Putting your money where your soul is

What are your criteria when it comes to investing in stocks or mutual funds? The return on your investment? Price-earnings ratio? A diversified portfolio?

Many people add another stipulation -- social responsibility. They would not choose, for example, to invest in a company that produces tobacco products, such as Philip Morris.

Still others pursue a lesser known but growing investment arena -- faith-based investing.

Socially responsible investing (SRI) can mean different things to different investors. Some experts say it began with Vietnam when some people didn't want their investments supporting the war.

SRI became much more popular when South African apartheid was making headlines in the 1980s. Today, SRI generally means screening out companies involved in alcohol, tobacco, gambling or environmental pollution. Financial institutions involved in predatory lending practices are banned by some mutual funds.

A branch of SRI, faith-based investing has been around for a long time. In the 1800s, the Quakers, who were anti-slavery and anti-war, avoided investing in weapons production.

Filtered investing strategies
Today, faith-based investing is often a combination of SRI plus the screening out of several other things germane to a particular religion.

Many Christian faith-based mutual funds exclude companies having anything to do with abortion. That can mean for-profit hospitals. Contraceptives -- that eliminates many of the major drug companies -- pornography and, sometimes, weapons production are also taboo.

Some very conservative Catholic mutual funds don't invest in companies that provide medical benefits to unmarried or same-sex domestic partners. That stipulation can eliminate many of the Fortune 500 companies.

Mutual funds that cater to Muslims don't invest in insurance companies, financial institutions that pay or charge interest, or companies involved in pork production.

"Each group decides both what their financial goals are and their strategies to achieve those goals," says Diane Bratcher of the Interfaith Center on Corporate Responsibility. "They also look at their social and religious teachings and that leads them to be willing to hold certain things in their portfolios."

Bratcher says that in 1999, an estimated $2.2 trillion were invested according to SRI principles. That means $1 out of every $7 invested in the stock market was subjected to some sort of social or religious screening that year.

Faith-based invested assets, according to a study done for the Mennonite-based MMA Praxis mutual funds, accounted for approximately $4.5 billion of that $2.2 trillion.

The myth of lower returns?
The rap against social or religion-based investing is you get lower returns than with neutral mutual funds. After all, you may be eliminating some of the country's most profitable companies because of their policies.

Catherine Hickey, an analyst with Morningstar, says that's not necessarily true, but you do have to do your homework.

"There are some good ones and some laggards. Remember, they're investments and they're supposed to be strong performers. Don't pick a lousy fund just because of religious values."

Mark Regier of MMA Financial Services, a Mennonite organization, says it's about making wise investment choices.

"It's fund size, the skill of the manager and the fundamentals of investing. You have to be careful because many religious funds are very small and that may mean they can't afford the better, high-priced managers," says Regier.

Not all funds within the same religion are created equal.

The Ave Maria Catholic Values Fund is a conservative fund whose advisory board includes former baseball commissioner Bowie Kuhn, conservative activist Phyllis Schlafly, and Tom Monaghan, the Dominoes Pizza mogul who founded the fund.

Oddly enough, companies involved with alcohol and tobacco aren't automatically ruled out because those products don't necessarily conflict with Catholic values.

But the fund shuns companies that give benefits to unmarried couples or same-sex partners. That eliminates a host of companies including American Express, AOL Time Warner, Dell Computer, Eastman Kodak, Coca-Cola, Bank of America and American Airlines.

It also rules out companies that manufacture or sell any products associated with abortion or birth control -- and any insurance companies that pay for abortion or hospitals that perform them. That's most of the big drug companies and Wal-Mart, which sells contraceptives.

"We use a stricter standard than many other funds employ," says portfolio manager Gregg Watkins. "Some people say, 'You're being too picky, you're going too far.'

"But if my neighbor came over and said, 'I'm going to start a business and distribute the morning after pill, do you want to invest?' I'd say no. But if a multinational corporation that's one of 50 companies in my mutual fund distributes that, then the reality is somewhat diffused."

On the other hand, the Catholic Values Investment Trust invests in many companies Ave Maria avoids.

"If we have a drug chain and more than 99 percent of its business is selling drugs and less than 1 percent is selling contraceptives -- they're forced to carry these things -- that's not what their business is. We use rules to review things intelligently," says Walter Miller of Wright Investor Services, which manages CVIT.

"Ave Maria has chosen to not use equities whose firms provide medical benefits to unmarried couples," adds Miller. "That's nice, but in many states it's the law and some major companies are doing that."

Jeffrey Petersen, president of Carlisle Social Investments, says they also have Catholic mutual funds that invest in companies that allow benefits for same-sex couples.

"I think what's happening is there's some confusion between promoting or not promoting same-sex relationships and discrimination. We believe it's very clear in our teachings to not discriminate against any class of person or persons and we should take other means to educate this group as to any improvement in the way they lead their lives," says Petersen. "We are in no way promoting what we feel is an unhealthy lifestyle, but we don't want to promote harm to any group."

A wider appeal
Mark Regier of MMA Financial Services, the Mennonite organization, says they try not to be preachy and their mutual funds are meant to appeal to a variety of Christians.

"Conservative Christian funds tend to focus on moral issues. The progressive side looks at making it a better world," says Regier. "We sit in the middle. Those activist tendencies and faith-based concerns come together. Our guidelines are all positive -- not just a list of no's. What do we want to accomplish in the world that would be a positive influence?"

MMA Financial Services has devised the MMA Praxis Value Index Fund, which is meant to parallel the investment performance of Standard & Poor's 500/BARRA Value Index.

"Ours is a holistic approach," Regier says. "What are these companies doing? Are they making a serious effort to be a positive influence? Are they perfectly clean? No. We don't believe there is such a company."

If you're interested in investing in a faith-based fund, there are several things to consider. Make sure it screens companies for the things that are important to you. Find out who the manager is and check his or her track record, tenure and how well the fund has done during that time.

If the manager is new to the fund, see what other funds he or she has managed and how well those funds performed. If there is no public record of the manager's past performance, consider that a red flag.

Ask the company for a prospectus. Often they're available online. Check the fund's returns over a five or 10-year period. If the fund is brand new, unless it's an index fund, you may want to give it some time before investing.

The Social Investment Forum Socialinvest.org gives you a way to check the financial performance and the social screens of many funds.