Having FAITH in the market

BY HEATHER HAHN

Posted on Saturday, August 23, 2008

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Even in a bear market, a number of investors aren’t losing faith. They are applying their religious values to their stock portfolios and in many cases, they are reaping much more than they’ve sown. Mutual funds that are tailored to the beliefs of specific denominations or religions make up one of the fastest-growing subsets of investing, said David Kathman, an analyst with the independent investment research firm Morningstar Inc. In the past decade, he said, the total assets of faith-based mutual funds have grown more than 30 fold, from about $ 500 million to more than $ 17 billion. Kathman attributes the trend in large part to the rise of 401 (k ) plans, which unlike earlier pension plans, give employees a say in how their retirement funds are invested.

“A lot of people are now involved in choosing mutual funds who would never have been involved before,” he said. “There are a lot of religious people who have views that they don’t want to compromise, and they want to invest according to that.” Many of these faith-based funds screen out companies that promote products or ideas that contradict religious teachings. For example, Catholic funds avoid investing in businesses involved with contraception and abortion. Islamic funds shun investments in alcohol distillers, pork processors and financial businesses that make money by charging interest. Evangelical Protestant funds often reject anything seen as “anti-family.” ROLE AS ADVOCATES Some mutual fund companies also act as shareholder advocates, trying to ensure that the companies they invest in act in a moral manner. Still other funds seek out investments that help improve communities. Todd Sadowski of Hot Springs first entered faith-based investing eight years ago when he discovered 40 percent of his investments were going toward things he believed violated biblical teachings.

So in 2000, he and his father, Richard, renamed their Hot Springs-based brokerage Christian Financial Principles, and dedicated their firm to building wealth in a “biblically responsible manner.” Todd Sadowski said by e-mail that the change resulted in the loss of some clients but also has attracted plenty of new investors.

“People are fed up with the companies on Wall Street who are tearing down the moral fabric of America,” he said. “They want to take a stand and can easily do so through their investments.” The father and son now also co-host a weekly radio show, The Good Steward, that airs at 5 p.m. Wednesdays on American Family Radio of Arkansas.

MORE THAN A GAMBLE Richard Sadowski acknowledged that some might regard what he and his son do as a form of gambling. But he stressed financial management is more than just a roll of the dice. “When you talk gambling, really the odds are with the house,” Sadowski said. “The point of gambling is one party — for example, the casino — makes money when the gambler loses. In investing, it’s completely different.... The investor wins when the corporation wins. Do some people lose when they invest ? Sure. But the whole goal of what I do is not to lose.” He said when Christian Financial Principles started, it was difficult to find enough funds to diversify their investments and create good bets. “Now we’re at a point where we have so many good options,” he said. The Timothy Plan, based in Maitland, Fla., is one family of funds his company uses. The plan, founded in 1994, initially aimed at serving the retirement needs of conservative nondenominational ministers. Its clientele has since expanded beyond clergy. The company now serves about 36, 000 clients of a variety of religious backgrounds around the globe.

UNDESIRABLE FIRMS The funds screen out companies involved with pornography, alcohol, tobacco, gambling and abortion as well as companies perceived as supporting “antifamily entertainment” and “alternative lifestyles” such as gayrights groups.

At present, The Timothy Plan has 626 companies on its “Hall of Shame” list of prohibited securities. These include a number of Fortune 500 companies such as Microsoft, News Corp., Walt Disney Co. and Coca-Cola.

But the exacting standards haven’t hurt investors’ bottom line, said Stephen Ally, Timothy Plan spokesman. The plan’s large / mid-cap value fund had a five-year return of 13. 62 percent through the end of June, outpacing S&P index’s 7. 57 percent return during the same period.

“Some of [our funds ] will outperform and some will underperform,” Ally said. “But over time, we feel you don’t have to give up investment returns in order to meet your convictions.” Faith-based funds are an offshoot of socially responsible investing, the industry term for funds that blend social and personal values with investment decisions.

The concept first gained popularity in the 1980 s during the push to divest from South African interests to protest apartheid, said Todd Larsen, spokesman for the Social Investment Forum, an organization that promotes socially responsible investing.

PERFORMANCE STUDIES Since then, he said, studies repeatedly have shown that such investment portfolios — including faith-based funds — typically perform as well as other types of mutual funds. MMA Praxis, a Mennoniteowned company based in Goshen, Ind., offers some of the oldest socially responsible investment funds. Like the Timothy Plan, the company screens out vices such as alcohol, gambling and tobacco.

Because Mennonites are pacifists, the funds also shun defense contractors and weapons manufacturers. In addition, MMA Praxis avoids corporations that have poor environmental records.

But the company also is involved in community investing — using some of its assets to support affordable housing and other programs devoted to developing poor neighborhoods.

Mark Regier, director of stewardship investing for MMA Praxis, said many of the programs his company supports have been lending to the same sort of low-income families who have been most affected by the subprime mortgage crisis.

But he said the communityinvesting industry so far has gone unscathed.

“In our community investment portfolio,” he said, “we are seeing none of the losses, none of the defaults, none of the destabilization that you’ve seen in the primary subprime mortgage market.” CLOSE RELATIONSHIP The reason, he said, is that community investment lenders work closely with prospective homeowners to make sure they have the means and preparation to make their mortgage payments. Not all funds involved in community investing are religious in origin. Community Capital Management is a secular investment company that has invested in more than a dozen community development projects in Arkansas. But Todd Cohen, Community Capital’s president and chief investment officer, said the Weston, Fla.-based company is increasingly numbering faith-based institutions among its clients. The Sisters of Charity of the Blessed Virgin Mary, a Catholic order based in Dubuque, Iowa, has invested retirement savings and funds for charitable ministries in Community Capital funds.

“The reason we chose them is because they reinvest in many of the disadvantaged areas of the country where we serve,” said Sister Mary Margaret Colgrove, the order’s immediate past treasurer. “They fit with our social justice policies.” Regier of MMA Praxis said some major companies are signing onto the idea of what he calls “socially engaged” investing. In the past three years, more than 100 investment firms have signed the United Nations Principles of Responsible Investment. The signatories, including Goldman Sachs, say they will consider environmental, social and corporate governance concerns when designing their portfolios.

Together, the firms have $ 15 trillion in assets. According to the Social Investment Forum, socially responsible investments now account for $ 1 out of every $ 9 in securities.

Said Regier: “This isn’t just a funny, little fringe movement.”

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