Does God Have a Place in Your Portfolio?

What’s God got to do with investing? Increasingly, quite a bit.

Last winter, Oklahoma City-based asset management firm FaithShares Advisors L.L.C. unveiled the first Christian exchange-traded funds (ETFs). These newly fashioned investment vehicles screen out companies that engage in businesses that Christians might find objectionable, such as alcohol, tobacco, and weaponry. They may also take into account a company’s treatment of its employees, its environmental policies, and corporate governance issues. “There’s a tug-of-war where investors want to make money but they want to avoid sin stocks,” says Thompson Phillips Jr., president of FaithShares. Simply put, a growing number of investors want to reap returns and make a difference.

FaithShares is hoping to attract investors who want to build wealth while remaining true to their denominational beliefs. The company hit the market in December with five ETFs: Baptist Values (FZB), Catholic Values (FCV), Christian Values (FOC), Lutheran Values (FKL), and Methodist Values (FMV). Those funds are joined by the first Muslim ETF, Javelin Exchange Traded Funds (JETS) DJ Islamic Market International Index (JVS), launched in July 2009 by Javelin Investment Management. According to research firm Morningstar, there are now more than 80 faith-based mutual funds and six ETFs. Over the last decade, assets in those funds have grown from less than $12 billion to more than $30 billion.

The trend is clear. The question is whether the movement toward mixing religious commitment and investing will take place among African Americans, who are more religious than the American public as a whole. A 2007 Pew Forum U.S. Religious Landscape survey found that nearly 80% of African Americans say that religion is “very important” to them, versus 56% of all U.S. adults.

FaithShares’ ETFs could appeal to someone like 26-year-old Grant T. Harris of Washington, D.C. Harris does his own research into companies whose stock he holds. “I only invest in companies that I feel are ethically and morally sound,” says the management and image consultant, who describes himself as a devout Christian. “And I don’t invest in anything that expressly goes against my core Christian beliefs and values.” Harris finds the new Christian investment products intriguing, but he’d like to see them develop more of a track record before he invests.

Should faith figure into the equation? Investing with a conscience

can make you feel good, but what does it do for your retirement account? One positive aspect of faith-based investing, says Nathan Mersereau, president of Planning Alternatives in Bloomfield Hills, Michigan, is that people could be more motivated to save when they have investments that represent their belief system.

For most investors, though, it’s all about performance. Essentially, experts say investors should expect faith-based investing returns to mirror those of socially responsible funds. Last year happened to be a great one for socially responsible investing, or SRI. From Dec. 31, 2008 through Dec. 31, 2009, the Dow Jones industrial average rose 18%. SRI funds jumped more than 35% over the same period, observes Richard Dziak, vice president and investment officer with Wells Fargo Advisors L.L.C.

Steve Schueth, president of First Affirmative Financial Network L.L.C., which specializes in SRI, believes that with 2009’s returns “the myth has been dispelled that if you do good you have to take a lower return. There is no reason to expect underperformance.” Faith-based investors can expect returns similar to those of socially responsible investors because the companies held in both types of portfolios are likely to be the same. For example, FaithShares has about 85 to 90 recognizable names in its mix, including stakes in Google, Starbucks, Southwest Airlines, and Microsoft.

Despite their recent performance, there’s one glaring downside to faith-based and socially responsible investing: fees and expenses. “On average, the expenses will be more than [the average fund] because of the deeper and different research involved. Analysts are looking at a company’s policies, culture, and behavior, for example,” says Schueth. The truth is, says David Kathman, mutual fund analyst at Morningstar, “If it’s important to you to invest this way, then that’s the price you pay.”

Many investors object to investment decisions made with anything other than pure quantitative analysis. Yaron Brook, president and executive director of the Ayn Rand Institute, agrees with that sentiment. “You should evaluate an investment based on whether it achieves its intended goal,” says Brook. “In general, the goal of a business is to make money, not to serve a social agenda. Companies should be left alone to maximize their profits.” While that may seem a bit cold, Brook poses some questions for investors to ponder: “What does socially

responsible investing even mean? Is it socially responsible to manufacture the weapons we need to protect ourselves in a time of war? Is selling alcohol socially responsible? And if not, what about Big Macs and M&M’s? Socially responsible is an undefined term that’s tailor-made for people who want to control what businesses can and can’t produce.”

Other experts point to another flaw in SRI and faith-based investing: a dearth of choices in asset classes other than equities. A purely faith-based investor, therefore, isn’t able to properly diversify his portfolio. “There are no SRI investment options with respect to emerging markets equity funds, emerging markets bond funds, or global strategic fixed-income funds. There are some SRI bond funds but they are primarily focused on government, municipal, and corporate debt in the U.S.,” admits Eric Lybarger, principal and owner of Evergreen Global Investment Group L.L.C., which specializes in investment advice and portfolio management.
The debate over religion-influenced investing won’t be settled anytime soon. In the meantime, those who purchase faith-based funds will be praying for outsized gains.

This article originally appeared in the May 2010 issue of Black Enterprise magazine.