The funny thing about faith-based mutual funds is, well, that there’s anything called a faith-based mutual fund. For one thing, scripture is full of exhortations against accumulating wealth. The New Testament, especially, repeatedly reminds followers of Christ that earthly wealth means nothing in heaven. “It is easier for a camel to go through the eye of a needle than a rich man to enter the Kingdom of God,” says Jesus. Also, it seems quixotic to apply a religious framework to something as material as the markets. What, after all, does God have to do with mammon? Nevertheless, faith-based funds have grown to nearly $17 billion from $500 million over the past decade, according to Morningstar, which tracks market data.

Even funnier is that some religions outperform others on the free market — at least in the short term. Faith-based funds work by screening out stocks that don’t reflect the values of the faith group. So the MMA Praxis funds, founded by the Mennonites, have a pacifist and pro-environment bent: their funds screen out most oil companies and weapons makers. But financial companies are “more or less benign,” explains Chad Horning, senior equity investment manager at MMA. That’s why, over the past year — with oil prices up and financial services down — the MMA Core Stock Fund has performed below the market. The Timothy Plan, a conservative-Christian group of funds, also screens out “sin stocks”— tobacco, alcohol and many entertainment companies — but it doesn’t share MMA’s “green” perspective. Heavily invested in energy stocks, Timothy’s Large/Mid-Cap Value Fund has outperformed the market over the past year.

The big winners in faith funds (if you can be so crass) are the Islamic funds. They screen out “sin stocks”— and producers of pork products. The profitable difference is riba, or interest. The Qur’an strictly prohibits the borrowing or lending of money at interest: “Whatever you give as riba so that it might bring increase through the wealth of other people will bring you no increase with Allah,” it says. Because of this prohibition, Islamic mutual funds, like those in the Amana group, don’t invest in financial-services companies: they escaped the subprime mortgage debacle altogether. Most energy companies, however, are fine. “We don’t consider ourselves an environmental or socially responsible fund,” says Monem Salam, Amana’s director of Islamic investing. “Energy was a big part of our growth.” Over the past year, the Amana funds outperformed the market; their assets have more than doubled from $400 million in 2003 to $1.3 billion this year. Five years ago, most of Amana’s investors were American Muslims, Salam adds. Now, he guesses, 80 percent of new investors are non-Muslims.

The managers of the Christian funds say they’re in the faith-based business not to help people get rich, but to help them save — for retirement, for college — with tools they can believe in. Arthur Ally founded the Timothy Plan 15 years ago. “There’s nothing wrong with having money and making money,” says Ally. “What’s wrong is hoarding money.” At MMA, counselors help investors think about the concept of “enough.” “Is it to generate as much as you can in your retirement account? Or is it to generate enough to do what you want to do?” says Mark Regier, MMA’s stewardship manager. Amana encourages investors to think about how to give 2.5 percent of their wealth to charity, a tax called zakat mandated by the Qur’an. “You can amass as much as you want,” says Salam. “You’re purifying your wealth by paying that tax.” Faith-fund clients may be happy to know that so-called vice funds, which invest exclusively in tobacco, liquor, gaming and defense, are having a tough year.

From Newsweek, Jul 28, 2008 © 2008