Mutual funds that practice faith-based investing may be no more
exciting than a font of still holy water or the worn cover of a
Koran. But over the years, these funds have proved that you don't
have to sacrifice your spiritual values when it comes to
Faith-based funds invest according to a set of religious
principles. Even if you don't share these funds' religious views,
you may want to consider investing in some of them because they
have many of the attributes you'd ordinarily seek in a fund.
Moreover, some analysts contend that investors who take a
faith-based approach may reap bigger rewards than those who invest
just for the money. "When you have stronger ties to an investment
because it's also expressing your values, you're more likely to
stick with it for the longer term," says Jon Hale, who directs
Morningstar's North American fund research.
Be aware of a couple of negatives. In many cases, the religious
guidelines nix certain industries, limiting a fund's ability to
diversify. And although fees have come down, the funds' expense
ratios regularly top category averages. The five funds described
here do not levy sales loads and have delivered solid returns
despite their investing constraints. That should appeal to any
LKCM Aquinas Value (symbol
) follows the guidelines of the U.S. Conference of Catholic
Bishops. The fund, which owns mostly large-company stocks, avoids
firms that deal with abortion, birth control and pornography, as
well as certain weapons. Then comes the stock picking: Manager Paul
Greenwell looks for companies that consistently generate a high
return on invested capital (a measure of the return a company makes
from each dollar invested in the business). "You want a business
that management can't mess up," Greenwell says.
That strategy has paid off for long-term investors. Over the
past ten years, Aquinas Value has delivered an annualized return of
8.3%, edging Standard & Poor's 500-stock index by an average of
0.3 percentage point per year and placing the fund in the top 22%
of its peers--funds that focus on large-company stocks with a blend
of value and growth attributes (all returns are through July 31).
But in the first seven months of 2014, Value's 0.9% return lagged
that of the S&P 500 by nearly five percentage points. Value's
light allocation to two of this year's best-performing
sectors--health care and utilities--is mostly to blame. The fund
excludes many health companies because of the religious screen, and
it typically avoids utilities because they tend to have low returns
on invested capital. Annual fees of 1.50% are above average.
Ave Maria Rising Dividend (
) takes a slightly different approach to investing according to
Catholic values. The fund avoids companies with ties to abortion or
pornography (including hotels that offer X-rated films in guest
rooms). "It is a zero-tolerance policy," says co-manager George
Schwartz. (But the fund doesn't specifically ban weapons
Still, only about 150 of the 3,000 companies in the Russell 3000
index are disqualified on religious grounds. From there, Schwartz
and co-manager Richard Platte search for businesses with rising
sales, earnings and cash flow--all signs that a firm can increase
its dividend in the future. They prefer stocks that are reasonably
valued and that they think can double over five years.
The strategy has helped smooth out market swings. In 2008,
Rising Dividend dropped 22.8%, compared with the S&P's 37%
plunge. And the fund, just under a decade old, is building a solid
long-term record. It earned 17.2% annualized over the past five
years, beating the S&P 500 by 0.4 percentage point per year and
the average large-company blend fund by 1.8 points per year. Annual
fees are a reasonable 0.93%.
Beneath the broad umbrella of Christian-oriented funds is
Eventide Gilead (
). Managers Finny Kuruvilla and David Barksdale believe work done
in the service of others is blessed. So they look for firms that
are sensitive to shareholders as well as to internal stakeholders
(such as customers and employees) and external stakeholders
(communities and the environment). They won't invest in companies
that profit from alcohol, gambling and other potential
Although the managers will invest in companies of any size,
their fund tilts toward midsize firms (53% of assets). Barksdale
says smaller firms can pass faith-based screens more easily. "Very
large companies have their fingers in a lot of pies, one of which
is usually something we don't want to own," he says.
Barksdale and Kuruvilla favor fast-growing businesses, often in
biotech and technology. Biotech stocks stumbled earlier this year
when investors worried about lofty valuations. But, Barksdale says,
biotech stocks can be good diversifiers. "A company's fate depends
on the next data release or government actions, not the economy,"
So far, Gilead's performance has been divine. Over the past five
years, the fund, which launched in 2008, earned 21.3% annualized,
beating the S&P 500 by 4.5 percentage points per year and
besting 98% of its peers (funds that invest in expanding midsize
companies). One drawback: Annual fees are 1.64%.
A number of funds follow the principles of Islamic, or sharia,
finance, including Amana Income (
). Sharia bars investments in companies involved in alcohol, pork,
gambling, pornography or tobacco. It also requires that investors
avoid interest. One way manager Nicholas Kaiser and deputy manager
Scott Klimo deal with that is to eliminate banks and companies
whose total debt adds up to more than 33% of their stock market
Then Kaiser and Klimo look around the world for companies that
offer a dividend yield higher than the S&P's (currently 1.9%)
and can increase their dividend over time. Today, about 85% of the
fund's assets is in U.S. stocks, and 15% is in foreign stocks. In
addition, industrial and health care firms account for about 40% of
the portfolio. One top holding is Swiss drugmaker Novartis, which
has raised its dividend 17 consecutive years. The stock yields
The focus on low debt has allowed Income to hold up especially
well during downturns. So has the fund's zero stake in banks. In
2008, during the financial crisis, Income fell only 23.5%. Annual
fees are reasonable, at 1.19%.
For a fixed-income fund option, consider Ave Maria Bond (
). The fund applies the same Catholic principles of its
stock-owning sibling to a mostly fixed-income portfolio. Bond
currently has about 85% of its total assets in U.S. Treasury bonds
and corporate bonds with strong credit ratings, as well as cash.
(Treasuries are not subject to the religious sieve, but corporate
bonds are.) The rest of the money is in dividend-paying stocks.
That adds risk to the portfolio but has helped pad returns
recently. Last year, for example, when interest rates rose after
the Federal Reserve announced that it would begin winding down its
bond-buying program, the Barclays U.S. Aggregate index fell 2.0%
(bond prices fall as rates rise). But Ave Maria Bond gained
A stock market correction could drag down returns because of the
fund's stock holdings. So could a spike in interest rates. To
protect against the latter, Platte and co-manager Brandon Scheitler
are keeping the average duration of the fund's bonds to less than
three years (duration is a measure of interest-rate sensitivity).
The fund, which yields 0.65%, charges 0.56% annually for expenses,
well below the average of 0.88% for taxable, intermediate-term bond
funds. That is praiseworthy, indeed.