10 Steps for Christian Investment Committees and Fiduciaries

Under the nose of Christians, investment managers have forced initiatives onto the public that do not align with our values. Historically, investors trusted company management to support initiatives in the company’s and their shareholder’s best interest. We have seen a backlash against company social decisions – Target, Budweiser, John Deere, Harley Davidson, etc. Companies support many issues that directly conflict with our faith. For instance, Starbucks does not support religious organizations in their employee donation matching program. Apple is fighting a resolution that would restrict adolescents access to pornography on their devices.

Further, certain investment best practices are timeless and prudent. However, Christians, especially committees responsible for universities, religious orders, denominations, churches, dioceses, ministries, and other Christian portfolios, must complete important steps in the investment process that are often ignored or misunderstood. They should consider a prudent process to help ensure that they manage their Christian portfolios well and in accordance with their faith.

Step 1 – Evaluate Current Situation

Time frame is the most important variable. The longer the time frame, the more risk a portfolio can take. In addition, spending policy is an important consideration. Heavy contributions to a portfolio are a formula for taking more risk. Conversely, short time frames and distributions should lead to a more conservative portfolio. Downside risk quantification is a valuable exercise as well. Investors and investment committees tend to make mistakes in down markets, and quantifying risk can help them stay grounded in that environment. Other key factors to analyze include liquidity, taxes, and investment experience, among others.

Step 2 – Formal Asset Allocation Study

At least annually, a formal asset allocation study should be conducted. Backtesting is flawed; capital market assumptions should be based on a forward view. For instance, with interest rates higher, bonds are much more attractive than in recent history. A backtest would underestimate future bond returns. Current yield anchors future returns in the bond market. Besides stocks and bonds, alternative investments such as real estate, real assets (timberland, farmland, infrastructure, energy), and private equity and debt can all work well in a Christian portfolio.

Step 3 – Investment Policy Statement

Documentation is a prudent exercise for a fiduciary. The Investment Policy Statement (IPS) outlines investment expectations, characteristics and constraints, asset allocation, and appropriate benchmarks for each portfolio component. In addition, the IPS outlines the process for investment manager selection. Step 5 explains manager selection.

Step 4 – Christian Screening

The United States Conference of Catholic Bishops (USCCB) and a Vatican document, Mensuram Bonam, provide solid guidelines for Christian investors and committees to review. These comprehensive guidelines can help with establishing a set of values-based guidelines for each portfolio and committee. Interestingly, fifteen years ago, eliminating child labor from socially responsible portfolios was always a standard. However, child labor restrictions have been eliminated, with Environmental, Social, and Governance (ESG) being the new standard for many socially responsible portfolios. Cobalt, an important ingredient in lithium batteries, is predominantly mined in Africa, and retrieving cobalt often involves slave and child labor. For information, see this article. Christian guidelines can also include positive screens. These may focus on companies that overtly engage in “human flourishing,” which often creates a great company culture and, in turn, makes them a great place to work. These comprehensive guidelines are often created as an addendum to the investment policy statement.

Step 5 – Evaluation of Investment Managers and Funds

A sound due diligence process is necessary to discover if an investment manager with a solid track record will repeat it in the future. That is the essence of due diligence, and it should go well beyond number crunching. A committee should be confident that the investment process and philosophy are time-tested, that the investment team is of high quality, and that the organization is healthy. There have been a tremendous number of mergers in the money management industry; therefore, the qualitative side of due diligence is critical. Evaluation of company culture is crucial. A firm with a poor corporate culture will have difficulty repeating its track record.

Step 6 – Evaluation of Christian Portfolio Contribution

Larger portfolios have the advantage of using separately managed accounts (SMA), which allows for the customization of portfolios based on an organization’s or investor’s values. Direct indexing, where an investment manager replicates index characteristics while carving out objectionable securities, is a sound, inexpensive strategy for some asset classes. For alternatives, often in partnerships and similar vehicles, and with mutual funds for smaller allocations, the investment committee must review the characteristics of the Christian fund to determine if their Christian screens are acceptable. The number of Christian funds has grown significantly over the years, and there are good-quality managers in nearly all asset classes.

Step 7 – Investment Manager Values Assessment

Shockingly, consultants, advisors, and investment managers who have values that completely misalign with our faith manage the majority of Christian assets. Innovest surveys managers as part of our due diligence process, which focuses on culture and values.

Some notable questions include:

• How do you allow for religious freedom and expression in the workplace?

• Do you offer abortion payment and abortion travel in your benefits plan?

• Do you offer human egg harvesting to prolong the reproductive years for female employees?

• Explain your culture and approach to human flourishing.

• Outline your charitable donation practices and those of your foundation.

Generally, a firm with a neutral stance on our questionnaire could be acceptable. However, over 3,000 ESG-signatory investment managers and consultants will provide unacceptable answers to a Christian investment committee.

Step 8 – Establishing Sound Proxy Voting

Far too many investors ignore proxy voting, assuming that corporate management has their best interest at heart. However, as ESG mandates have increased, many corporate executives are rolling over to obscene practices, as noted earlier. Further, investment managers of Christian portfolios are voting contrary to Christian values or are delegating proxy voting to firms with no interest in voting according to Christian values. The largest proxy voter in the U.S. allows for a selection of “Catholic” guidelines, but those guidelines are neutral on euthanasia and transgender services. Regarding board diversity, this proxy voter does not differentiate between a biological and a transgender woman. This approach is contrary to most Christians. Proxy guidelines should be outlined and established as an addendum to the IPS.

Step 9 – Corporate Engagement (Optional)

Alliance Defending Freedom (ADF) has created an effective approach that helps Christian organizations fight negative resolutions and often takes an offensive stance to combat anti-Christian practices. With recent better engagement by Christians, they have had some remarkable success. Historically, anti-Christian resolutions faced opposition, but with the engagement by ADF and other Christians, they are now starting to face resistance. The results will be even better with more engagement by prominent Christian organizations.

Step 10 – Ongoing Monitoring and Reporting

Quality reporting should outline the portfolio’s performance and provide full attribution for “why” performance occurred. Too many investors make decisions on performance alone, firing investment managers at performance bottoms and replacing them with managers at a relative performance top. Reports should outline a manager’s values score and any violations of the Christian policy. A good consultant should be monitoring this.

This process is never-ending, especially for a fiduciary. Markets, objectives, and investment managers will all change. Fiduciary law hinges on the process, and this 10-step process will offer fiduciary protection, increasing the odds of quality performance.

At Innovest, we believe there is no investment performance “give up” with a Christian portfolio relative to a traditional secular portfolio. Christian screener Brightlight recently did a study on Christian product investment performance; slightly over 50% of these investment managers have outperformed their benchmark over the last 5 years, on par with secular products. Furthermore, many direct index managers are adept at hitting their benchmarks quarter after quarter, whether Christian or secular. Finally, studies are recognizing that companies that focus on human flourishing are outperforming those that do not. Sovereigns Capital has demonstrated this over time.

Conclusion

A movement is beginning where Christian investors are pushing back against anti-Christian corporate practices. Further, Republican treasurers have successfully combated mandates of ESG and DEI (Diversity, Equity, Inclusion) rules. Consumers have negatively reacted to companies having anti-Christian policies. Consequently, companies are beginning to change their behaviors. The time is ripe for Christians to become more deliberate in the way they manage their portfolios.