Faith-based funds are making leaps.
In 1997 there were a handful of faith-based mutual funds, worth nearly $500 million, in the United States. Now there are about 40 and they are worth $17.5 billion, according to a report released this month by Morningstar Inc.
As of Oct. 30, 15 of 91 faith-based and secular socially responsible funds that invest in stocks had outperformed the Dow Jones industrial average benchmark, some by more than 10 percentage points, the report said.
David Kathman, an analyst at Morningstar, said the Ave Maria funds are prominent among Catholic-focused funds. The largest and oldest of these is the Ave Maria Catholic Values, which was started in 2001 and is managed by George Schwartz, the president and chief executive officer of Schwartz Investment Counsel in Bloomfield Hills, Mich. The funds' screening criteria are overseen by the Catholic Advisory Board.
All the funds follow what Ave Maria calls a "pro-family" investment philosophy that emphasizes attractively priced stocks with good profitability and cash flow. The funds will not invest in companies involved in abortion, contraception, or pornography or any that offer nonmarital-partner benefits to employees. The managers will quickly sell holdings that violate these guidelines, he said.
But, he said, "I wouldn't want to make too many generalizations about socially responsible funds or faith-based funds, because they're such diverse groups, and lots of funds use very different criteria."
The Amana funds have done "spectacularly" well this year, Mr. Kathman said "They're managed according to Islamic law," he said, "which means they can't hold stocks that get more than 5% of their revenue from things that are forbidden by the Koran, like alcohol, gambling, pork products, or paying or receiving interest. The interest restriction means that they can't own any financial stocks, which has been a very good thing this year."
He said both funds have strong long-term records and were among the best in their categories in years when financials were doing very well. He said other funds operated according to Islamic law, have mediocre long-term records.
Monem Salam, the director of Islamic research and co-manager of the Amana Funds, which are run by Saturna Capital in Bellingham, Wash., said there has been in Shariah-compliant funds not only from the American-Muslim community, but also from advisers who are keen to find out why the funds are doing so well and how they can participate.
"Some, with clients they already have, really want to market to the growing, wealthy and well-educated Muslim community in the U.S.," he said. "In this environment, where the crisis is taking place in the financial services industry, we are outperforming our benchmarks because we cannot own any financial companies due to the prohibition in Islam on earning interest. When financials rally one day, this might change."
In any environment, Amana likes to stick to its investment philosophy of buying value companies that generate good free cash flow and low debt, he said.
CapTrust Financial Advisors of Raleigh manages the largest amount of Catholic church assets ($4 billion) of any U.S. independent investment consulting firm.
Peter Gardner, a senior investment consultant at CapTrust, said the key to the success of faith-based funds is that decision-makers in faith-based organizations understand and value their role as a steward. Most faith-based organizations have been around a long time, so decision-making intended to be long-term truly is, he said.
That is in stark contrast to the average investor's definition of long-term, which has seemingly shrunk to 10 days instead of 10 years, Mr. Gardner said.
CapTrust is one of the country's largest private investment consultancies, with client assets of more than $10 billion.
