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If faith plays a substantial role in your life, then you probably spend a significant amount of thought as to how generous you should be with your charitable giving, and where your generosity should be directed? Those are noble thoughts and pursuits.
As a person of faith, you probably focus your thoughts on how you spend your money as well. Are you being a good steward of your assets? Do you spend your money wisely? Are you prudent? Do you save enough money for future needs?
If, as a person of faith, you try to align your giving and spending with your faith, should you also try to align your investing with your faith?
WHAT IS INVESTING?
When you invest money in stocks, mutual funds or exchange traded funds, you are becoming a part owner of a business. You are providing capital to help that business operate, grow, and prosper.
Investing is ownership in a business.
If you own a small business, you are familiar with this concept. You start it. You hope that business becomes profitable and grows. As it grows so may the value of your original investment. Sometimes a business reaches a point where it needs a lot of new capital, and so it makes sense to “go public” by allowing investors, like you and me, to buy a share, or part, of the company.
The public stock markets give individuals the unique opportunity to profit off the growth and ingenuity of some of the world’s largest companies. Ownership allows the investor to participate in the profits (and losses) of the company.
This leads to a question.
DOES IT MATTER HOW PROFIT IS MADE?
If you own an index fund that tries to replicate the return of the S&P 500, then you likely own most or all the S&P 500 companies, and you may profit from their activities.
One of the stock holdings in the S&P 500 is Altria Group. Altria is one of the largest tobacco companies in the world. In the fifteen years that ended December 31, 2022, if you owned stock in Altria, you would have averaged over 11% in annual total returns, a very nice financial outcome.¹
In 2018 smoking reached an all-time low in the U.S. at just 13.7% of the population.² This is due in large part to various laws and regulations and overall health awareness of the populace. So, given the fact that Altria is no longer targeting American children, is it okay to share in its profits?
The losses in the U.S. market led to some scrambling by companies like Altria. In 2005, Altria entered the Indonesian market.³ In Indonesia and other emerging Asian countries there is much less regulation and awareness, and much more advertising. This has resulted in a tremendous amount of smoking amongst the youth in Indonesia. The average age that a child begins smoking in Indonesia is seven years old.⁴
The main point of this tragic fact is that Altria is looking for profits by exploiting and endangering young children. Do you want to share in those profits? If you invest in a mutual fund that seeks to replicate the return of the S&P 500, then you probably do. You may be profiting from the exploitation of Indonesian children.
HOW WE MAKE OUR MONEY MATTERS TO GOD!
We need to start with the question of why we invest money in the first place. Here, the parable of the talents found in Matthew 25:14-30 is instructive. This parable provides a clear message that God wants us to invest what he has given us to bear fruit for his kingdom. The fact that Jesus uses money to illustrate this point indicates that God has no problem with Christians who take the money over which he has given us responsibility and wisely invest it. In fact, he expects it.
As such, at Stonecrop, we have always started with the proposition that clients hire us to invest with excellence. The verses that seemed most appropriate were I Corinthians 10:31 – “So, whether you eat or drink, or whatever you do, do all to the glory of God”; and Colossians 3:23 – “Whatever you do, work heartily, as for the Lord and not for men,”. As investment advisors we must work with excellence, professionalism, and competence to get clients sound investment returns that support successful financial plans.
But there is a second component. The Bible makes it clear that good stewardship with investing is not all about maximizing return. How the returns are earned is also important.
In the Old Testament, we are told, “You must not bring the earnings of a female prostitute or a male prostitute into the house of the Lord your God to pay any vow, because the Lord your God detests them both.” Deuteronomy 23:18 (NIV).
The New Testament writer Paul states, “Have nothing to do with fruitless deeds of darkness, but rather expose them.” Ephesians 5:11 (NIV).
The words of Solomon in the book of Proverbs seem relatable to investing and the functionality of modern-day investing. “My son, if sinners … say ‘Come along with us; let us lie in wait for someone’s blood, let’s waylay some harmless soul, … we will get all sorts of valuable tings and fill our houses with plunder; throw in your lot with us and we will share a common purse’ -- ... my son, do not go along with them.” Proverbs 1:10-15 (NIV, Emphasis added).
Imagine if a man came to you and told you that he owned a small company in your town that was making huge profits by legally cutting environmental corners and polluting the local stream that was a source for a neighboring town’s drinking water. Suppose further that this man said that if you invested $25,000 it would help him increase his profits, which he would share with you, and you could double your money in six months. Would you make the investment? Because it is a small, local company that is making its money exploiting citizens of a neighboring town, it would be easy for you to say ‘no’ and even work to help shut his business down, or reform it.
When we invest in the stock market, we are often insulated from thinking about how the profits are made because there are layers between your money and the activities it is supporting. You hire a financial advisor, who buys a mutual fund, which researches and buys stock in a company. You may not even know the name of the company or how it makes its money. You look at your monthly statement to see whether you made money. Should you analyze whether to invest in these large, publicly traded companies in the same way you analyze whether to invest in the small company in your hometown?
In both examples, you are being asked to provide valuable, finite, capital to support the activities of a business.
IS THERE A VIABLE WAY TO MAKE PORTFOLIO PROFITS IN A MANNER MORE CONSISTENT WITH YOUR FAITH CONVICTIONS?
Fortunately, over the course of the past two or three decades, a large variety of faith-based investing options have been created. Beginning in the 1990s, an industry that became known as “Biblically Responsible Investing” or BRI was born. In the first decade, funds such as Timothy Plan, Praxis Funds, Ave Maria Catholic Fund, and GuideStone Funds opened a variety of mutual funds, followed shortly thereafter by funds from Eventide, Crossmark Global and others. In the past several years, faith-based exchange traded funds have been created and added to the mix. Faith Based Investing is now a mature industry, with a long history and track record.
Well over five years ago, we at Stonecrop Wealth Advisors created our own Faith Based mutual fund models and began investing our own money in them. We wanted to invest out of our own personal convictions and develop a track record that would give us confidence to recommend faith-based portfolios as fiduciaries to clients interested in getting attractive investment returns and investing in a manner that more closely aligns with their convictions.
HOW DO THESE FUNDS WORK?
A Faith Based mutual fund or exchange traded fund starts like any other fund in that it develops a strategy, or sector of the market in which it will invest, such as U.S. large cap funds or Emerging Markets funds, etc. It develops due diligence and trading processes like any other mutual fund. The difference is that in addition to developing these trading parameters, it executes is model by engaging in one, two or all three of the following:
Avoidance
Affirmation
Advocacy
First, all the funds we use place a negative filter on their funds. The most common filters are the following:
Tobacco
Pornography
Gaming/Casinos
Sanctity of Life
Adult Entertainment
Weaponry
Family Values
Environmental Stewardship
If a company violates a screen, it will be excluded or avoided.
In addition to the negative filters, some use what are called positive filters. Rather than just avoiding companies that do not align with Biblical values, the investment manager will focus on committing capital to those companies who are doing good in the world. They will purposely look for companies that work on items such as the following and in a manner that the fund company deems is adding to the positive good of society:
Renewable energy
Human Capital Management
Supply Chain Management
Product Quality and Safety
Business Model
Customer Welfare
Customer Privacy
Access and Affordability
This part of the strategy is called affirmation, and not all of the fund managers we use employ this.
Finally, the last step for some of these companies is corporate engagement and shareholder advocacy. The mutual fund companies that we use constantly monitor the companies in which they invest for any violations of their negative screens. If they discover a recent violation, they will not necessarily sell the position immediately. They will first have a conversation with the company to discuss the issue and why they will need to sell the company. If the company does not change, the fund company will sell. There are many positive stories of Faith Based fund companies causing a large corporation to change its direction due to this kind of advocacy activity.
WHAT ARE YOU GIVING UP?
By committing to a Faith Based portfolio, are you giving up performance? It is a very reasonable question. There are about 7,500 total mutual funds available for investors in the United States. An investment advisor using Faith Based mutual funds is limited to scores of options, not thousands. The Faith Based fund industry is newer and smaller, and as a result, you could reasonably expect fees to be higher, lowering long term performance.
How does performance compare?
In 2020, the Christian Investment Forum analyzed data for the prior 15 years comparing averages of faith based funds compared to their respective category averages. The 15-year history allowed for data from the recession of 2007-08, the slow recovery, and the long bull market through the end of 2019.
With the stock-based mutual funds, the composite average return of the faith based funds was 7.1% compared to their peer group returns of 6.3%.⁵
For the bond-based portfolios, over that same period of time, the average return for the faith based portfolios was 4.2% compared to 3.8% from their peers
Across six categories of equity and bond funds, each of which included at least 3 faith-based funds, the average of those funds outperformed the category benchmark average in four of the six, and in two categories the funds averages slightly underperformed the benchmark.
It may be time for you to give faith based investing a closer look.
PROCESS AND NEXT STEPS
Stonecrop Wealth Advisors follow a detailed and regimented investment process in which we use quantitative and qualitative measures to identify the top funds in each category. We have been doing this for many years, and the process we apply to the faith based mutual fund marketplace is no different. Our goal is to put together a portfolio of managers that will provide the risk and return profile that best fits your needs and helps support a successful financial plan.
This may make complete sense to you. If so, that is great. We would love to take the next step with you to ensure that your values align with your investment portfolio.
Investments are only one piece of the overall financial puzzle in your life. We have a strong conviction that every area of your financial life should support your values and your mission as a person or a family. We have created a detailed process in which we assist you in developing a financial plan that will support your values in all aspects of your financial life. We start by getting to know you and what is most important to you. No forms or numbers are needed, just a casual conversation. If you’re interested in taking the next steps please contact us by emailing us at info.stonecropadvisors.com.
⁴For further reading on the implications of a young generation of smokers see Eventide Investments excellent article here.