Faith-based funds attract loyal investors

It turns out negative screens aren't necessarily a drag on funds' performance

Aug 20, 2019 @ 2:25 pm

By Jeff Benjamin

Applying religious screens to mutual funds and ETFs is sometimes compared to investing with one hand tied behind your back, but that's just fine for a large and growing number of investors.

"If people are really interested in faith-based investing, a difference of 10 or 12 basis points is not that much if you're avoiding things you don't want to invest in," said Shane Morrow, managing partner at IronBridge Wealth Counsel, an advisory firm that offers clients "mission-driven" portfolios alongside traditional strategies.

"We do have a number of clients that are interested in mission-driven investing, and in particular, biblically inspired investing," Mr. Morrow said.

Unlike strategies that invest based on environmental, social and governance issues, which are taking increasingly proactive stances to try and change corporate behaviors, faith-based strategies traditionally have relied on negative screens, and largely continue to do so.

For most Christian funds, that means screening out companies associated with a compact list of no-nos, including abortion, alcohol, tobacco, gambling and pornography.

But not all faith-based funds are Christian. Amana Funds, for example, applies Islamic principles and screens out various forms of interest income.

According to data compiled by Lipper, the faith-based investing universe is relatively small, with less than $28 billion in total assets across about 150 funds. But it is seen as having an incredibly loyal following.

"There is a stickiness to the assets in faith-based funds, because those investors are less likely to run and flee during rough times, and in normal downturns we're seeing these people double down," said Tom Roseen, head of research services at Lipper from Refinitiv.

Investor loyalty is something most faith-based asset managers have come to appreciate.

"We are blessed that we don't have big turnover, because our investors buy into our pro-life, pro-family mission," said George Schwartz, founder of Ave Maria Mutual Funds, a $2.5 billion firm that screens out companies associated with abortion, embryotic stem cell research, Planned Parenthood and pornography.

Mr. Schwartz said the screens eliminate about 150 companies from the Russell 3000 Index.

"We don't have one hand tied behind our back because many of those 150 companies are lousy companies with poor management, bad track records and too much debt," he said

Faith-based strategies have seen asset growth of 33% over the past five years and they're now found in 38 different fund categories, covering most debt and equity categories.

"What's unique about the space is the very large offerings now," Mr. Roseen said. "The offerings have been growing because people are interested in faith-based investing."

But faith-based investing is still wildly overshadowed by the faster-growing and more popular ESG category, which has more than $12 trillion invested in 870 funds.

Faith-based investing, which dates to colonial times in America, when Methodists and Quakers refused to invest in the slave trade, is credited with spawning the socially responsible investing movement in the 1960s, which evolved into today's ESG investing.

Meanwhile, faith-based investing has maintained its tidy niche of committed investors, money managers and advisers.

"It's something I bring up with every client or prospect," said Thomas Rindahl, a financial adviser at TruWest Wealth Management.

"I have found that many people are interested in aligning their investments with their moral beliefs," Mr. Rindahl said. "Usually clients didn't know this was possible but once they knew that it was, they were eager to utilize it."

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Part of what might be making the sale easier is an increasing amount of data showing negative screens don't necessarily create a drag on performance, Mr. Roseen said.

"We've always had the assumption that if they're focusing on negative screens, people are willing to forgo a little bit of return, but not a lot," he said. "In some cases, in a nice market rally, even faith-based funds doing negative screening can outperform."

This year through July, for example, the Ave Maria Rising Dividend Fund (AVEDX) gained 20.8%, which compares to a 15.7% average gain for Lipper's equity income fund category.

Over the same period, the Steward Global Equity Income Fund (SGIGX) gained 15.7%, compared with an 11.9% gain by the global equity income fund category.

The Timothy Plan Israel Common Values Fund (TICIX) gained 25.1% this year, which compares to its category average gain of 13.3%.

"It is investing with one hand tied behind your back, but if faith-based investing is important to you, you come to us," said Art Ally, founder and president of Timothy Plan, a $1 billion faith-based fund company. "Otherwise there are thousands of great mutual funds out there to choose from."

In terms of the challenge posed by negative screens, Mr. Ally said, "There are about 8,000 domestic companies out there and we screen out less than 10%, but our managers are able to go to the bench and find alternatives."

Faith-based investing is not for everyone, but if it's for you, it's often really for you.

"I invest 100% with biblical integrity, and my clients know that and they're here for that reason and for the returns as well." said Mark Minnella, founder of Integrity Investors, who co-founded the National Association of Christian Financial Consultants 20 years ago.

The association, which includes 230 advisers, was founded to "educate and equip those that want to bring biblical investing to Wall Street," Mr. Minnella said. ""If a manager is investing to glorify God, their goal should be to perform at least as well as the world, if not better."

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