Jay Peroni had been a financial advisor for over seven years when a client asked him a question he could not answer: “Can I expect God to bless my investments if I’m investing in things that oppose his word?”

Peroni, author of “The Faith-Based Millionaire” and president of Values First Advisors, was stumped. His search for the answer sent him on a two-year journey to interview people of various faiths, who had been financially successful, to find out some of the key ingredients of their investing philosophy. “Through this whole discovery I was able to realize that you can keep your faith central in your life and your financial performance doesn’t have to suffer,” he said.
 
Peroni’s certainly hasn’t. He said his faith-based portfolio raked in 35.5% in returns year-to-date, compared to the 24.23% return so far this year for the S&P 500.

The way that most faith-based funds work is that they screen out what they call “sin stocks” or companies that produce or offer services that go against religious beliefs, such as abortion, pornography, gambling, alcohol and tobacco. Of the universe of 8,000 publicly-traded companies, there are 5,000 to 6,000 companies that Peroni deems eligible.

But what one denomination may think is acceptable, another group may not want to invest in. “There’s different opinions even within one faith,” Peroni said. “That’s probably one of the biggest challenges for faith-based investing in general: Where do you stop your screening?”

If a company doesn’t perform abortions, but donates to a women’s health center which does, is that company tossed out? Are a company’s subsidiaries screened as well? “This takes a lot of due diligence,” Peroni said. “You can keep drilling down and drilling down and you’ll be left with no companies to invest in. No company is ever going to be perfect.”
 
Faith-based investing is a branch of socially responsible investing, an investment area with $2.71 trillion in total assets under management—11 percent of the $25.1 trillion under professional management in the U.S., according to the Social Investing Forum, a trade organization. David Kathman, a Morningstar fund analyst, said that religious funds are an area that has grown in the last ten years, partly because there are more people investing in general, and in mutual funds in particular, and a wider range of people are investing.
 
Dan Nielsen of Christian Brothers Investment Services, which only invests for Catholic institutions, said his firm is a socially responsible investment company and a faith-based firm as well. That means that not only does it avoid companies that are engaged in activities that go against its values, but it also seeks to have a positive impact by engaging in shareholder advocacy.
 
According to Nielsen, socially responsible investing really picked up speed in the 1960s and 1970s, when investors became aware that they could use their money as a form of protest against nuclear weapons, the Vietnam War and apartheid in South Africa, to name a few. The wave grew even larger with the corporate scandals around Enron and WorldCom and the behavior of the financial institutions over the past few years, said Mark Regier of MMA Praxis, a mutual fund family run by Mennonite Mutual Aid.

Regier said that at times the whittling down of a funds investment universe can hurt profits, but over the long term the funds are competitive. “During times of war, like right now, when some of the defense stocks are high, we lose out because we don’t invest in defense,” he said. “But we are overweight in green tech, for example.”

The faith-based investing universe is made up of about 100 mutual funds with a value of about $31 billion, including the Ave Maria Mutual Funds, the Ave Maria Catholic Values Fund and the LKCM Aquinas Funds. They are all Catholic funds. But not all Catholic funds are equal and some ban more companies than others. For instance, the Timothy Plan Funds are uber-conservative, with an online “Hall of Shame” for a slew of companies with ties—even weak ones—to alcohol, pornography and tobacco.

There are also Islamic funds, which do not invest in companies that produce pork products and avoid financial stocks altogether. That’s because the Koran doesn’t allow investors to hold stocks that get more than about 5% of their revenue from interest.