Socially responsible investing has become a popular way for investors to put their money where their values are. Experts say faith-based investing is now following suit in popularity.
“The faith-based investment approach is predicted to grow, especially as companies see the socially responsible investing agenda as good business,” says Alexander Lowry, professor of finance at Gordon College in Massachusetts.
There are more than 250 socially responsible funds in the United States, of which approximately 40 would fall into the biblically or religiously responsible investing space, says Dwayne Safer, assistant professor of finance at Messiah College in Pennsylvania.
The funds help like-minded investors avoid putting their money into items and practices that don’t match their spiritual values — such as alcohol, tobacco, pornography, gambling and guns — by screening them out, he says.
Faith-based investing is based on the idea that how a business makes money is just as important as how much it makes, says Ben Malick, chief investment officer at Bright Portfolios, which offers biblical investments to clients in Lee’s Summit, Missouri.
Faith-based investments exist across all asset classes and industries — and they control billions of dollars. Eager to get started? Here are a few things you should know before pairing dollars with dogma.
Do you want to invest for the greater good, a return, or both? Defining the impact you want to have with your faith-based investment is a good place to start. Investors who wish to follow the Jewish belief of investing in “tikkun olam,” or repairing the world, may choose to make investments without an immediate or monetary payoff, says Michael Kosowski of Herald Strategies in New York.
“My client, Solomon Schechter Day School of Bergen County, has a course called the ‘Design Thinking Course,’ where students would design solar-powered, collapsible lights for students without electricity in South Africa,” he says. “Eventually, the school turned this course into an Idea and Innovations lab, where students will be able to use sand blasters, laser cutters, 3D printers and more technology in order to improve the lives of others. The Popkin family specifically invested their money in the future generations of Jewish children. It really highlights a key part of faith-based investing.”
Other organizations have the mission of ensuring they do not profit from the abuse of others. The Christian Investment Forum, which comprises of investors and advisors, says that it is “committed to educating advisors and investors by providing opportunities to bring about change — in the hearts, homes, cities, and world that we serve.”
GuideStone Capital Management, a Christian-screen fund family, goes beyond just restricting ownership in companies that fall under its Christian screening policy, says Will Lofland, director of intermediary sales at GuideStone located in Dallas. “We also seek to influence the way companies engage their employees, customers and communities in order to support the physical and emotional well-being of society,” he says.
But that doesn’t mean you shouldn’t make money. Faith-based investing strategies have proved they can be profitable. Over the last five years, a composite of the returns from all of the equity mutual funds within the Christian Investment Forum, which comprises of like-minded investors and advisors, outperformed the industry average by 77 basis points annually.
In a study published in the Journal of Investing in 2010, John Adams and Parvez Ahmed found that from 1998 through 2009, the annual return for faith-based Christian and Islamic funds was 4.55 percent compared with a little better 5.72 percent for all mutual funds.
But of course, like any investment, you’ll have the best success with your faith-based investments if you stick to it over the long term.
“On a quarter-to-quarter basis, a faith-based screen can have a noticeable impact on fund returns,” Lofland says. “… When looking at longer-term time periods, there has historically been no meaningful difference in performance between screened mutual funds and their market benchmarks.”
Robert R. Johnson, professor of finance at Creighton University in Nebraska, says faith-based investing is competitive. “My advice to investors is that if you want to feel good about your investments … then go ahead and do so,” he says. “Just don’t expect that you will systematically outperform or underperform the broad market.”
Use a screener to save time. If manually searching funds or securities with faith-based values doesn’t sound appealing, you can choose use an online screener such as with a major brokerage or many financial websites.
The Customizable Impact app has a Catholic present that seeks to avoid investments in companies that seeks to “avoid investments in companies believed to operate contrite to core values and teachings of the Roman Catholic Church, as set forth by the Catholic Advisory Board,” says Jason R. Escamilla, CEO and chief investment officer at ImpactAdvisor, which developed the app.
You can also hire a firm that screens faith-based investments for you, such as GuideStone, The Timothy Plan or Sharia Portfolio, to name a few.
Accept that you may have limitations. One of the challenges that any socially responsible investing strategy is “that the universe of investable assets is limited based on its screening criteria,” Safer says. “As a result, its ability to diversify or pursue stocks based solely on fundamental financial characteristics is limited.”
In some cases though, “managers would engage with businesses to try and bring about some form of change, or formalization of policy that they believe would provide long-term benefit to the company and people or places that the company has an impact on,” Lofland says, so ask your advisor about how the fund is being put together.
Watch the fees. Niche products such as those pertaining to faith-based investing used to always come to market with high fees and commissions, though this is slowly changing, Escamilla says.
Those high fees can cause any fund to underperform the market, and faith-based funds can have a wide range of loaded fees and expense ratios. For example, the Iman Fund (ticker: IMANX), which invests in companies that adhere to Islamic principles, has a 1.33 percent expense ratio, or $133 annually for every $10,000 invested. The Global X S&P 500 Catholic Values exchange-traded fund ( CATH) has a much lower expense ratio of 0.29 percent.
Scandals should have little impact on funds. If you’re worried about whether a religious institutional scandal, such as the priest abuse issues that roil the Roman Catholic church, will have an immediate impact on your faith-based portfolio, you shouldn’t lose sleep over it.
Because funds are not directly invested in religious institutions themselves, the scandal is unlikely to impact funds focused on Catholic values, says Scott Sacknoff, CEO of SerenityShares Investments, which sponsors the socially-responsible SerenityShares Impact ETF ( ICAN).
That doesn’t mean you shouldn’t put all your eggs in one basket, however, so be sure to diversify, Sacknoff says. “Ultimately, returns are determined by the manager and their methodology, as they are in any investment category.”
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