Putting values first with faith-based portfolios

Host: Coming up: putting values first with faith-based investment options.

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Host: From Thrivent Asset Management, welcome to episode 22 of Advisor’s Market360™. A podcast for you, the driven financial advisor.

As of 2020, seven out of 10 Americans describe themselves as Christians, according to a report published that year by the Public Religion Research Institute. Knowing this, advisors should count on there being churchgoers in the communities that they serve. Those familiar with Thrivent, the parent company of Thrivent Asset Management, likely know of its historical roots in the Lutheran church. This history has taught us that offering your clients investment choices that align with their beliefs not only makes for satisfied clients, but it can also help you deepen your connections.

The universe of investment products designed to align to specific issues and personal values is growing. Many firms that offer such funds categorize them as “ESG funds,” which stands for “environmental,” “social,” and “governance.” We caught up with Jeff Branstad, CFA, Model Portfolio Manager at Thrivent Asset Management, to learn more.

Branstad: There are several different types of value-based investment options out there in the managed account world and in the mutual fund world. You have ESG funds, which are environmental, social and governance; you have a wide variety of faith-based products across multiple different faiths; you have carbon-free products – there's lots of different ways that you can build portfolios to align with people's values.

Host: In fact, according to a Morningstar roundtable on ESG from August of last year, total global assets in “sustainable” investments have moved up rapidly recently both through new inflows and market appreciation, from about $600 billion in 2018 to about $2.5 trillion in 2021. But currently, U.S. investors make up only a small part of the pot, accounting for just 14% of the total, while European investors account for 82%.

What is “sustainable investing?” Generally, the term refers to investing in companies that work to minimize the depletion of natural, social, and economic resources and other negative impacts. There’s a variety of techniques that can be employed to select assets that are deemed sustainable, such as ESG analysis, exclusionary or inclusionary screening, and impact investing.

If the trend toward sustainable investing in the U.S. continues to follow a trajectory similar to Europe’s, financial professionals in the U.S. may want to make plans to meet the challenge.

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Host: Following in the footsteps of sustainable investing is faith-based investing, the topic of today’s episode.

While sustainable funds run the gamut of ethical interests and approaches, faith-based products may appeal to a more focused subset of investors. Our own Thrivent Faith-Based Managed Portfolios are positioned as such and offers three models that vary by risk tolerance: Moderately Aggressive, Moderate, and Moderately Conservative.

These portfolios are geared toward investors looking to participate in the equity markets while avoiding such areas as gambling, adult entertainment, abortion, and the manufacturing or distribution of alcohol and tobacco products.

Thrivent has a long history of managing model portfolios. Although Thrivent Faith-Based Managed Portfolios were launched in July 2020, Thrivent has been managing other model portfolios since 2007. Branstad explains:

Branstad: The primary difference between Thrivent Faith-Based Managed Portfolios and the other portfolios we manage is the investable universe. The strategic and asset allocation strategies are generally the same across all the different portfolios. But in the case of the faith-based portfolios, we include Christian asset managers who approach investing with a faith-based perspective. This unique collection of managers helps provide investors with an opportunity to invest with purpose.

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Host: So, how are companies selected, or more importantly for our discussion, excluded from Thrivent’s faith-based funds? Most of the firms that are included in the model portfolios use exclusionary screening, and firms may also use ESG analysis alongside other investment processes as part of the investment approach. When analyzing potential investments, a firm that uses ESG analysis typically considers how a company creates value for customers, employees, and stakeholders, in addition to reviewing the company’s financial merits in general.

Branstad: The firms that employ exclusionary screens in our models are responsible for determining and implementing those screens themselves. Typically, what they do is they look for a certain revenue threshold and exclude any companies that have greater revenue than what they're looking for. So, if a company has 5% in alcohol sales, that might be allowed because the rest of the company is not associated with alcohol. But if it has 55% from alcohol sales, it would be excluded.

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Host: As you talk with clients about faith-based products, it’s important to discuss trade-offs and risks. Questions to expect include, “Can investing in what I believe in affect the bottom line?” And “Do exclusionary screens, like those that exclude certain types of businesses, lead to a drop-off in performance?” We’ll let Branstad answers those questions.

Branstad: There's been a lot of research done on that and in general, the answer is: not necessarily. Obviously, excluding certain companies could have short-term negative impacts towards performance. There are a lot of different ways to manage those differences. So, if you take a lot of stocks out of a certain sector, you can add back into that sector to balance it out so you're not going to automatically be underperforming if, say, healthcare does really well and you had screened out several Health Care companies – you can add in different Health Care companies to help offset that.

Host: Although Branstad acknowledges that the specific allocations of a faith-based model portfolio may be a little different than Thrivent’s other model portfolios, the overall approach remains the same. They start by determining a strategic allocation model and then pick the right funds, in the proper allocation, to fill out that model. 

For Branstad, the management process goes well beyond asset allocation models. 

Branstad: We're also very closely monitoring all the managers that we use in the model. So, we are constantly reviewing the models at a daily, monthly, quarterly level, always keeping close eye on how they are tracking with their allocation targets and how the underlying managers are performing.

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Host: To wrap up this overview, Branstad said there are three primary components to building managed portfolios: strategic targets, tactical allocations, and the underlying managers. 

Branstad: All the academic research points to the most important one being the strategic targets. Next is the technical allocation and third is the underlying managers. And it's helpful to remember: trust your work. If you put in your homework and you make your decisions built off of solid ground, you're going to meet your goals if you stick with it, and the biggest pieces are those two at the front: the strategy and the tactics.

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Host: Thanks for listening to this episode of Advisor’s Market360™. All episodes are available on Apple Podcasts, Spotify, and Google Podcasts. Learn more about us at thriventfunds.com and find other items of interest to you, the driven financial advisor. Bye for now.

(Disclosures)

Speaker: All information and representations herein are as of February 7, 2022, unless otherwise noted.

Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Thrivent Asset Management, a division of Thrivent, offers financial professionals a variety of investment products to help meet their clients’ needs.

Investing involves risk, including the loss of principal. The prospectus and summary prospectus for the securities within the model portfolios contain more complete information on the investment objectives, risks, charges, expenses and other information of the fund, which investors should read and carefully consider before investing. To obtain prospectuses, contact your Regional Investment Consultant or call 800-521-5308.

Faith-Based Investment Strategy Risk. The Faith-Based Model Portfolios’ investment strategy limits the types and number of investment opportunities available to the models and, as a result, the allocations among asset classes may vary from other Thrivent Asset Management, or TAM, model portfolios and strategies that do not have a Faith-Based focus. In addition, the Faith-Based models may underperform other strategies that do not have a Faith-Based focus. Further, the Faith-Based models’ investment strategy may result in the model allocating to underlying funds that hold securities or industry sectors that underperform the market as a whole or underperform other strategies screened for, or that do not include, securities that conflict with the Faith-Based focus of the models. While TAM monitors the allocation and performance of the underlying funds selected for the models, TAM does not monitor whether the underlying funds include securities that conflict with the Faith-Based focus of the models. Further, if the models include underlying funds that liquidate securities for violations of one or more screening criteria, such liquidation could negatively impact the performance of the underlying fund and the models. 

Before June 1, 2019, Thrivent Managed Portfolios were offered through Thrivent Investment Management, Inc, an affiliate of Thrivent Asset Management, LLC. Thrivent Asset Management personnel comprised a committee that made investment recommendations for these portfolios to Thrivent Investment Management during that time.

TAM’s role is providing sponsors of managed accounts with non-discretionary investment advice in the form of model portfolios. The implementation of or reliance on a model portfolio is at the discretion of the managed account sponsor. TAM is not providing personalized investment advice or investment recommendations and will not make any representations about the suitability of a model portfolio for any investor. Thrivent model portfolio information is intended for use only by third-party adviser firms in conjunction with their management of their clients’ accounts. The information about the Thrivent Managed Portfolios is confidential and should not be disclosed, copied or used for any other purpose. TAM does not have investment discretion over, or place trade orders for, any portfolio derived from this information.

Thrivent Managed Portfolios will include Thrivent Mutual Funds. Thrivent Asset Management, LLC, herein referred to as “Thrivent Asset Management”, is a registered investment adviser, and serves as investment adviser and administrator to the Thrivent Mutual Funds and receives fees for its services as disclosed in the applicable Funds’ prospectuses and Statement of Additional Information. As the investment adviser for Thrivent Mutual Funds, Thrivent Asset Management has greater knowledge of these funds and has a tendency to prefer Thrivent Mutual Funds over non-affiliated funds, which may be a conflict of interest. Thrivent Mutual Funds included in the Faith-Based models do not incorporate an exclusionary screening process, but do not own securities that may conflict with certain values as described above. Thrivent and its subsidiaries may earn distribution and other fees, including 12b-1 fees, in connection with Thrivent Mutual Funds. For more information about potential conflicts of interest, read the Thrivent Asset Management Form ADV – Part 2 Brochure. Thrivent Mutual Funds are distributed by Thrivent Distributors, LLC, member FINRA/SIPC. Both Thrivent Asset Management and Thrivent Distributors, LLC are subsidiaries of Thrivent, the marketing name for Thrivent Financial for Lutherans.