(MONEY Magazine) – To 17th-century Puritans, business success was a sign of God's grace -- tangible evidence that they were headed for heaven. For nearly 20 years, Anthony Brown, a taciturn fourth-generation New Englander, has also been following his conscience in business. And as portfolio manager of $95 million Pax World, the nation's oldest mutual fund devoted to ethical investing, his reward has been gratifying indeed, especially recently: for the 12 months that ended March 8, Pax was up 18.5%, placing it third out of the 61 balanced funds ranked by Lipper Analytical Services. Not surprisingly, the fund has caught on with investors who value environmental and social responsibility; so far this year, Pax World has seen a record inflow of $3 million. What's more, three out of the four ethical funds that are at least five years old, including Pax, have outperformed the averages for their categories over the past five years, according to John Schultz, head of Ethical Investing, a Minneapolis money-management firm. And of the seven such funds in operation last year, half beat the averages. One reason for this transcendental behavior: the business cycle and geopolitics have been moving to the side of the angels. For example, rising demand for such ethically impeccable goods as healthier food and medical products has pushed the manufacturers' stocks up, while less sociable industries such as nuclear power and defense have been lagging. Pax World's long-term record has been less spectacular. Its cumulative return for the past decade is a solid 264.7%, compared with the balanced-fund average of 307.4%. Critics of the ethical approach to investing call such performance the inevitable price of conscience. ''The long-term record of the socially responsible funds is mediocre,'' contends Sheldon Jacobs, editor of the newsletter No Load Investor, who notes that Pax World and Dreyfus Third Century, the second oldest ethical fund, both rank in the bottom 40% of no- load growth funds for the past 10 years. ''You would probably have done better to aid social causes by investing in a regular, top-performing mutual fund and donating your gains to charity,'' he says. Brown retorts that Pax World's goal is more than just making money. The Portsmouth, N.H. fund (no load; 800-767-1729) was opened in 1971 during the Vietnam War by Brown, a Wharton School graduate whose money-running experience was limited to investing family assets; his brother Paul, an attorney; and two Methodist clergymen -- Luther Tyson, who is also an economist, and J. Elliott Corbett, a political scientist. ''We were outraged that the country was wasting boys' lives in a war that no one wanted,'' recalls Brown, 55. ''We decided we could make a political statement by investing ethically.'' The fund's objective: to contribute to world peace by putting money only in firms that produce ''life supportive'' goods and services. A value investor, Brown favors stocks with low price/earnings and debt-to- equity ratios. He also looks for companies with a history of strong management and quality products. ''I invest for long-term growth and will not pay a premium for takeover speculation,'' he maintains, noting that only 37% of the fund's portfolio turns over in a year, vs. 117% for the average balanced fund. Brown's choices are screened for responsibility by Tyson and Corbett on the basis of several social and environmental criteria. For example, they rule out firms that earn more than 5% of revenues from defense contracts. Other no-no's include tobacco, alcohol and gambling companies; firms with records of unfair employment practices or of polluting the environment; and corporations that do business in South Africa. About 30% of Brown's potential choices are rejected on the basis of ethical criteria. One recent example: Sara Lee, which owns a small tobacco company in Europe. Traditionally, Pax World divides 70% of its assets among roughly 20 stocks, but lately its equity holdings have dipped below 60% because of Brown's bearishness. ''We'll stay hunkered down until interest rates drop,'' he says. The remainder of the portfolio is invested primarily in U.S. agency issues, such as 2 1/2-year Fannie Mae mortgage certificates. Pax World's current 60-40 ratio is a bit more growth-oriented than the average balanced fund's mix but, Brown notes, ''We make up for the risk by investing in shorter-maturity, high- grade bonds.'' Lately, Brown has concentrated 17.5% of Pax World's portfolio in natural gas stocks, which offer high dividends and stable earnings growth. ''Because natural gas burns more cleanly than coal, it will be the bridge fuel until solar power becomes economically feasible,'' he predicts. His biggest holding, at 5% of assets, is Bay State Gas of Canton, Mass., with a five-year annual average total return of 25.5%, vs. the S&P average of 20.2%. Another favorite stock is red-hot Cabletron Systems, a computer company in Rochester, N.H. that was up 43.9% in the first quarter. Cabletron makes local area network (LAN) systems, which link personal computers to provide business users with the computing power of a mainframe at far less cost. ''Although computer sales are in a slump, LAN sales should grow 20% to 25% annually over the next three years or so,'' Brown says. ''Cabletron's earnings may double in 1990.'' Of course, even a company that passes Pax World's social screen is hardly a corporate Mother Teresa. For example, the fund owns H.J. Heinz, maker of StarKist tuna, which is under attack by environmentalists because the tuna nets used by fisherman who supply the company also trap and kill dolphins. Brown approves Heinz because it is trying to improve its fishing practices. He frankly acknowledges, however, that his reasoning doesn't satisfy purists. ''There's no such thing as a perfect stock,'' he says in his own defense. ''But we're not trying to find the Holy Grail -- we're just trying to do what we can to make the world a better place.''

CHART: Six socially responsible stocks These companies are among Anthony Brown's ethical-financial favorites. They are ranked by 1990 projected earnings growth. Recent Revenues P/E* 1990 projected Stock price P/E* (in millions) earnings growth

1.Cabletron Systems $13.50 15.0 $55 90% 2.Wellman 26.75 11.5 450 34 3.Walt Disney 111.25 18.0 4,594 20 4.Merck 69.50 15.3 6,550 19 5.Procter & Gamble 67.75 15.9 21,398 18 6.Bay State Gas 20.00 10.4 325 16

*Based on estimated 1990 earnings. Sources: Institutional Brokers Estimate System, Pax World and Value Line Investment Survey