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A Review of Inspire's Screening Tool and BRI Funds

I recently wrote a post about some of the issues that Christians can run into when investing in funds today and the concept of biblically responsible investing (BRI). In that post, I noted that of the firms offering BRI funds I've seen, I like Inspire Investing the most. (Note that I do not have relationship with Inspire Investing, nor do I currently own any of their funds, but I might in the future.)

In this post, I offer some thoughts about Inspire's screening tool, Inspire Insight, followed by a review of Inspire's funds.

Inspire Insight

Inspire created the Insight score as a screening tool for BRI purposes. Detailed information about how the Insight Impact score is calculated can be found here. Below is my own summary of how it's done.

Insight first screens stocks and funds according to sixteen behaviors that Inspire's creators treat as being negative, and I believe that a strong biblical argument can be made that all these behaviors are indeed inappropriate. Inspire's creators don't believe that the production and consumption of alcohol is inherently sinful but that the alcohol industry is "problematic," which I agree with.

These sixteen behaviors span three broad types of issues that Insight's creators define as bioethics, social, and addiction. Companies that have engaged in any of these behaviors within the last two years or funds holding such companies will receive a negative Insight score; engaging in positive behaviors does not offset negative behaviors. Only companies not engaging in any negative behaviors can receive a positive Insight Impact score. Lastly, Insight's creators have subjectively assigned a 'severity factor' to each of the sixteen negative behaviors.

The negative Inspire Impact score is then calculated as a function of (1) the number of times a company's has engaged in a negative behavior, (2) the number of different negative behaviors the company has engaged in, and (3) the 'severity factor' of the negative behaviors. This score is then scaled to fall between -1 and -100.

If a company has not engaged in any of the sixteen negative behaviors, it is eligible for a positive Inspire Impact score. Positive Inspire Impact scores occur if a company has performed better than average in one or more of twenty-six "materiality categories" defined by the Sustainability Accountability Standards Board. These categories include such things as supply chain management, selling practices and product labeling, and ecological impacts. Similarly to negative Impact scores, positive scores are scaled to fall between +1 and +100.

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Groupings of individual securities, including mutual and exchange-traded funds, are referred to by Inspire as 'composites', and the calculation of Impact scores differs for composites. Put simply, a composite with any holdings engaged in any of the sixteen negative behaviors will have a negative Impact score, regardless of anything else. But if most of the holdings in the composite do not have a negative Impact score, the composite's Impact score will be only slightly negative. If none of the holdings in a composite have a negative Impact score, then it's possible for the composite to have a positive Impact score.

Overall, this means that within the context of funds, Inspire's Impact is non-compensatory; any fund including any company engaged in any negative behaviors will receive a negative Impact score. The creators of the score clearly designed the score to function as such and say this about it: "Faith-based investors familiar with biblical texts such as the teaching of Proverbs 16:9 that 'Better is a little with righteousness than great gains with injustice,' will rightly prioritize morality and integrity of conviction above profit potential. No amount of profit is worth violating conscience or biblical morals."

On one hand, I agree that we should only seek after profit when we can do so in a way that is God honoring (i.e., in accordance with His Word). But on the other hand, this is complicated by the reality that we live in a world cursed by sin, and all human beings are sinners (Romans 3:23).

As I noted in my earlier post, I'm not aware of a strong, biblically-based argument that voluntarily choosing to consume an 'unoffensive' product from an 'offensive' company who will profit from the transaction and use a portion of those profits to fund 'offensive' behaviors as being '100% fine' while somewhat involuntarily owning a tiny piece of an 'offensive' company via a fund and having no real ability in that capacity to change the company as being '100% wrong'. In other words, this is a messy problem resulting from the messy world we live in, and I don't know that there are cut-and-dried biblical answers for it. But I certainly don't think this means that Christians should throw up their proverbial hands and do nothing about the issue from the perspective of a an investor or a consumer. And I'm fully aware that other Christians have different takes on this issue.

Still, I believe that Inspire's Impact score can be very useful for, at a minimum, identifying the companies and funds that are among the worst offenders in terms of violating Christian values as set forth in the Bible. And being able to also see that a company or fund has engaged in many positive actions is helpful.

Next, let's apply Inspire's Impact score for various companies and funds to see what we can learn from it. This reveals that the top nine largest companies in the S&P 500 all have negative Impact scores, and only four of the 50 largest companies currently have a positive Impact score (NVIDIA, Broadcom, Costco, and Honeywell). The Impact score for the S&P 500 as a whole (as measured by the SPDR S&P 500 ETF, ticker SPY) is -31. More than a hundred companies are involved in two of these negative categories of actions in the Impact score.

By comparison, smaller companies engage in Inspire's identified negative actions on a far less frequent basis. For instance, the Impact score of Vanguard's small cap index fund (VSMAX) is -4. All of the screening tool's negative categories involve one or more companies, but the cumulative depth and frequency of their involvement is much less than in the S&P 500. Similarly, Vanguard's small-cap value fund (VISVX) has an Impact score of -5, and Avantis' small-cap value fund (AVUV) has an Impact score of -2. As one subscriber has put it to me, even in the U.S., smaller companies are just "trying to stay alive" and aren't so concerned with using their company to further an unbiblical sociopolitical agenda.

Intriguingly, stocks outside the U.S. also tend to have less unfavorable Impact scores. Both Vanguard's ex-U.S. stock fund (VFWAX) and Fidelity's ex-U.S. stock fund (FSGGX) have an Impact score of -3. And both Avantis' ex-U.S. small-cap value fund (AVDV) and Vanguard's ex-U.S. small-cap fund (VFSAX) have an Impact score of -1.

From my investigations into these and other funds, the trend here is exceptionally clear: large companies in the U.S. are much more involved in negative actions than are small companies in the U.S. and both small and large companies outside the U.S.

However, I've not yet seen a single stock fund of any sort that does not have a negative Impact score other than Inspire's own funds. Some might view this with cynicism, believing that Inspire has 'tilted the scale' so that only their own funds are not 'unoffensive', while others might view this as being nothing more than the natural result that any fund with hundreds or thousands of stocks is bound to include at least one company involved in negative actions unless they are specifically excluded. Given that Inspire says that they used their Insight tool to develop their funds, I lean toward the latter position. But at the same time, I also view any for-profit company like Inspire, even though they endorse Christian values, that promotes its own products with some degree of skepticism. And remember that I'm a business professor, so please don't take my perspective as being a slight against Inspire or anti-capitalistic in the slightest!

Before moving on to a discussion of Inspire's funds, I'll also note that Inspire offers subscriptions to their Insight tool which allow investors to use the tool to analyze their own portfolios and find alternatives to funds with negative Impact scores.

Inspire ETFs

Inspire currently offers eight exchange-traded funds (ETFs) that have all been screened using their Insight Impact score. No companies involved in any of the negative actions in the Insight Impact score's calculations are included in any of Inspire's ETFs. If a company in one of these funds begins to engage in a negative action, Inspire has a process by which they alert the company of their position on the issue and give them a chance to alter their behavior before the stock is removed from Inspire's funds.

Two of Inspire's ETFs are actively managed, a mid-cap momentum fund and a 'tactical balanced' fund, and have high expense ratios, .80% and .84%. As such, these don't appeal to me personally. They also have a fund (FDLS) that Inspire says is intended to focus on the factors of quality, value, and momentum, but Morningstar reports that this fund actually has a slight growth (i.e., not value) tilt, and the expense ratio is .85%, so that fund doesn't appeal to me either.

The five funds that I find interesting are Inspire's U.S. 'large-cap' stock fund (BIBL), U.S. small- and mid-cap stock fund (ISMD), global stock fund (BLES), ex-U.S. stock fund (WWJD), and their investment-grade corporate bond fund (IBD). These funds have expense ratios significantly higher than many index funds, ranging from .35% for BIBL to .69% for WWJD. However, given that Inspire's funds collectively have only a tiny amount of net assets compared to the large, mainstream funds, this makes some sense. For instance, BIBL has the most assets of any Inspire fund at $265 million, but with a net expense ratio of .35%, that only works out to $927,500 of annual gross revenue for Inspire, which isn't much for such a company.

Also, the bid-ask spread, which is essentially a transaction cost, has varied from an average of .19% to .58% over the last 30 days, and this is significantly higher than that of most larger ETFs. By comparison, the bid-ask spread of Vanguard's total stock market index ETF (VTI) has only been .01% over the last 30 days.

Whether the comparatively high expense ratios and bid-ask spreads of Inspire's funds are justified by the funds' complete avoidance of companies with negative Impact scores is a matter of opinion. But there's no disputing that Inspire's funds entail meaningfully greater costs than exist among many of the largest, 'secular' index funds.

Beyond the expense ratios and bid-ask spreads of these five funds, my biggest concern with the funds that appeal to me pertains to BIBL, which Inspire calls a 'U.S. large-cap' fund and has 100 holdings. Since such a large number of the largest companies in the U.S. have negative Impact scores, they are entirely avoided by the fund. As such, Morningstar indicates that, compared to the overall stock market, BIBL is a mid-cap fund with a slight tilt to growth companies. The average market capitalization (i.e., the value of all a company's stock) of companies in the S&P 500 is $173 billion, whereas the average market capitalization of companies in BIBL is much lower at $33 billion. Also, the sector composition of BIBL varies significantly from the overall stock market. For instance, the fund has 2% exposure to consumer cyclical vs. 10% for the market, 5% vs. 14% to financial services , 14% vs. 2% to real estate, 19% vs. 10% to industrials, and 0% vs. 7% to communication services. By comparison, Morningstar indicates that Inspire's U.S. small- and mid-cap fund (ISMD) is a small-cap fund with a slight value tilt, and its sector composition is similar to that of mainstream small-cap index.

That the market capitalization (i.e., average size) of the holdings in BIBL are markedly smaller than those of most 'large-cap' funds is, again, a natural result of so many of the largest U.S. publicly-traded companies being involved in actions not in keeping with a biblical worldview. In my view, this isn't the fault of Inspire in any way, though I'm not quite sure that Inspire should be advertising the fund as being a 'large-cap' fund. But there's no doubt that a company with a market cap of $33 billion is still a 'large' company. And the labels of 'large', 'small', etc. are inherently subjective anyway.

Final Thoughts

Inspire's screening tool Insight is intriguing to me and seems to be a good tool for Christian investors to at least begin investigating whether a stock or a fund aligns with biblically-based values. Some investors may be more or less concerned about the actions that Inspire focuses upon with their Insight tool, and some may be concerned about actions that Inspire does not directly screen for at all. But their screening tool certainly appears to be a good step in the right general direction. And Inspire reports that the stock of companies with positive Impact scores has generally outperformed that of companies with negative Impact scores, so investors using this tool to screen out the latter might not be sacrificing long-term returns.

I also look favorably at several of Inspire's funds, though the comparatively high expense ratios and bid-ask spreads are concerning. But Christian stewards should realize that living out their faith is going to cost them something. Still, one hopes that the costs of Inspire's funds will drop if/when the funds become more popular, grow in assets, and push down the costs of operating the funds relative to their assets.

Also, while I like Inspire the most of the BRI investment companies I've looked into, I'd like to see more companies enter this space, bringing new ideas in how to approach BRI and how to implement it in a cost-effective way.

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