For Christian Fiduciaries, Diversification is a Free Lunch but Alternatives Must be Carefully Scrutinized

By Richard Todd

By nearly any measure, 2022 was the worst in history for a typical balanced portfolio. Bonds suffered the worst drop in history as the Bloomberg aggregate index was down -13.01%, largely attributable to the Federal Reserve pushing rates higher at a record pace to combat very high inflation. The S&P 500 pulled back -18.11%, the 5th worst annual decline in history.

For institutional investors with long time horizons, alternative asset classes like real estate, private equity, hedge funds, private debt, and energy MLP’s have seen gains or comparatively small declines thus far. These more diversified investors are not nearly as devastated as a traditional 70/30 stock-to-bond investor.

For Christian institutions, investing in some of these alternatives can be tricky. Avoiding companies that are involved in pornography, abortion, and embryonic stem cell research, among others in a less than transparent space, requires extensive due diligence on each manager’s process, portfolio, and values. Having ‘Christian’ in the product or company name doesn’t always offer security.

Here are a few real examples of the challenges:

A “Christian” Hedge Fund

In order to screen out “sin” stocks, the manager simply eliminated the performance of these objectionable securities and applied the performance to their secular fund with a similar broad objective. In other words, the objectionable stocks were actually still held in the portfolio, but the performance was not. Consequently, we deemed this as not being as Christian-conscious of a portfolio as their marketing would indicate.

The Christian Private Equity Fund of Funds

This fund claimed to be screened using Christian values, but our work and experience with some of the underlying managers discovered that one of the funds was invested in a Chinese hospital that performed abortions. The fund of funds firm acknowledged this and stood behind the statement that they have a “substantially Christian” objective.

An Equity Manager Responsible for Hundreds of Millions in Christian Investments

This large institutional manager of secular and Christian investments made substantial charitable donations to organizations that were clearly in conflict with Christian teaching. In our due diligence interviews, they suggested that their goal was to influence the “backwards” Christians through their progressive agenda.

Understanding the values of managers and vendors must become top of mind for many Christian organizations. Diversification is a “free lunch” in investing – the inherent benefits are easy to come by and easily demonstrated. But if a Christian Catholic values portfolio is important to you or your organization, manager due diligence must be deep and comprehensive to ensure that the actual investments and processes are what they purport to be. There are many firms in the financial service arena that market heavily to Christians. That doesn’t always mean that they agree with our faith and our values.