Which faith plays the stock market best when the market seems headed for the financial equivalent of purgatory? That may sound like a whimsical question, but there are, in fact, mutual funds tailored to a number of religions and denominations. Their track records won't answer the question of which investment strategy best ensures eternal salvation, but they have certainly had an impact on some believers' nest eggs and they provide a window into how each faith understands appropriate investment.
For centuries Muslims were either out of the Western stock market or burdened with a certain amount of guilt. The Koran states, "Whatever you give as riba so that it might bring increase through the wealth of other people will bring you no increase with Allah." Since riba means "interest," this was a powerful dampener on investment for the pious. In 1998, however, the influential scholar Yusuf Talal DeLorenzo released the so-called "Dow Jones Fatwa," which allowed believers to invest in funds with a degree of what one of his sons termed "permissible impurity."
Shortly afterward, an Islamic investment group called the Amana Funds made a mosque-to-mosque push for business. Amana's funds avoid stocks with above 5% stakes in alcohol, pork or tobacco. None of these is tightly connected to a major market dynamic, and during the long-running bull market, Amana's success owed less to its distinguished Islamic legal team than to its head stock picker, non-Muslim Nicholas Kaiser. But as Mohen Salam, Amana's director of Islamic investing, points out, "during a bear market, and particularly during this credit crisis," other Islamic restrictions have kept Amana away from the most radioactive issues. It avoids investment banks such as Lehman Brothers because of a limitation on interest-oriented business. Along the same lines, says David Kathman, a mutual-fund analyst at the Morningstar research group, Amana "won't own companies with too much debt on their balance sheets, because if you have too much debt you're paying interest on it." The top three holdings of its large-growth fund are tech titan Apple, fertilizer giant Potash Corp. and freight-railroad firm Norfolk Southern.
Amana's value has dropped along with that of the rest of the market in the past few months. But it has lost less than other funds, remaining in the top 2% of Morningstar's funds the in the large-growth category.
Occasionally Salam lunches with a colleague who plays a similar role at Ave Maria Catholic Values, a fund whose religious-advisory board has included such conservative luminaries as pizza baron Tom Monaghan and religious-right activist Phyllis Schlafly. Ave Maria will not invest in companies involved with abortion, contraception or pornography. Perhaps more important for the future, it won't buy into firms that offer domestic-partnership benefits to unmarried couples of any gender. Since both presidential candidates have come out for such benefits and the list of companies offering them is expected to grow, this could become a drawback. Top holdings of its mid-cap blend fund include electro-optical maker Gentex, printing solutions provider Zebra Technologies and Meadowbrook Insurance Group.
Ave Maria's mid-cap blend is not in the Morningstar top 5%, but another, tiny Catholic fund called Epiphany has a large blend that is in that category and has posted an incredible (given market conditions) growth rate of about 40% from June to September. Epiphany, too, plays doctrinal hardball, basing its screening process on what CEO Sam Saladino says are "a lot of different Church teachings." Epiphany eschews companies that contribute to Planned Parenthood and tries to avoid those that manufacture weapons or discourage unions. It gravitates predictably toward firms engaged in adult (rather than embryonic) stem-cell research and, interestingly, to companies in the top-100-firms list of the magazine Working Mother. An Epiphany spokeswoman explained, "When looking for positive criteria to reflect family values, we felt their scorecard fit." It may be a sign of the changes in the Church that few Catholics would have employed that definition of family values 50 years ago.
Epiphany's ethical-screening policies may not have a large impact during the current crisis, but its allergy to corporations that pay their CEOs more than $12 million a year could. "We know this is a capitalistic society and companies are trying to make income," Saladino says, "but we feel there's a basic responsibility that companies have to employees and vice versa, and we try to set up screens so these things can be proved out." Its large blend fund features financial firms like Allstate, Bank of New York Mellon and BB&T Corporation.
Like Protestantism itself, Protestant funds come in different flavors. The largest is GuideStone Funds, which began as part of the Southern Baptist Convention employees' retirement plan and excludes firms "whose products, services or activities are publicly recognized as being incompatible with the moral and ethical posture" of conservative Christianity. In practice, its large growth fund invests in such companies as Google, Apple and oil-services giant Schlumberger. The Evangelical Timothy Plan takes as its inspirations two diverse verses from the Bible: "If any one does not provide for his relatives ... he has disowned the faith and is worse than an unbeliever," and "... do not participate in another man's sins; keep yourself pure." It avoids the classic "sin stocks" and also provides a fiscal "Hall of Shame" that includes Playboy Enterprises, Inc. but also Starbucks Corp., because of the coffee chain's domestic-partner benefits coverage, among other reasons. Its large blend fund's holdings feature ExxonMobil, Lowe's and human-resources solutions provider Paychex.
Then there are more liberal groups such as New Covenant Funds, guided by the principles of the Presbyterian Church USA; its large blend fund has holdings like AT&T and ExxonMobil. Both it and the MMA Praxis funds, affiliated with the Mennonites, tend to resemble secular liberal socially responsible investing funds (SRIs). The Mennonite fund, for example, uses shareholder advocacy to press causes like fair-trade coffee and HIV/AIDS prevention. Its large-blend holdings include Costco, JPMorgan and Berkshire Hathaway.
Morningstar's Kathman has never heard of a religious investment fund aimed at Jews. Religious Jews are not, however, exempted from observing biblically derived market etiquette. Aaron Levine, head of the economics department at New York City's Yeshiva University, says significant direct investment in a tobacco company "would be considered an encouragement of wrongdoing on a grand scale." Yet, he believes, investing in a mutual fund with a small stake in tobacco might be acceptable. The same, however, does not apply to a weapons company: "Regarding direct danger to life, there are no small percentages," he says. Levine also notes that Jews are encouraged to involve themselves in enterprises that (in rabbinic language) "produce the good settlement of the earth."
The faith side of religious funds is aimed at decreasing sin rather than increasing profit, and doing that well doesn't guarantee a strong return on investment. Amana's Salam, observing that there are several other Muslim groups that have not fared as well during the crisis as his own, explains, "After you've screened for the Islamic criteria, you still end up with 50% of the market available," and from then on, "it's a matter of good stock-investment skills." Kathman has written, "If you decide to invest in any of these funds, it should be because you agree with the moral principals [sic] underlying the fund," not because you think those principles will be the ones that assure a good return.