NEW YORK (CNNfn) - If purifying your soul tops your to-do list, then purifying your portfolio might make sense.|
Although your choices are still limited, there is a growing universe of funds targeting investors who wish to apply their religious values to their secular financial needs. At present, there are 35 faith-based funds with assets totaling nearly $5 billion, according to fund-tracking firm Wiesenberger, a division of Thomson Financial Corp.
Generally speaking, such funds place bans on investments in stocks directly or indirectly related to alcohol, tobacco, gambling, pornography and, in some cases, defense contractors or products used in partial-birth abortions. But not all religiously based funds screen alike.
"The United Methodists wouldn't own Philip Morris but the Sisters of Mercy might," said Timothy Smith, director of the Interfaith Center on Corporate Responsibility, which serves as coordinator for the social justice concerns of 275 religious institutions that manage $100 billion in pension funds.
'Are you going to pay a conscience penalty?'
For a society in which sin and sex sell quite well, it's easy to wonder whether faith-based funds, which are a subset of the broader social investment universe, can do as well as their secular counterparts.
"We talk about the social bottom line and the financial bottom line," Smith said. "A lot of investors would be willing to make a lesser return, but the record shows they don't have to."
Fund-tracker Morningstar did a study last year analyzing how funds applying social or value screens stacked up against funds that did not.
"As a group, the funds have shown that you can do about as well in a screened universe as in a non-screened universe," said Morningstar analyst Emily Hall. "But that doesn't mean all socially screened funds are good."
Indeed, you still have to comparison-shop for screened funds as you would any other, she said. That includes looking critically at the manager's record, the fund's performance and its expenses, which in the case of religious funds can be high given that the asset base is relatively small.
More Islamic funds may be coming
One fund that has done quite well recently, screens and all, is the Amana Growth Fund, which delivered a 1-year return of 71.8 percent by the end of January.
The fund invests according to Islam's Shari'ah law, which, in addition to things such as alcohol, tobacco, gambling and pork, bans investment in companies that derive revenue from interest-bearing activities.
"The whole financial sector is basically out for us," said fund manager Nicholas Kaiser. But not so the technology and health sectors, which have helped fuel the fund in the past two years.
Currently, the Amana fund family is the only one to offer Muslims in the United States Shari'ah-specific investment choices, but that may not be the case for long, particularly since Dow Jones recently launched its global Islamic Index, which includes about 600 stocks that trade on Wall Street.
Two index funds and one actively managed fund for Muslims are under consideration and may be available from other fund families as early as this summer, said A. Rushdi Saddiqui, director of the Dow Jones Islamic Index Group.
Taking secular sins into account
Given the mix-and-merge nature of global business, it's almost impossible to totally separate your investments from the sins of the world.
That's why many funds will set targets, or what in Islamic investing are called "tolerance parameters," to account for the fact that most companies derive at least a small portion of their revenue from some activity your fund might find objectionable, Morningstar's Hall said. That way, a fund manager has greater flexibility in determining the makeup of the portfolio.
For instance, a company may have a division that makes a small amount of money from horse-racing. But that doesn't necessarily disqualify it for Muslim investment, presuming the horse-racing accounts for less than 5 percent of the company's total revenue, since that is the cap set for money gotten from non-operating interest income and "impure" income, said Dow Jones' Siddiqui.
Looking for diversity? Keep looking
But tolerance has its limits, as does the diversity most faith-based funds offer.
"There aren't enough funds in any one denomination to serve a broader portfolio," said Hall, who noted that often there is not enough exposure to small caps, bonds and international equities among screened funds. And that means your portfolio may lose out to market volatility or rallies outside your screened arena.
But that doesn't mean you shouldn't invest in a faith-based fund.
If you're looking for a good core holding, Hall suggests a high-performing, large-cap blend fund that represents companies with a strong influence in U.S. markets and abroad. "That will give you the biggest bang for your social buck," she said.
Finding the right fund
The goal, of course, is to find a mutual fund that meets your financial goals and your values, said Alisa Gravitz, vice president of the Social Investment Forum. One way to start your research is to check Web sites like that of the Forum and, if you're Christian, Crosswalk.com. They offer information on what screens individual funds apply and provide lists of financial planners experienced in value investing.
If you find you that your particular faith doesn't offer enough choice, or its funds are performing poorly, you might consider a broader-based social investment fund, which often applies up to 90 percent of the same screens your religion might, Gravitz said.
And soon, you may have to look no farther than your 401(k) plan. A study commissioned by the Calvert Group last year found that of 800 randomly surveyed mutual fund investors, 35 percent said their companies offered a social investment choice in their employer-contribution retirement plans, up from 16 percent in 1996. Of those, 70 percent said that they had used these options, up from 50 percent three years ago.