An Urgent Message from Fr. Owen Kearns LC, Publisher

Buying Stock in Values

… And Vice Versa: Faith-Based Funds and the Crisis

BY Wayne Forrest

November 30-December 6, 2008 Issue | Posted 11/24/08 at 8:15 AM

NEW YORK — In these turbulent economic times, investors are looking for safe havens to protect their futures. Although it is almost impossible to avoid losses with stock markets around the world experiencing dramatic downturns, there are ways to at least lessen the downside.

Faith-based investments, such as mutual funds that adhere to the social policies and teaching of the Church, are performing better than many of the more traditional market indices.

As a rule of thumb, faith-based fund managers evaluate public companies’ actions and policies on several issues and criteria before making an investment decision.

In the case of Epiphany Funds, portfolio manager Sam Saladino uses “nonnegotiables or exclusions” to choose which stock to purchase. “One of those is that we do not invest in a company that is a Planned Parenthood donor,” he said. “We do not invest in a company that supports abortions.”

Saladino said it is surprising how many companies are rejected on that exclusion alone, especially pharmaceutical firms which use aborted fetal tissue in research and medicine. The Epiphany Funds also excludes companies that support the Human Rights Campaign, which advocates for same-sex “marriage.”

“If the companies get past these nonnegotiables or exclusions, we have a score card system,” Saladino said. “It’s our way of being prudent. If they have a negative, they need a positive to offset it. They have to have a neutral or positive score to be included for stock selection. Once they get past the exclusions and scorecard, then they are available for purchase.”

From a purely financial perspective, Saladino looks for companies with sound business plans and concepts and “can explain what they do to me in two or three minutes.” He also analyzes their dividends and debt and cash levels, which are important indicators of a company’s fortitude in the current lackluster world and U.S. economies.

“I feel called to do this and live my faith in my business,” he said. “To me, if you do not pass the screening system, I don’t care what you do or what you are involved in; if you don’t pass the nonnegotiables, you’re out. Literally, I never look at the companies that never pass those screens.”

Investor Returns

Saladino believes the criteria will increase an investor’s return and protect him or her from volatile markets. So far this year, the company’s Faith and Family Values 100 Fund’s performance, albeit it down on a year-to-date basis, is faring better than similar market funds. As of Oct. 31, the fund is down 25.2%, compared with the Standard & Poors (S&P) 500, which has lost 32.8% in the first 10 months of 2008.

Saladino also evaluates companies’ employer-employee policies and relationships, discrimination lawsuits and safety in the workplace. “If a company has had more than $1 million in fines for discrimination or safety violations, they are not included,” he said. “To me, the social justice of having a nice place to work is important.”

Saladino estimates that about half of the larger capitalized public companies meet the criteria for possible inclusion in the Epiphany Funds portfolio. The Faith and Family Values Fund’s five largest holdings are: Bank of New York Mellon (BK), Allstate (ALL), BB&T Corp. (BBT), XTO Energy (XTO) and EOG Resources (EOG).

Under the criteria for the Ave Maria Fund he manages, George Schwartz, president of Schwartz Investment Counsel, Inc. in Minneapolis, estimates that as many as 2,600 companies (87%) in the Russell 3000 Index qualify for purchase.

Stock screening and selection for the six mutual funds within the Ave Maria Funds are based on four criteria: abortion, pornography, Planned Parenthood and nonmarital or same-sex partner benefits. Those screens are established by the fund’s Catholic advisory board, which includes prominent lay Catholics. Cardinal Adam Maida of Detroit is its ecclesiastical advisor.

The Ave Maria Mutual Funds also have performed better than the S&P 500 for the first nine months of 2008, though by the end of October its numbers were not as good. Its Catholic Values Fund has slipped 34.22%, compared with S&P 500’s 32.8% decline. The Ave Maria Growth Fund has decreased 27.14% this year, as of Oct. 31.

Prominent stocks in the Ave Maria Funds portfolio include Sherwin-Williams (SHW), Burlington Northern-Santa Fe Railroad (BNI), Kellogg (K) and Western Union (WU). Financially, the companies dominate their markets, have good future growth potential, are well-managed, have cash on hand and lack debt.

“We are not buying companies that claim to be following Catholic morals, except to the extent that they do not violate the four screens,” Schwartz said.

Religious Convictions

So how difficult is it to combine one’s religious convictions with investments for financial gain? Jared Peifer, a graduate sociology student at Cornell University, has been researching this area for the last several years, saying he was “drawn to the intersection of religion and the economy” from related past research.

To date, Peifer has researched 15 socially responsible funds and interviewed about a dozen of the portfolio managers. Though his findings are very preliminary, Peifer said that so far it appears that faith-based funds and their portfolio managers have been able to serve God, hold to their religious convictions, and reap a financial reward.

“I am finding that people very logically are drawing from their religious tradition on how they negotiate in these realms,” Peifer said. “There are interesting and creative ways that people are making sense of it. Many [portfolio] managers are comfortable with saying that their religion doesn’t stop on Sunday mornings.”

Wayne Forrest is based in

Providence, Rhode Island.

INFORMATION EpiphanyFund.com & AveMariaFund.com

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