NEW YORK (TheStreet) -- Religious groups have long designed mutual funds. Besides seeking to offer competitive returns, the portfolio managers shun certain kinds of offending stocks. Protestant funds avoid alcohol and gambling companies, while Catholic managers shy away from businesses that facilitate abortion. According to Morningstar, the faith-based funds have $30 billion in assets.
Because religious managers face limitations, you might expect these funds would deliver uninspiring returns. In fact, a number of the faith-based funds have recorded sizzling results.
Among the leaders is
, which follow Islamic laws. During the past 10 years,
Amana Trust Growth
returned 10.9% annually, outdoing the
by 4 percentage points and topping all large growth competitors, according to Morningstar.
In the same period,
Amana Trust Income
returned 10.8% and surpassed 99% of its large blend peers.
Other faith-based funds that have finished near the top of the standings include
Ave Maria Rising Dividend
, a Catholic choice, and Protestant winners such as
Thrivent Diversified Income Plus
Timothy Plan Large/Mid-Cap Value
Do the religious screens boost returns? Not necessarily. In a study of Islamic funds, Andreas Hoepner, a researcher at the University of St. Andrews in Scotland, found that most portfolios lagged their benchmarks. According to other researchers, the average Protestant and Catholic funds have produced unexceptional results.
Still, there is no evidence that the screens hurt performance. Portfolio managers say they are able to find good stocks that survive the screens.
Instead of using their own employees to manage portfolios, many of the top-performing faith-based companies have excelled by hiring outsiders known as subadvisors. The subadvisors often work for a variety of clients, including institutional investors and wealthy individuals who don't necessarily apply religious screens.
A top fund that uses a subadvisor is the Timothy Plan Large/Mid-Cap Value, which has hired
. Led by chairman Susan Byrne, Westwood has operated
Westwood LargeCap Value
and other funds that focus on companies with strong cash flows and little debt.
By seeking undervalued stocks that are improving their balance sheets, Westwood has excelled in downturns. The recipe has succeeded at the Timothy Plan fund, which has returned 8.5% annually during the past 10 years, outdoing 96% of large blend peers.
The stocks in the Timothy Plan fund are similar to the holdings in other Westwood-run funds. But for the faith-based portfolio, the managers are barred from buying companies that are involved in "activities contributing to the moral decline of America."
The fund must avoid businesses that produce "anti-family entertainment" or that actively promote abortion and pornography. On its Web site, Timothy Plan provides a list of companies it has refused to own. Stocks in the Web site's "Hall of Shame" include cigarette maker
, and casino operator
Religious screens helped Amana Trust Income excel during the financial crisis. According to Islamic principles, the fund is not permitted to own companies that collect interest. That eliminates financial stocks, some of the worst performers during the market turmoil. Partly because it held no banks or brokers, the Amana fund outdid 99% of its competitors in the downturn of 2008.
Even during periods when financial stocks performed well, Amana Trust Income has delivered competitive results. Portfolio manager Nick Kaiser focuses on rock-solid dividend payers that can grow for years. The portfolio is heavy with consistent blue chips, including
Once he buys a stock, Kaiser often holds for a decade or more. He only turns over 3% of his portfolio annually, compared to a figure of 71% for peers.
To limit risk, Kaiser holds cash when stocks look shaky. In 2008, the fund had one third of assets in cash, which helped to damp losses. Lately Kaiser has been finding more bargains, and the fund currently has 7% of assets in cash.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.