Can moral investing strategies trump the markets? Apparently so, if the returns of the Ave Maria Catholic Values fund are anything to go by.
The fund, which was set up four years ago to invest according to the teachings of the Catholic Church, has returned 18 per cent a year on average over the past three years - well ahead of the 12 per cent return of the Standard & Poor's 500.
It has also beaten the growing ranks of socially responsible investing funds, which have a rather different set of investment criteria. (The Domini Social Equity fund, one of the best-known, has turned in only 10 per cent a year over the three years.)
Rather than divine intervention, the key to the fund's success may be found in its manager, George Schwartz. A practising Catholic, he had been running a value investing shop for 31 years when he was tapped for the Ave Maria job.
His Schwartz Value fund has averaged 12.2 per cent a year since its inception in 1984, and Mr Schwartz uses the same investing principles in managing the Ave Maria fund - a value fund - and its siblings, the Ave Maria Growth fund, Bond fund and most recently the Rising Dividend fund.
Good returns have brought money in, with the total under management now topping $400 million (€324 million) - an achievement given that many fund companies in the overcrowded US market are finding it difficult to attract new money.
The fund excludes companies according to four criteria, explains Schwartz: "Companies related to abortion; pornography; companies that contribute to Planned Parenthood; and companies that provide their employees with non-marital partner benefits."
That eliminates 200 of the 500 companies in the Standard & Poor's index. "It's a growing number," says Schwartz. It is mostly big companies that offer non-marital partner benefits, which is why so many of the S&P are excluded.
"That naturally pushes us to midcap and smaller companies, which suits us fine because we specialise in smaller companies," says Schwartz, who holds about 75 stocks in the main fund.
Schwartz is careful to point out that he invests according to morally responsible principles, not socially responsible ones. That clearly distinguishes Ave Maria from the pack of faith-based funds, which can be indistinguishable from socially responsible funds. The fund does not screen on the basis of environmental issues.
"We don't screen out alcohol or tobacco either," says Schwartz. "Our Catholic advisory board believes those are not core issues of the Catholic Church. We don't try to be all things to all people."
The advisory board - which is separate from the board of trustees - is made up of prominent lay Catholics, including conservative activist Phyllis Schlafly, Domino's Pizza founder Tom Monaghan, and the former baseball commissioner Bowie Kuhn.
Occasionally the fund's advisory team will also decide a particular company is unsuitable.
"We invested in a company called Hot Topic, which made T-shirts for teenagers, and they came out with a line that was demonic-related, devil-worshipping, etc, so we had to sell," says Schwartz. Happily, the fund reaped a 50 per cent profit when it did.
There have also been several instances where he has had to sell a stock that was otherwise an excellent investment.
One such was Eli Lilly, in which Ave Maria held a $3 million stake, or three per cent of the fund at the time. "In late 2003 they announced they were going to start offering non-marital partner benefits," says Schwartz.
"When they announced this policy we asked them not to, but they said too bad, they wanted to hire some key people that wanted the non-marital partner benefit.
Another he had to let go was Pepsi, which last year introduced same sex partner benefits.
Apart from the Catholic criteria, Schwartz cleaves to the principles of an old-fashioned value investor, avoiding most of the technology sector and looking for smaller, undervalued companies. He is a buy-and-hold investor and aims for a turnover of 20 per cent or less, although it has been running a little higher than this.The fund is overweight in energy stocks, which have done well in the past few years.
One of Schwartz's best picks is Fargo Electronics, a homeland security play - it has technology that codes ID cards - which has doubled in value since he bought it 18 months ago. Other holdings include Dollar Tree stores, General Dynamics, ExxonMobil and Mylan Laboratories.
The fund advertises extensively in Catholic publications, although the churches have not provided an automatic distribution network.
"Priests tend to be fairly liberal, and our fund is conservative. It is also a commercial enterprise, which makes it difficult to promote in a Church," says Schwartz. He is also hoping to lift the numbers of institutional investors - it currently has about 85 Catholic universities, hospitals and foundations - and tap into diocese money.
