What is faith-based finance?
People who use their religious values to guide their daily life can also put their morals where their money is with faith-based funds. Major religious denominations have an opinion about how to invest cash in support of favored causes and against those that contradict their views and values.
Why faith-based institutions invest?
In almost every regular mutual fund, a client with religious beliefs is going to get a share of companies that are involved in activities in which they would rather not be involved. It’s difficult to consider religious funds as a specific investment group because they vary in what they look for and what they screen out.
Investment principles followed by religious groups
Managers of faith-based funds typically are not theologians. They often rely on advisory boards or paid services to establish how to screen investments. Managers then pick stocks within those limitations, so there is minimal impact on the overall stock choices available to them. Some faith-based funds are top performers in their respective investment categories, proving that limitations do not have to lessen results.
Catholic
Investors wishing to put their money to work in a manner consistent with Catholic values often seek to avoid investing in firms that support abortion, contraceptives, embryonic stem cell research, tobacco, alcohol, pornography, gambling and the weapons industry. They often favor firms that support human rights, environmental responsibility and fair employment practices via the support of labor union organizations.
Some Catholic funds have an additional proactive social stance, taking in some environmental or other social-service issues. Some funds have liberal religious leanings, while others are conservative. Check portfolios, as some do not screen out all the companies you might expect.
Islamic
Investors seeking to follow Islamic religious principles generally avoid firms that profit from alcohol, pornography or gambling. They are also prohibited from owning investments that pay interest or firms that earn a substantial part of their revenue from interest. Some Islamic investors also seek to avoid companies that carry heavy debt loans (and therefore pay interest). Investments in pork-related businesses are also not permitted.
A variety of mutual fund firms offer strategies based on Islamic values. These funds avoid bonds and other interest-bearing securities by making long-term equity investments. Investments are asset ownership in an underlying asset. These include lease-buy back investments, such as for project finance or real estate or equipment leases. Similar to bonds, Islamic investment certificates known as ‘sukuk’ have stated rates of income, maturity dates, and usually a credit rating.
Funds that follow the tenets of Islamic law often have portfolios of low-debt companies. These logged strong performance as financial stocks took a hit in the 2008 financial crisis, making this strategy appealing to non-Muslim investors.
Jewish
Investors seeking to follow Jewish practices with their investment portfolios generally begin with the concept of diversification, dictated in the Talmud. While less formal than some other religions, socially responsible investing is often closely associated with Jewish oriented investment strategies.
Mutual funds that follow Jewish investment strategies provide multiple interpretations of Jewish investing. Some funds have a mandate based on the Jewish belief in helping the poor to provide compassionate use of money to foster community development in areas such as affordable housing, small businesses and community facilities that are in need of affordable capital.
Protestant
Protestant denominations include a range of beliefs from liberal to conservative and tend to encourage individuals to make investments based on broad Christian values such as social consciousness. Investments in tobacco, gambling, alcoholic drinks, high interest lending or human embryonic cloning are usually avoided. Some also avoid firms that cause environmental damage and businesses that do not engage in fair trade.
Bottom line
Religious funds do not sacrifice performance. In theory, it should because, according to modern portfolio theory, any time you restrict your investment universe, you’re lowering your expected return for a given amount of risk. In practice it does not hurt because there are so many other factors involved. Whilst performance is not impacted by a faith-based investments, the costs of a faith-based fund can be higher costs than their peer groups.