Jay Peroni had been a financial adviser for more than seven years when a client asked him a question he could not answer: "Can I expect God to bless my investments if I'm investing in things that oppose his word?"
Peroni, the author of "The Faith-Based Millionaire" and president of Values First Advisors, was stumped. His search for an answer prompted him to interview people of various faiths who had been financially successful, to find out some of the key ingredients of their investing philosophy.
"Through this whole discovery," he said, "I was able to realize that you can keep your faith central in your life and your financial performance doesn't have to suffer."
Peroni's certainly has not. His faith-based portfolio has raked in a 47.81% return so far this year, compared to the S&P 500 index's 23.3%.
Overall, faith-based investing is a growing, $31 billion, 100-mutual-fund branch of socially responsible investing, a $2.71 trillion marketplace in the United States.
Most faith-based funds start their stock-picking by screening out what they call "sin stocks," companies that produce products or offer services such as abortion, pornography, gambling, alcohol and tobacco. Of the universe of 8,000 publicly traded companies, Peroni deems 5,000 to 6,000 eligible for faith-based investing.
But what one denomination may think acceptable, another may not. There are "different opinions even within one faith," he said. "That's probably one of the biggest challenges for faith-based investing in general: Where do you stop your screening?"
If a company does not perform abortions but donates to a women's health center that does, is that company unacceptable? Are a company's subsidiaries screened as well? "This takes a lot of due diligence," Peroni said. "You can keep drilling down and drilling down, and you'll be left with no companies to invest in. No company is ever going to be perfect."
Dan Nielsen of Christian Brothers Investment Services, which only invests for Catholic institutions, said his firm is a socially responsible investment company and a faith-based one as well, meaning that it not only avoids companies engaged in activities that contradict its values but also seeks to have a positive impact by engaging in shareholder advocacy.
Socially responsible investing really picked up speed in the 1960s and '70s, according to Nielsen, when investors became aware that they could use their money to protest against nuclear weapons, the Vietnam War and apartheid in South Africa, to name a few hot-button issues of the time.
The wave grew even larger with the corporate scandals sparked by Enron and WorldCom and the behavior of financial institutions during recent years, said Mark Regier of MMA Praxis, a mutual fund family run by Mennonite Mutual Aid.
At times, the whittling-down of a fund's investment universe can hurt profits, but over the long term, the funds are competitive, he said. "During times of war, like right now, when some of the defense stocks are high, we lose out because we don't invest in defense," he said. "But we are overweight in green tech, for example."
The recession also has affected the sector's returns. Islamic funds, which avoid anything to do with charging interest, performed well in 2008 when owning financial company stocks would have been a mistake. Another rule that protected Islamic funds is that they cannot own highly leveraged stocks. But this year, as financial stocks have rallied, the largest group in the Islamic sector, Amana Funds, has had a rough time. "The fund has struggled in the risk-driven rally of 2009, with year-to-date returns that trailed 71% of its category peers as of Oct. 12, despite big gains from [its] top holding, Apple," wrote David Kathman, a Morningstar analyst.
The recession has left investors reexamining their finances and trying to be conscious both financially and morally, Peroni said. People not only are questioning government now more than they did a few years ago but also questioning their financial companies, their advisers and, ultimately, their investments.
"In the long run, we will have more clients that are aligned with our values and share the same passions," Peroni explained. "Like other successful companies, we have to play to our strengths and the things we're passionate about, rather than trying to be all things to all people."
