God vs. Satan

Who’s the better investor?

The market is amoral and agnostic. It has no interest in your virtues or vices or God, except insofar as they help make money. But just as morality and faith have taken a larger role in all of American life, so are they also playing an increasingly prominent role in investing. For the secularly progressive, there are socially conscious mutual funds. Jews may be partial to Israel bonds. Thrivent Financial for Lutherans, which sounds like the setup for a Garrison Keillor one-liner, offers more than 20 mutual funds. Putting money to work in ways compatible with your overall worldview is clearly appealing to growing numbers of investors.

And this has produced a very odd market anomaly: Both virtue and vice seem to be increasingly effective investing strategies. God and Satan are both winning on Wall Street. In recent years, people who have invested in a particular brand of virtue—the Ave Maria Catholic Values Fund—and people who have invested in a particular brand of vice—the Vice Fund—have both handily beaten the market.

The Catholic Values Fund, with about $250 million in assets, is one of four funds offered by the Ave Maria Funds, which invests from a Catholic perspective. And, no, it doesn’t mean finding companies that make communion wafers. First, it looks for stocks that meet financial criteria set by the portfolio managers at Schwartz Investment Counsel. It uses a “proprietary screening process” created by a Catholic advisory board, whose members include former baseball commissioner Bowie Kuhn, Domino’s Pizza founder Thomas Monaghan, American Enterprise Institute theocon Michael Novak, and Phyllis Schlafly. That screen is pretty simple. They eliminate companies connected with abortion or pornography, or those whose policies “undermine the Sacrament of marriage,” by offering benefits to domestic partners of employees.

Just as you don’t have to be Jewish to like bagels and lox, you don’t have to be Catholic to like the performance of Ave Maria’s funds, which also include the Growth Fund and the Rising Dividend Fund. The flagship Catholic Values Fund has picked stocks very well. Here’s a chart of the Catholic Values Fund against the S&P 500 since its inception in January 2002. And the 2004 annual report shows the holdings to be rather catholic. The managers have chosen companies in an array of sectors: energy and mining, healthcare, and consumer products. Some of the holdings may raise some questions. It owns insurer AIG, which has recently been revealed to be a corporate sinner. Among its largest holdings is defense contractor General Dynamics. (Presumably, it only makes weapon systems used in just wars.) And the bond fund has about half its assets in the bonds of a U.S. government that maintains a death penalty and permits abortion.

By contrast, the much-smaller Vice Fund actively embraces companies that profit from human fallibility. And it has profited handsomely from doing so, crowing that it ranks in the top 1 percent of funds in its category. Here’s a chart of the Vice Fund against the S&P 500 since its inception in 2002.

As of June 30, the Vice Fund’s $42.5 million in holdings were divided among gambling, booze, and defense stocks (about 25 percent each), tobacco stocks (15 percent), and a bunch of randoms. It’s easy to see why Playboy Enterprises and Rick’s Cabaret International Inc. are here. But Berkshire Hathaway, run by the abstemious Warren Buffett? And Microsoft? Maybe Warren Buffett and Bill Gates gamble when they play bridge.

How is it that both funds have walloped the S&P 500 and the vast majority of other mutual funds in recent years? Is it that investing in vice, or virtue—as defined by the Catholic Advisory Board—is a better investing discipline than looking at P/E ratios and charts? Perhaps. The folks managing these funds have clearly been good and judicious stockpickers.

But both funds have been well-positioned to outperform the market in recent years. Think about it. Aside from the ever-growing gambling market, vice gets you defense (supported by huge military budgets) and noncyclical consumer goods like beer and tobacco—all three of which were laggards in the go-go tech- and financial-services-dominated 1990s, but which are booming now.

The Catholic Values Fund is benefiting in a different way. Consider which companies and sectors it excludes because of its screening criteria. In 2003, 40 percent of the Fortune 500 offered benefits to domestic partners, according to the Human Rights Campaign. So, for the Values Fund, there is no Microsoft, Citigroup, General Electric, Cisco, or Dell—none of whom have done particularly well since 2000. And the fund’s morality has helped it avoid altogether some sectors that have done poorly in recent years—entertainment, media, newspapers, technology, advertising, and pharmaceuticals. Meanwhile, its screening criteria made it more likely to look at less-progressive companies in thriving sectors such as raw materials and energy. Following either the Vice Fund or the Catholic Values Fund in the 1990s would have been a mistake. And given the trend toward providing benefits for domestic partners, the Catholic Values Fund will find itself with a smaller universe of stocks to pick with each passing year.

Now let’s answer the two questions I am sure you have been asking yourself. First, do the funds share any holdings? In other words, what vice is also a virtue? The answer, of course, is war. Both the Catholic Values Fund and the Vice Fund own General Dynamics. And Ave Maria’s bond fund owns bonds of United Technologies, which is also in the Vice Fund.

Second, in the competition between virtue and vice, who’s winning? Alas, as this chart shows, vice has been winning by a small margin over the past few years. In the past year, its margin has been impressive.