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A small but growing number of mutual funds try to balance seemingly contradictory aims: promoting religious goals and making money. But just as the funds' philosophies differ, their performance ranges from impressive to anemic. In most cases, they don't offer anything close to financial salvation for investors.

Most of the funds are less than 10 years old, and almost all have less than $100 million in assets, a figure many regard as the benchmark for profitability. But the number of offerings has grown, along with the increasing segmentation of the mutual fund market.

Indeed, it's now possible to own not just a fund focused on small-cap value stocks but a fund oriented towards small-cap blend stocks that is in sync with the sensibilities of conservative Christians (the

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Timothy Plan Small Cap Value fund).

Since 2000, at least 16 religion-oriented investing products have debuted, including institutional funds and indexes. They range from the

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Dow Jones Islamic Index to the Timothy Plan Aggressive Growth fund, which targets conservative Christians.

The Birth of Retail Religious Funds

For decades, many religious institutions have screened their pensions and endowments for companies they would define as undesirable, such as weapons manufacturers and alcohol companies. In the 1990s such religious institutions decided to offer the same options to their members amid a surge of retail interest in mutual funds. Religious funds also have ridden the coattails of increased awareness in socially responsible investing (which, in turn, received a promotional boost from earlier anti-apartheid campaigns).

"This is a subsector that has benefited from the rise in other socially responsible funds," says Catherine Hickey, an analyst at Morningstar. "Over the last few years, people have gotten savvier about their available options as far as

fund investments. They know you can invest with your values and conscience."

Investors in religious funds tend to be "sensitized to the fact that as investors, they're really an owner of a company, and along with ownership privileges come responsibilities," says John Liechty, president of MMA Praxis funds, which caters to Mennonites and other Anabaptists. "As owners, they are responsible for management decisions, and when there's some conflict with their own faith, they have a responsibility to speak up."

At least in some cases, religious funds appear to be attracting investors away from mainstream investments. When MMA Praxis rolled out its mutual funds back in 1994, some of the money inflow from retail investors had "probably been stuck away in CDs," says Liechty.

More recently, the funds have received rollovers of retirement plans from major wirehouses and no-load mutual fund companies. The fund family now manages about $320 million in four mutual funds.

Selling the Gospel

Fund companies with a spiritual bent pitch their products with varying degrees of religious ardor. MAA Praxis is relatively straightforward in its approach, telling investors it seeks to balance "a need for productive use of financial resources with a deep-seated concern for others."

The tiny, $13 million

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Noah fund, which appeals to conservative Christians, opts for a bolder approach. A message on its Web site announces, "Hallelujah, we believe the Noah Fund is a gift from God that could be your answer to Biblically-based investing."

Amid sagging markets last spring, the president of the Noah fund invoked religious language in a letter appealing investors not to bail out of the fund. "'Stay the course' in Noah's ark is our strategy because: In God, we most certainly do trust," wrote William Van Alen Jr.

The fund's five-year record lands it in the bottom 38% of large-cap growth funds.

Shunning Sin Stocks

To some degree, different religious funds agree on stocks they won't own. Whether Catholic, Anabaptist, Muslim or Christian, they all largely avoid securities associated with alcohol, gambling, pornography and tobacco.

MMA Praxis and Aquinas Funds (which targets Catholic investors) also shun military contractors.

But beyond that, more striking differences emerge that reflect the range of philosophies among religious funds. For example, the Amana Funds company, which focuses on Muslim investors, abides by Islamic laws forbidding usury (lending money at a high interest rate). As a result, its fund managers aren't allowed to buy bonds; Amana's income fund owns dividend-paying equities instead.

The policy can make for rough going when markets get tough, since managers can't move to the relative safety of fixed-income securities. The only alternative for the managers is selling stocks for cash.

Different funds may have completely opposing views on whether it's acceptable to own a given stock. Liechty says MMA Praxis wouldn't own


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because of its poor environmental record. Instead it owns another oil and gas company,

BP Amoco

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, which it deems more environmentally responsible.

On the other hand, the Noah fund counts ExxonMobil among its top 25 holdings, according to Morningstar, reflecting its focus on social issues rather than environmental concerns.

At some point, stock pickers must draw a line, since enough investigation into a company is likely to produce some evidence of perceived ethical weakness.

To make selections easier, managers at the Noah fund focus only on whether a company's products are acceptable, disregarding the personal beliefs of corporate executives. The Noah fund refuses to invest in companies associated with abortions. But it decided to keep its investment in


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, even though founder

Bill Gates

has donated money to

Planned Parenthood

, an abortion provider.

Performance of Religious Funds

A common criticism of religious funds is that their spiritual mission can get in the way of profit-making goals. Managers of the funds disagree, citing academic research that found little difference in performance between mainstream funds and those that focus on socially responsible investing.

But in fact, performance varies widely among the funds that have been around for at least five years, all of which have different restrictions on the stocks they'll own.

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Amana Growth, which is marketed to Islamic investors, is probably the best of the bunch. Its returns over the past five years average 14.32%, ranking it in the top 4% of large-cap funds.

Still, its operating expenses of 1.80% are considerably higher than the average of 1.38% for all equity funds.

In terms of performance, Amana Growth is an exception among religious funds. "Some have really not performed that well relative to their peer groups," says Morningstar's Hickey. "It could be because religious funds tend to be run by small companies that don't have the huge budget or research capacities of some of the bigger fund shops."

Indeed, most religious funds, in their relatively short life spans, have racked up middling records and are expensive to boot. To pay for stock screens and shareholder activism, they often exact expensive operating fees and charge substantial loads that will cut into returns.

The Noah fund charges the fattest total operating expenses of any of the funds, at 2.20%. It says it gives a portion of the proceeds to charities such as Campus Crusade for Christ, but the donation is equivalent to only 10% of a 1% management fee.

Some investors might be willing to pay extra on behalf of their religious ideals. But they should be aware that they are paying a premium.

For now, says Hickey, underperforming religious funds probably benefit from the strength of investors' religious commitment and the fact that there are relatively few options for those who want to invest according to the tenets of a particular religion. "If a fund really is just a poor performer, even if it does suit your values," she says, "I would say, think twice about investing."

In general, investors who want to maximize their returns should seek offerings with lower operating expenses. They always can opt to do good works on their own, instead of paying somebody else for them.