those companies because of their support for alternative lifestyles such as including same-sex couples in employee-benefit plans.
Similarly, investors in the Amana Funds had also been sheltered from the perils of owning bank or insurance company stocks. In their case because Amana invests according to Islamic principles, which means avoiding interest.
No doubt Minella’s clients and investors owning shares in Amana Funds, like investors in general, have taken a few lumps in a challenging environment. But the absence of financial stocks is one part of their portfolio they can feel good about, thanks to their participation in a rapidly growing segment of socially responsible investing known as faith-based investing. In fact, a number of socially responsible investors benefited from being light on financial services during the financial crisis.
Just as SRI means earning a competitive return on investment dollars without offending one’s social or environmental principles, faith-based investing applies principles consistent with one’s religion.
That typically means emphasis on “anti-family” screens such as abortion services, pornography, alcohol, gambling and alternative lifestyles. But it can also mean avoiding companies whose business practices violate beliefs, such as earning interest.
As the number of socially responsible mutual funds has grown during the past decade, so too have funds that invest according to faith-related screens.
“This group of funds has definitely emerged as a growing and distinct subset of the SRI world,” said Michael Herbst, mutual fund analyst covering faith-based funds for Morningstar. “What we’re seeing is a growing awareness among individual investors that there may be faith-based offerings that coincide with their own spiritual beliefs perhaps more closely than there had been options in the past.”
Morningstar followed nearly 100 faith-based mutual funds, run by almost a dozen fund families. They include small, mid and large caps, fixed income, value, growth and sector funds. They invest according to Christian and Muslim principles and though they are part of the social investing family, they might well contain stock in companies that wouldn’t be found in a more general SRI portfolio.
Faith-based funds include Catholic choices such as Ave Maria Mutual Funds and LKCM Aquinas funds. Ave Maria managers use a “proprietary moral screening process” to pick its stocks, developed by its Catholic Advisory Board. That board includes well-known figures such as former Notre Dame football coach Lou Holtz; economic advisor and CNBC talk show host Lawrence Kudlow and Domino’s Pizza founder Thomas Monaghan.
LKCM Aquinas funds uses the United States Conference of Catholic Bishops Socially Responsible Investment Guidelines when screening companies.
Among Protestant funds Thrivent Financial For Lutherans is the largest with more than 40 options, including sector funds. Guidestone Funds, which began as the retirement plan for employees of the Southern Baptist Convention, has 23 funds, five of which have more than $1 billion in assets. The MMA Praxis funds are connected to the Mennonite Church USA, (MMA stands for Mennonite Mutual Aid) and designed for church denominations with Anabaptist roots including Mennonite, Brethren and Amish church groups.
Among Islamic funds Amana Growth and Amana Income have both received five-star ratings from Morningstar. The income fund seeks current income but without investing in bonds because of its policy on interest.
Rather, it invests in dividend-paying stocks.
“Muslims in America had a desire to own stocks and they knew there were certain restrictions or guidelines that they should follow,” says Nicholas Kaiser, portfolio manager. “By hiring a mutual fund management company to create a fund to follow those restrictions they knew it would meet their religious needs and satisfy their goal of buying equities.”
Faith-based funds tend to have higher expense ratios, compared to traditional mutual funds, which experts attribute to the smaller size of the funds on average, as well as the costs associated with screening companies. But an increasingly large segment of the investment community is willing to bear those costs to find funds consistent with their beliefs.
“There’s a huge awakening going on in the Christian community that they can do more with their money than just invest it arbitrarily,” says Minella. “People are becoming aware that they have choices.”
Faith-based investing does not ignore fundamental questions any investor should ask when building a portfolio, such as what is the investor’s time frame until retirement, what is his tolerance for risk. But it adds an additional screen to be sure their money is going to companies that would not offend their religious principles.
Minella says abortion and pornography are the two major objections of his BRI or biblically responsible investors, followed by support for alternative lifestyles. That includes not just gay and homosexual living, but also heterosexual couples living together outside of marriage. He says this alternative lifestyle screen is often misunderstood.
“It’s not attacking anyone,” he says. “It’s saying this is the lifestyle we believe that the Lord would want us to have for ourselves. We aren’t imposing on you, but we don’t want to support or encourage other people to do it. Therefore I won’t partner with a company that would do that.”
While many faith-based funds are connected with specific faiths or churches, fund managers stress they are open to all investors.