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A Fund Counts Its Blessings

By Palash R. Ghosh Socially responsible mutual funds come in many shapes and sizes. The three-member Ave Maria fund family takes its investment philosophy from the top, buying companies that it believes conform with the values of the Roman Catholic Church.

Launched in May, 2003, the $35 million Ave Maria Growth Fund (AVEGX) avoids companies that are associated with abortion or pornography, as well as corporations that support Planned Parenthood or provide health-care benefits to nonmarried partners of employees. The fund was created as a growth alternative to the firm's successful flagship portfolio, Ave Maria Catholic Values Fund (AVEMX) (See BW Online, 10/31/03, "Does Somebody Up There Favor This Fund?".) Without a three-year performance history, the Growth Fund is too new to be ranked by Standard & Poor's.

For the 12-month period through September, the Growth Fund gained 23.6%, while its benchmark, the S&P 500-stock index, climbed 13.9%. Year-to-date through September, the fund was up 10%, vs. a 1.5% rise by the index.

Jim Bashaw, president of Plymouth (Mich.) investment-advisory firm JLB & Associates, manages the fund, which has a Catholic advisory board that determines a potential holding's compliance with Church teachings. Bashaw can invest in any company as long as it meets the fund's religious criteria.

TENETS OF THE FAITH. Members of the advisory board include Bowie Kuhn, a former commissioner of Major League Baseball; Tom Monaghan, founder of Domino's Pizza (DPZ); and Phyllis Schlafly, a long-time conservative activist. The board meets periodically to monitor the fund's holdings.

"We do not invest in companies whose practices violate the core teachings of the Catholic Church," says Robert Schwartz, director of marketing at Schwartz Investment, the fund's investment adviser. The ban on abortion excludes most hospital stocks and most health insurers, drugmakers, drug-store chains, as well as contraceptive makers and distributors. The ban on adult entertainment rules out most media companies. In the case of Planned Parenthood, Schwartz said a company is rejected if it uses shareholder money to support that organization, not if a top executive makes a private donation to the group.

The fund, however, can invest in gambling, tobacco, alcohol, firearms, and defense stocks, investments that some socially conscious funds avoid. For example, the portfolio currently includes defense contractor General Dynamics (GD).

While Schwartz Investment generally takes a value-oriented stock-picking approach, Bashaw follows a growth strategy, seeking stocks with above-average revenues, earnings, and rising cash flow. "We work from a pool of 200 stocks, which we rank based on risk-adjusted returns and relative costs over the next three years," Bashaw says. "Stocks in our top quartile are typically ones we put into the Ave Maria Growth Fund, as long as they don't violate the Catholic Church screens."

ELIGIBLE PICKS. Bashaw likes to keep holdings in the fund equally weighted, so each of the 30 to 35 stocks typically in the portfolio represent 3% to 3.5% of assets. Some of the fund's holdings as of June 30 included Alliant Techsystems (ATK), KB Home (KBH), Garmin Ltd. (GRMN), Kellogg (K), and Harley-Davidson (HDI).

While the fund can invest in stocks of all market-cap sizes, Schwartz generally focuses on mid-cap stocks. "Companies that fail our screens tend to be large-cap names, since they have so many different divisions and operations," he says.

On a purely financial basis, Bashaw would likely sell a stock that fell to the fourth quartile, if its fundamentals deteriorate, or if valuations rise too rapidly.

Since its inception, the fund has had negligible turnover. During his tenure, Bashaw has sold only two stocks, both due to the fund's religious screens. He dumped Eli Lilly (LLY) and PepsiCo (PEP) earlier this year after the companies started offering benefits to their employees' unmarried partners.

WILTED LILLY. Schwartz asked both companies to rescind these benefits, but they rejected his requests. He also notes that pharmaceutical maker Lilly was one of the last of the drugmakers to offer partnership benefits. He noted, "despite being a big drug company, Lilly was not involved in abortion in any way and thus was originally acceptable to our board."

Not surprisingly, the fund is marketed primarily to conservative Catholic individuals and organizations. Following an arrangement with Charles Schwab, it has become more widely available to investors, Bashaw says. Many of Ave Maria's shareholders, according to Schwartz, have never before invested in a mutual fund or a stock. Ghosh is a reporter for Standard & Poor's Fund Advisor

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