Investing often requires a leap of faith, no more so than when the bottom has fallen out of the market and the collapse of a multibillion Ponzi scheme is being felt from coast to coast.
For some, that leap is made easier when the investments they're buying reflect their religious beliefs.
Dr. Khalique Zahir found Azzad Asset Management in Falls Church, Va., while looking for an investment adviser that observed Islamic rules banning things like alcohol, tobacco and interest-based lending. "They had the right ideas of what we want as Muslims, as well as investors," Zahir said of Azzad, where he became a customer three years ago.
The Fairfax, Va., cosmetic surgeon wasn't looking for outsized returns each year. "You want your money to grow, but you want your money to grow wisely," he said. He wanted a manager who would stay on top of what the companies in their funds were doing. Zahir feels that recent events have shown the dangers investing in "something that isn't really there."
Azzad, which manages two mutual funds, is one of at least a dozen companies that offer funds developed on religious principles, according to Morningstar Inc. The roughly 100 faith-based funds are part of a group of about 170 funds, and a few dozen other investment vehicles, that fall under the umbrella of socially responsible investing, a growing portion of the market that aims to put money behind companies that support principles like nonviolence, concern for the environment and workers' rights. The Social Investment Forum, a membership organization for people in the field, said SRI assets grew to $2.7 trillion in 2007, a fourfold jump from the group's first estimate in 1995.
Most faith-based funds begin by screening out companies that don't meet certain requirements. Their priorities may vary, depending upon the faith they reflect, but the screening processes are similar. Money managers are able to eliminate companies behind products or in industries they want to avoid, such as gambling. Many funds then go further, examining factors like corporate responsibility, governance issues and worker relations, before deciding whether to buy stock.
‘You have to be prudent’
In many cases, the guidelines that fund managers follow stretch across several different areas, and make it difficult for any company to meet them all. For instance, to comply with Shariah, or Islamic law, companies must avoid interest-based activities because it is forbidden in the Quran.
Among the top holdings in Azzad's Ethical Mid Cap Fund are consumer products maker Church & Dwight Co., parent of Arm & Hammer, Brillo and other brands; pharmacy benefit manager Express Scripts Inc. and U.S. natural gas producer Southwestern Energy Co.
"Of course, it would be very difficult to find a company that has zero interest income," said Fatima Iqbal, an investment adviser at Azzad. So they instead avoid companies that have significant interest income, and help calculate what portion of clients' gains might have come from such banned practices, Iqbal explained. The investors could then return that percentage to their community through charitable giving, as a way to purify their holdings.
"When you're doing religious-based investing, you have to be prudent about it," said Sam Saladino, portfolio manager for Epiphany Faith and Family Values 100 fund, which is designed around Catholic principles. "You have to realize that this is a capitalist society, and these companies are trying to make money."
Nevertheless, Saladino has several non-negotiables that reflect Catholic tenets, for instance companies that profit from abortion and contraception, or that support legislation or groups in favor of gay marriage. Other red flags, like excessive executive pay, helped him avoid some of the companies that have fared the worst in the recent turmoil, like Lehman Brothers, the storied investment bank that went bankrupt in September.
He also screens companies for positive attributes like adult stem cell research, a strong corporate governance record and high rankings for the workplace it provides.
Shareholder advocacy
Stephen Schott of CapTrust Financial Advisors in South Florida, who provides investment consultations for Catholic diocese and archdiocese around the country, noted that exclusionary screening still leaves about 90 percent of publicly traded companies open for investment. But he also noted that regular evaluation is needed, especially when companies engage in mergers and acquisitions, which can create or eliminate problematic issues.
Mark Regier, stewardship investing services manager at MMA, parent of MMA Praxis mutual funds, said such screening is only a first step. "Staying away from companies doesn't do anything for the world," he said. The bigger impact from faith-based investing comes from shareholder advocacy and community investing.
Shareholder advocacy can take the role of writing letters to companies the funds hold, encouraging management to do the right thing on a particular project, he said. In extreme cases, it might lead to proposing a shareholder resolution. "It's our job... to understand the intersection between our faith's values and the marketplace," Regier said. "Increasingly, some of the best companies in the U.S. and around the world are being open to that dialogue."
Regier said MMA funds are among those that also engage in community development investing. MMA sets aside 1 percent of a fund's assets to invest in things like micro-lending programs that loan small amounts to people in developing countries to start businesses or low-income housing in the U.S. This portion "goes first to achieve a social end, and second yields an investment return," she said.
Overall faith-based investing produces competitive results. In mid-December, when the S&P 500 was down about 38 percent for the year, just 26 of the nearly 100 faith-based funds Morningstar tracks had more significant losses, and 15 were down less than half as much as the benchmark. "Over time, we don't think it's a significant detractor or enhancer," said Schott of CapTrust. "But recent history has shown that it's been a positive."