The faith-based investor: Making financial decisions based on religious beliefs
When the Rev. Phil Blackburn and his wife, Tasha, stabilized their finances and started saving, they began looking into mutual funds.
Blackburn, the pastor of First Presbyterian Church in Fort Smith, Arkansas, noted that their first priority was to find a fund that would pay off financially without crossing certain ethical boundaries. He asked his financial adviser to research faith-based mutual funds that avoided weapons manufacturers.
"As a Christian and as a pastor, I have some obligation to be consistent across the board," Blackburn said. "My faith has to play a role in all the aspects of my life. If it doesn't, then what does it really mean?"
Larger institutions go through the same self-analysis Blackburn did. Earlier this summer, the Presbyterian Church (USA), Union Theological Seminary and the University of Dayton adjusted their investment portfolios to reflect their values. Deseret News National reported that the two schools would divest from fossil fuels, while the PC (USA) ended its relationship with Israeli companies tied to the occupation of Palestine.
Faith-based investors like Blackburn are a subset of so-called socially responsible investors that money managers are increasingly accommodating. Mutual fund families like The Timothy Plan or Amana Mutual Funds Trust build investment options around religious convictions, empowering investors to put their money where their faith is.
"People should be comfortable with their investments," said David Kathman, a mutual fund analyst at Morningstar, a Chicago-based investment research and investment management firm. "If (faith-based investing) helps people sleep at night, that's great."
Socially responsible investing
The 2014 Investment Company Fact Book reported that $15 trillion was invested in U.S. mutual funds last year. Faith-based funds are often discussed alongside the larger trend of socially responsible investing. Socially responsible mutual funds are defined by Forbes as funds "which eliminate or favor certain investments for moral or ethical concerns."
And although the number of investors who are influenced by their faith is impossible to come by, the market for such customers could be huge. Pew Research Center reported in 2012 that 79 percent of Americans consider themselves members of Christian, Muslim or other faith groups.
Stephen Ally, the vice president of The Timothy Plan, said that despite the company's success in attracting faith-based investors, it is still "barely scratching the surface."
The Timothy Plan has attracted mainly Protestant and Catholic investors to its funds, which are designed around the company's conservative Christian beliefs.
Although personal faith clearly influences the The Timothy Plan (its website includes the testimony of the company's founder and Ally's father, Arthur Ally), its faith-based funds and socially responsible investing are still built around the same financial fundamentals as other funds.
"We should perform as well as other funds that don't do what we do," Ally said.
That's why after Blackburn met with his financial adviser about faith-based investment options that would meet his moral expectations, they then spoke in terms of performance.
"He described to me what he understood to be (the investments' moral) parameters and then gave me performance-based advice," Blackburn said.
As Blackburn and Kathman noted, one of the strengths of faith-based investing is that it allows faithful investors to know they don't have to leave their beliefs at the door of a financial adviser's office.
"Investments are like jobs, and their benefits extend beyond money. Investments express parts of our identity," wrote Meir Statman, a professor of finance at Santa Clara University, in his book, "What Investors Really Want."
Kathman said investors are often driven by emotional ties to companies, although such instincts sometimes lead to risky decisions. Part of a financial consultant's job is to "get the emotion out of it," he said, and to analyze companies objectively.
Faith-based mutual funds offset sometimes risky belief-driven decisions through diversification. For example, The Timothy Plan's Large/Mid Cap Value A fund passes the organization's moral screens and spreads its assets across multiple industries.
Morningstar gives Large/Mid Cap Value A a four-star rating, which means that it ranks above 67.5 percent of the mutual funds in the category of large blend mutual funds, in terms of risk-adjusted returns.
Compared to other fund families under the umbrella of socially responsible investing, faith-based funds often achieve greater levels of diversification because of the screening approach, Kathman explained.
"In the socially screened fund universe, you have a couple of different types. It's positive versus negative screening," he said. "With positive screening, the fund tries to own companies that do positive things. Environmentally focused funds only want to own companies that are proactively doing things to help the environment."
Most faith-based funds, including The Timothy Plan, use negative screens, eliminating companies that violate their faith-based standards but not getting caught up in whether they produce religious products or have faithful owners.
The Timothy Plan promises to avoid companies that are contrary to Judeo-Christian principles, most notably those involved in abortion, pornography, alcohol, tobacco and gambling. As its moral screening statement explains, "Timothy Plan is committed to maintaining portfolios that are not actively contributing to the moral decline of our society."
Where positive screening is used in faith-based funds, it comes in interesting forms. Sam Saladino, the president of Epiphany Funds, explained that his organization's screening process, based on Roman Catholic beliefs, takes note of companies with strong employee retirement or pension plans.
"Those companies are higher scoring for us," Saladino said. "I personally think it makes great economic sense. A happy employee is a good one."
Whether positive or negative, the screening process is not about finding righteous companies, Ally noted.
"We just happen to avoid certain companies because of their moral and ethical positions," he said.
The Timothy Plan publishes its list of problematic companies in the "Hall of Shame" on its website. Pharmaceuticals, tech firms and media corporations are among the 30 companies called out for involvement in abortion, adult entertainment and other vices. The Timothy Plan also supports the eVALUEator and Screen It-Clean It tools, which allow investors to learn more about the companies in their investment portfolios.
Although faith-based funds sometimes report higher expense ratios due to the cost of screening, Ally said that investors aren't likely to question the cost differences.
"A lot of (our investors) are utilizing our fund family because of obedience" or a desire to live out their faith financially, he said.
Focused on living out their commitment to Christ, these investors have a unique relationship with personal wealth. Ally noted that many are committed to tithe 10 percent of their income to their church community. A small difference in purchase price seems even smaller in the context of religious stewardship, he explained.
"We call it investing with purpose," Saladino said. "It's not only about investment returns. There are also moral returns."
In the long run, the performances of faith-based funds aren't hurt by moral screening. In fact, Kathman said that financial advisers suggest large faith-based funds like Amana to nonreligious clients because of their good track records. Amana's focus on investing in companies that comply with Islamic principles becomes incidental.
Blackburn said he didn't hesitate to spend a little extra to invest in a faith-based fund because he knew he'd never be able to do the moral screening on his own. He was willing to pay more to avoid what he felt were unsavory companies.
"Anytime in our society that you want to ramp up the quality of something, whether ethical or material, you're going to pay more," Blackburn said.
Paying a little more to find investments that aligned with his religious values, he said, is a better option than not investing at all.
"If I didn't have something that felt like it was a little bit better, I don't think I would have been able to do it," he said. "(Faith-based funds) made it possible for me to invest."
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