The rise of faith-based investing

A US-based investment group made headlines recently with the launch of two so-called “biblically responsible” exchange-traded funds that seek to buy into companies with products and policies aligned to evangelical Christian values.

The Inspire Global Hope ETF, with the trading code BLES, and the Inspire Small/Mid Cap Impact ETF, are the latest examples of retail funds that use religious criteria to determine where they will and won’t invest.

In an increasingly globalised trading world, Australian investors can tap into these ETF products quite easily. As yet, there are no exchange-traded funds listed in Australia that are purely based around a religion. But it’s also easy to find unlisted biblically responsible product providers here, with a growing number of Australian financial service providers and super funds offering investment funds that follow different religious doctrines.

Values strategies with an ethical spin

With more than $7 billion in funds under management and in excess of 70,000 members, Catholic Super ranks as the biggest religion-based financial services group in Australia.

“Within the context of a Christian ethical framework, Catholic Super operates under values and goals to benefit our members and employers,” it states on its website.

Interestingly, there is a strong overlap between the investment principles of biblically responsible funds and those outlined by mainstream ethical investment funds. For example, religious and ethical funds tend to follow very similar environmental, social and governance criteria to screen out investments in companies that don’t tick all the boxes in terms of sustainability, protecting the environment, and the rights of people and animals.

Australian ETFs issuer BetaShares recently launched the BetaShares Global Sustainability Leaders ETF, which invests in 100 large global stocks from developed market countries (excluding Australia) that are deemed climate change leaders. Its top holdings include IT giants Apple and Facebook, hardware chain Home Depot, pharmaceutical group Roche, and credit card issuer Visa.

To be defined as a leader, a company must be 60 per cent more carbon efficient than the average for its industry. The ETHI fund also uses a broad set of ethical eligibility screens to remove companies that have exposure to fossil fuels, gambling, tobacco, armaments, human rights concerns “and other activities deemed inconsistent with responsible investment best practice”.

The Inspire ETF biblical funds similarly shun investments in any companies involved in products or services that relate to gambling, armaments, that harm the environment, commit human rights violations, and have any involvement with terrorist sponsoring countries or oppressive regimes.

But also on its hit list are any companies that have products of services related to abortion, alcohol or pornography, and Inspire has also screened out any investments in companies supporting lesbian, gay, bisexual or transgender lifestyles.

Chief executive, Robert Netzly, defended this on the basis that “our investors want to invest according to conservative values. Certain companies choose to take a hard line stance on the issue of gay marriage, for instance, and our investors don’t want to support that issue.”

BetaShares managing director, Alex Vynokur, says there are definite similarities between ethical and religious-based investment funds, but also strong differences.

“In most cases there are very similar exclusions, along the lines of investing in companies that are environmentally responsible and are not involved in industries such as gambling or alcohol,” Vynokur says. But he points out that different religious-based investment groups invest differently, according to their beliefs, and they don’t always align.

Choose your investment religion

Sexual preferences and gender are a new twist in an investment thematic that is rapidly gaining in popularity. But for those not identifying with evangelical Christian beliefs, there are also investment products that adhere to Catholic, Anglican, Methodist and other investment principles.

It doesn’t stop there either. There are also numerous financial services groups offering “Shariah-compliant funds” that invest according to the principles outlined in Islamic law. The Dow Jones Islamic Market Index removes companies involved with alcohol, pork, conventional financial services, entertainment, tobacco, and weapons and defense. A second level of screening based on financial ratios removes companies based on debt and interest income levels in their balance sheets.

Last year the Global X S&P 500 Catholic Values Index ETF was launched, using the S&P 500 Catholic Values Index as its trading benchmark and basing its methodology on the socially responsible investment guidelines outlined by the Conference of Catholic Bishops. Within a short period of time the ETF raised more than $US90 million, and since inception has achieved returns of close to 15 per cent.

Its top holdings, like BetaShares’ ETHI ETF, include Apple and Facebook, but also on its list are Microsoft, Amazon and, surprisingly, oil giant Exxon Mobil. There’s also Warren Buffett’s Berkshire Hathaway.

Edwin Lo, senior portfolio manager at Australia’s Christian Super, which has around $1 billion in funds under management and 30,000 members, says his group’s investment philosophy “is in sync with responsible investing standards”.

Delving deeper on the fund’s website, Christian Super says “being ethical means more than just integrity and honesty in how we deal with members and stakeholders. It also means developing an investment strategy that focuses on investments that support core Christian beliefs including – the authority of God, respect for human life and the importance of caring for God’s creation.

“As part of our responsible investment strategy we screen 100 per cent of our investments to make sure that Christian Super does not invest in industries such as stem cell research and atomic or chemical weaponry and greatly limits exposure to such industries as gaming and tobacco.”

In late March Christian Super announced it had set up an investment company called Brightlight as a service to institutional investors wanting to access the impact investment marketplace.

“There’s lot of demand out there for our impact investments, advice and products, and for faith-based values aligned to our investment products, and therefore we think there is a business to be built there,” said Tim Macready, who serves as Christian Super’s chief investment officer and as managing director of Brightlight.

Does faith-based investing pay off?

The short answer is, it can – but not always. In 2013, for example, four biblical funds were liquidated in one go after failing to gain investor traction: the FaithShares Baptist Values Fund, the FaithShares Catholic Values Fund, the FaithShares Lutheran Values Fund and the FaithShares Methodist Values Fund.

Irrespective of religion, ultimately success will come down to the fundamentals of investment strategy and good stock picking.

And, for those wanting to explore the world of investment sinners, there’s an ETF for that too. US investment group motif has created a basket of stocks it calls Seven Deadly Sins, covering listed alcohol, tobacco, sex, junk food and gambling stocks.

But the fund has been substantially underperforming the S&P 500 index for some time. In this case, it may be better to be an investment saint than a sinner.