Faith-Based Investing

Most mutual fund investors are familiar with the concept of socially responsible investing (a.k.a. values-based investing). A small chunk of that industry sector is comprised of faith-based investment funds, such as the Ave Maria funds that base their investment decisions on the social justice teachings of the Catholic Church. This sector has seen fairly rapid growth in recent years, even as the mutual fund industry itself has largely stagnated:

Although faith-based funds represent only a sliver of the mutual fund industry, the value of assets in religious-based funds has jumped from $2.37 billion in 2000 to $16.03 billion at the end of July, according to estimates by Morningstar Inc., a Chicago-based investment research provider.

As an investor, I'm skeptical. In the first place, actively managed funds tend to underperform the market over time. One reason for that performance gap is that high fees actively managed funds tend to charge. Another is that even star active managers make investment mistakes. In faith-based investing, you're adding additional expenses - to pay for the screening of investments to ensure consistency with your values - and you're blocking off whole industry sectors (e.g., defense or tobacco), which means your portfolio inherently will be less well-balanced and less well-diversified than a broad market index fund. Taken together, there's reason to think faith-based funds likely will underperform the market over time.

To be sure, many faith-based funds report high returns. But we don't know the portfolio betas of these funds. They may be skewed towards a higher than market level of risk and, as such, may be more vulnerable to a downturn than a broad market index.

As for whether persons of faith ought to suck it up and accept a lower rate of return in order to invest according to their beliefs and values, that's a post for another day.