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Investing on Faith

Funds adhering to religious principles have succeeded making dollars for the devoted.

It can pay to be faithful to your funds -- and to have your funds follow your faith.

This week

visits four funds that employ religious principles for stock selection yet still generate respectable returns: the

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New Covenant Growth fund, which adheres to the principals of the Presbyterian Church; the

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Ave Maria Catholic Values fund; the

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Amana Trust Growth fund, which follows certain Islamic tenets; and the

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AMIDEX35 Israel fund for investing in the Jewish state of Israel.

The funds have performed righteously -- literally and figuratively -- and outperformed key benchmarks in recent years. New Covenant is the biggest of the bunch, boasting more than $940 million in assets, but the others are growing. And, importantly, the funds are open to investors of all faiths.

New Covenant Growth

The New Covenant Funds are a family of four no-load funds guided by the Christian principals of the Presbyterian Foundation. The sub-advised funds hold $2 billion in assets, with the New Covenant Growth fund being the largest at just under $1 billion.

New Covenant allows shareholders to reinvest dividends, but it also gives holders the option to send their dividends or capital gains to charity instead. And any stock in the portfolio needs to pass a few screens before being purchased. No alcohol, tobacco, firearm or gaming stocks are allowed.

According to George Rue, New Covenant's chief investment officer, the fund also seeks to promote other socially responsible practices involving the environment, social and racial equality, shareholder action and community support by voting shares within their portfolios to champion their issues. The adviser may even engage in dialogue with companies whose shares the fund owns.

And while one might believe that a fund's decision to spend its precious time pressuring companies to act responsibly instead of squeezing out profits would detract from performance, that doesn't seem to be an issue.

The New Covenant Growth fund is up 1.5% year to date and has outperformed the benchmark over the last three and five years by 1.2 and 0.3 points, respectively.

And despite the screens, the fund doesn't have a problem finding stocks. It held 739 at last count, the top five being

Bank of America

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Exxon Mobil

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Ave Maria

Five years ago, Bloomfield Hills, Mich.-based money manager George Schwartz was running a traditional small-cap fund when some clients approached him with an idea. Schwartz, who had enjoyed great success running his

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Schwartz Value fund, found himself chatting with

Domino's Pizza

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founder Tom Monaghan and former Major League Baseball Commissioner Bowie Kuhn about a fund that would hew to Catholic principles.

Monaghan and Kuhn wanted to create a fund that would shun the shares of companies involved in abortion, which the Catholic Church outlaws. That meant avoiding some hospital, drug and insurance companies, for starters. Schwartz, who is Catholic, accepted the challenge, and the fund was born.

The fund has since broadened its scope beyond abortion to focus broadly on actions or policies that run counter to Catholic doctrine. The fund's no-no's include pornography and "policies that undermine the sacrament of marriage."

On the financial side, the fund has grown to more than $250 million in assets after being launched in May 2001 with just $15 million in its coffers.

The Ave Maria fund is up 5.98% this year, putting it 4.6 percentage points ahead of the

S&P 500

. In 2005, the fund returned 5.8%, outperforming the index by 0.9 percentage points.

When it comes to selecting stocks, Schwartz says the fund's religious screening process gets in the way less than people imagine.

"Of the entire Russell 3000, there are only 400 names which we steer away from," says Schwartz. "And of that 400 there are probably only a handful that we would invest in anyway."

Of those 2,600 stocks in his universe, Schwartz says he likes companies with low debt, cheap valuations and growing revenue. He also looks for turnaround plays and has been successful with story-stocks like

Fargo Electronics


, which announced last week that it was being purchased by a Swedish company at a 50% premium to its trading price.


Similar to the Ave Maria New Covenant funds, the Amana Trust Growth fund avoids investing in certain kinds of companies. Following Islamic principles, the fund won't touch businesses involved in liquor, pornography, gambling or lending (Islamic law prohibits


, or interest).

But the Amana Trust Growth fund hasn't let those strictures hurt its performance. The $280 million fund is up 4.02% this year vs. 1.4% for the S&P 500. And over the last three and five years, the fund has outperformed the index by 12.1 and 6.1 points, respectively.

Nicholas Kaiser, the fund's manager since 1994, has achieved these healthy rates of return by investing in stocks with good earnings growth and low P/E multiples relative to their industry.

As of April 30, his top five holdings were


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Adobe Systems

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Apple Computer




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Aside from Kaiser's stock-picking prowess, tax-conscious investors also benefit from the fund's low turnover of 2%, which stems from the Muslim belief that excessive trading is a form of gambling.

One area where the fund might be slightly disadvantaged is its inability under Islamic law to earn interest on its cash stake. So while Kaiser has the ability to raise cash, investors might prefer the fund to be fully invested, as it basically is now.

When it comes to matters of Islamic law, or


, Kaiser -- who is not Muslim -- relies on Monem Salam, the fund's director of Islamic investing. Salam also helps market the fund to Muslim communities nationwide through presentations at local Mosques and conferences.

"As the Muslim community ages, people become more religious," says Salam. "The fund gives them a chance to stick to their Islamic principles and earn a good return at the same time."

Adds Salam, "We do have non-Muslim shareholders who are happy with the fund's performance and have been with us for a while."

AMIDEX 35 Israel

While there are no Jewish faith-based funds, there is one fund that focuses solely on the Jewish state of Israel. The region has been in the spotlight after Warren Buffett's

Berkshire Hathaway

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announced earlier this month that it will pay $4 billion for an 80% stake in Iscar, an Israeli metal-cutting tools company.

According to AMIDEX35 Israel fund manager Gadi Beer, Buffett's move was overdue.

"Buffett discovered that Israel is not just a great place for technology stocks, but for other industries as well," says Beer. "Probably half the stocks listed on the Tel Aviv Stock Exchange are traditional, nontech companies, and smart investors like Buffett are going to start flocking there."

Beer splits his $13 million fund between Israeli stocks listed on the


and those listed on the Tel Aviv Exchange. And while it took a Nebraskan to locate Iscar in the Holy Land, many of the 35 stocks in the fund are household names to American investors.

For example, the fund's biggest holding, at 20.5% of assets, is well-known drugmaker

Teva Pharmaceuticals

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. Other large positions in the fund include tech companies


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Check Point Software

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Comverse Technology



The AMIDEX35 Israel fund is up 2.6% year to date after rising 14.2% in 2005 and 14.9% in 2004, according to Morningstar.

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