George Schwartz, Ave Maria adviser
Updated on 5/14/08
Plenty of mutual funds have gotten hammered by the big drop in financial stocks like Citigroup, but for Amana Growth and Amana Income, investing in that formerly highflying sector was never a temptation. The Amana funds invest according to Islamic principles, and religious law bars investors from receiving interest. That rules out financial stocks. Yet that hasn't stopped the two Amana funds from notching an impressive record—both boast a five-year average annual return near 20 percent.
Faith-based mutual funds, which screen companies according to religious values or interpretations of religious texts, are a booming sector in the world of socially responsible investing. Assets in faith-based funds grew to $17 billion last year from less than $500 million a decade earlier, according to Morningstar. About 10 percent of SRI mutual fund assets were in religious funds, up from just a half a percent in 1997.
Most faith-based funds are Islamic, Catholic, or Protestant. Some use screening criteria that many investors would deem highly conservative, and religious funds often carry higher expense ratios than comparable mutual funds.
Fizzing out. Among Protestant funds, the Timothy Plan is known for its "Hall of Shame," companies it won't touch because of involvement in pornography, alcohol, tobacco, gambling, abortion services, or "antifamily" entertainment. And companies like Coca-Cola and PepsiCo are screened out for supporting "alternative lifestyles" by recognizing same-sex relationships in employee-benefit plans and backing gay or lesbian organizations. Timothy's $121 million Timothy Plan Large/Midcap Value earns Morningstar's top rating, with a five-year annualized return topping 16 percent.
Several Protestant funds, like MMA Praxis Core Stock, are advised by outside managers who follow set screens. "They generally will do that so they can find the best managers," says David Kathman, a fund analyst with Morningstar.
Ave Maria Mutual Funds, a Roman Catholic fund family, follows investing standards set by an advisory board of prominent lay Catholics, like CNBC's Larry Kudlow and former Notre Dame football coach Lou Holtz. Ave Maria won't invest in companies associated with abortion services or pornography, and it screens out those that support Planned Parenthood or extend employee benefits to nonmarital partners. In all, about 400 companies in the Russell 3000 Index are rejected. Yet, says George Schwartz of Ave Maria's advisory firm, Schwartz Investment Counsel Inc., "we're interested in making lots of money for our shareholders."
Religious screens can't guarantee superior performance, of course. Faith-based-fund managers like Saturna Capital's Nicholas Kaiser, who manages both Amana funds, still have to apply good old stock-picking wisdom. Apple is Kaiser's top pick for Amana Growth, while U.S. Steel and pharmaceutical giant Pfizer are among Amana Income's major holdings.
You can credit Islamic principles, though, with helping Amana make at least one sweet trade. Amana Growth once had a stake in Enron, but when the former energy company's debt ratio hit 33 percent—running afoul of one of Amana's stock screens—the fund had to dump all its Enron shares. That helped Amana shareholders dodge one of the great stock meltdowns in American financial history—if not by faith alone, then pretty close.
Reader Comments Read all comments (1)
Ashlin Mathews of MA 3:55PM February 04, 2009