Does Somebody Up There Favor This Fund?

Although Ave Maria Catholic Values Fund is beating its benchmarks, its manager says that's due to disciplined stock-picking

Religious or "morally responsible" mutual funds are known more for leaving investors with a clean conscience than for producing heavenly returns. One exception may be the Ave Maria Catholic Values Fund (AVEMX ), which invests only in companies whose policies don't conflict with Roman Catholic Church teachings. This year, Ave Maria has risen 21.7% as of Sept. 30, outperforming the Standard & Poor's 500-stock index by 6.9 percentage points and the fund's peer group of midcap-blend portfolios by 4.3 percentage points.

Investors have piled into the fund, more than doubling its assets under management to $135 million from $62 million at the end of 2002. Ave Maria ("Hail Mary" in Latin) is now the largest of the nation's several Catholic-oriented mutual funds, according to fund tracker Morningstar.

Fund manager George Schwartz, president of Bloomfield Hills (Mich.) Schwartz Investment Counsel, which launched the portfolio in 2001, says Ave Maria isn't for everyone. Among the companies considered morally offensive and thus excluded from the portfolio are those that make donations to Planned Parenthood, Schwartz says.

"SLAP IN THE FACE."

  Also off-limits are corporations that offer domestic-partner benefits to employees. According to Schwartz, the Catholic Church views extending these benefits to opposite-sex and same-sex couples as putting a nonmarital union on par with the sacrament of marriage. "It's a slap in the face to the Catholic Church," he says. Overall, Ave Maria's moral screens end up ruling out about 400 companies, or roughly 13% of the 3,000 companies in the Russell 3,000 index, Schwartz says.

He says the fund could be the answer to the investing prayers of what he estimates are some 600,000 conservative Catholic investors in the U.S. So far, his fund has attracted 1,500 of them. Minimum investment is $1,000. And you don't have to be Catholic to invest, but 99% of those in the fund, including institutions and foundations, are.

Making sure Ave Maria's investing team doesn't stray from its mission is an advisory board made up of six Catholic lay people including Domino's Pizza mogul Thomas Monaghan and Phyllis Schlafly, founder of the conservative activist organization Eagle Forum. Adam Joseph Maida, the Archbishop of Detroit, serves as the church's adviser to the board.

In a recent chat with BusinessWeek Online reporter Eric Wahlgren, Schwartz discussed Ave Maria's investment objectives and religious principles as well as stock picks. Edited excerpts of their conversation follow:

Q: How do you explain Ave Maria's outperformance this year? Religious funds aren't usually looked to for stellar returns.

A:

One of our largest shareholders thinks it's because of divine intervention. I think it's the good management skills at our firm, our hardworking analysts, who do a lot of good digging, and some good luck. We have a mixture of large-cap, medium-cap and small-cap companies in this fund. We're competing against the S&P 500, which is mostly large-cap, so we have more players from which to choose. Since we started the fund on May 1, 2001, it's up 22%, while the S&P 500 is down 15%.

Q: How do you pick stocks for the fund?

A:

We're value investors. And we're bottom-up stock-pickers. We try to find good companies selling below what they're worth. We make an appraisal of a company as though it were a private company. We figure out what it's worth on a per-share basis and compare it to its trading price. If it's worth $40 a share and it's selling for $20 a share, it has potential for appreciation.

Q: But there's more to it than appreciation potential, right?

A:

Right, when we find a good stock, we run it through our four moral screens established by our Catholic advisory board. The first one is an abortion screen. Any company that is related to abortion is screened out. That usually includes big pharmaceutical companies, hospital companies that perform abortions, and insurance companies that pay for abortions.

Our second category is companies that contribute to Planned Parenthood. Any company that makes or distributes pornography is also screened out. That eliminates Hollywood entertainment companies -- most of the major studios have divisions that produce pornographic material. [Many] hotel companies show pornography.

The last category to be screened out is companies that provide their employees with nonmarital partner benefits. Many bigger companies are now offering them.

Q: You mentioned you avoid the major drug companies, but 2% of your holdings are in Eli Lilly (LLY ) stock.

A:

It was an exception because it doesn't make contraceptives. But then it announced it would offer nonmarital partner benefits. We have written to them telling them we will have to sell the stock. They said that it was too bad. But they felt they had to offer the benefits for competitive reasons.

Q: Why don't you have a lot of tech stocks in your portfolio? Socially responsible funds and even some religious funds have plenty, don't they?

A:

Many tech stocks are morally offensive because they offer nonmarital partner benefits.

Q: The Catholic Church and its head Pope John Paul II tend to be strongly antiwar. Yet you have several defense companies in your fund including General Dynamics (GD ), which makes tanks and nuclear subs? Why aren't these companies screened out?

A:

A few investors have called and asked us about this. And maybe one person sold out of the fund. But our Catholic advisory board says the Catholic Church is not against self-defense and is not against war per se. As much as the Pope is a man of peace, the Catholic Church has a concept known as a just war. You can argue whether or not the Iraq war is a just war. But the concept of having a defense or a military is not contrary to Catholic teachings.

Q: What about Exxon Mobil (XOM ) in the fund? In most socially responsible funds, the oil company is a pariah due to its spotty environmental record.

A:

The company doesn't bother any of the screens. It's one of the great examples of corporate good management and good governance. It's a highly profitable, well-run entity. It's a good investment for the fund. I think our shareholders are going to make a lot of the money with that stock. If it's offensive to some that the company polluted the Alaskan wildlife (with the Exxon Valdez spill), they can sell the fund as long as they do it by 4 p.m. We don't take late trades.

Q: Have you sold any stocks lately because of policies a company has enacted that go against Catholic teachings?

A:

Earlier the year, we had to sell Kimberly-Clark (KMB ), which makes Huggies diapers, because the company started making contributions to Planned Parenthood. Why a company that makes diapers would want to contribute to Planned Parenthood, I don't know. It was a bad business decision and a bad moral decision.

Q: So what hot stocks do you like right now?

A:

We don't like stocks that are hot. We like stocks that are cold. We like to buy bargains. One I like is Polaris Industries (PII ). It's at $84. We like it a lot at $50, but we recently added to our position. The company has a dominant position in all-terrain vehicles, personal watercraft, and snowmobiles. They are extremely well-managed. They've earned 30%-plus return on equity every year for the last 10 years. They have almost no debt. They are growing earnings per share at a 15% to 16% rate, and the stocks sells at 15 times earnings.

One small-cap company we like right now is Hibbett Sporting Goods (HIBB ). It's a $27 stock. They have a concept which is pretty unique. The company puts sporting goods stores mostly in small towns. They have 275 stores. They really like to be in a downtown when a Wal-Mart is on the edge of town. While Wal-Mart might have one catcher's glove, Hibbett will have five or six. The company has no debt. It's trading at 15 times earnings, but it's growing its earnings at 17% to 18% a year.

Edited by Beth Belton

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