George Schwartz is a resilient investor. His fund was among the top performers in its group during 2008′s traumatic financial crisis, and his average annual return over the past three volatile years is a rock-solid 18%. Schwartz even claims to have read every issue of Barron’s since 1967, a sign of true grit.

The 67-year-old asset manager oversees the unusual—to some, controversial—$224 million Ave Maria Rising Dividend Fund (ticker: AVEDX) with co-portfolio manager, Richard Platte, 60. It’s one of six Ave Maria mutual funds that his firm, Schwartz Investment Counsel, runs in Bloomfield Hills, Mich.

The funds adhere to Catholic values that are upheld by an advisory board that features former Notre Dame football coach Lou Holtz, CNBC commentator Larry Kudlow and conservative activist Phyllis Schlafly. Although the funds are open to anyone, 98% of shareholders are Christian, mostly Catholic. In all, Schwartz’s firm handles roughly $1 billion in assets, about $725 million as advisor to the Ave Maria funds, $37 million from the Schwartz Value Fund (RCMFX), and the rest in separate accounts.

DESPITE THE RELIGIOUS connection, most of the two Ann Arbor natives’ time is spent on financial analysis. The bottom-up, value managers seek companies with great products, high barriers to entry, low leverage, and high recurring cash flow run by managers who reward investors by consistently increasing dividends. The ultimate is a company with a valuable business franchise that has high margins, good sales growth and high-return on assets.  

“Some industries, like utilities and other capital-intensive industries, don’t lend themselves to our approach. They tend to have heavy debt leverage, low returns of capital, and little control over their own destiny,” says Schwartz, who serves as president and CEO of the parent firm.

Near the end of its financial analysis, Ave Maria applies a “morally responsible screen” (versus socially responsible screens for cigarette makers or big polluters). It excludes firms whose policies the church might view as antifamily or antimarriage.

Distributors of sexually explicit material are out. So are companies with any role in contraception or abortion, like insurer Aetna (AET), which covers tubal ligation, and Teva Pharmaceuticals Industries (TEVA), which makes a “morning-after” pill. Also out: companies that give to Planned Parenthood or are involved in embryonic stem-cell research. About 150 names are excluded. Some wouldn’t clear Ave Maria’s financial screens anyway, Schwartz says.

The added hurdle hasn’t held back performance as dividends have become crucial to investors. Fourth-quarter gains of 11.4% helped Ave Maria up 6.9% as of Jan. 13, versus a 2.9% gain for the Standard & Poor’s 500 index. That was good enough to beat 96% of its large-blend rivals for the trailing year. For three years, the no-load has risen 18% compared with a 17% gain for the S&P. It’s also topped 97% of its peers for the trailing five years, climbing 3.9% to the S&P’s flat line. Impressively, Ave Maria fell 23% amid the S&P’s 38% decline in 2008. The fund, which has a turnover rate of just 34%, has an expense ratio of 1.02%, and no 12b-1fees.

If Platte and Schwartz each have an eye cast toward heaven, the other is focused on balance sheets. The biggest of Ave Maria’s 41 holdings is ExxonMobil (XOM), which shot up 16%, in 2011 to $84.76, well above their average cost of $69.09. “If they keep buying back stock at eight and nine times earnings, in 15 years, there won’t be any stock outstanding,” jokes Schwartz. Platte calculates that ExxonMobil has reduced its share count by 30% over the last decade.

Ave Maria’s managers expect the payout to rise by a dime, to $1.95 this year on earnings of $8.37 a share. ExxonMobil’s payout could rise to $2.05 on 2013 earnings per share of $8.96.

The managers agree that 3M (MMM) is a “money machine.” The St. Paul, Minn., company, known for Scotch tape and Post-It notes, has been able to lift dividends for 53 years, thanks to a track record of creating new, often proprietary, products. “Year after year, they produce terrific returns [25% return on equity; 15% profit margin], with almost no debt,” says Schwartz. 3M’s net debt-to-capital ratio remains in single digits, despite its recently announced $550 million all-cash purchase of Avery Dennison‘s (AVY) office-supply unit.  

The shares recently traded at $84, up from Ave Maria’s average cost of $68.62. Schwartz and Platte expect EPS to rise 6%, to $6.31, in 2012, with free cash flow of $9 per share. In 2013, EPS should reach $6.79, while free cash flow increases to $9.75.

St. Louis’ Emerson Electric (EMR) is another favorite. The diversified industrial company makes everything from switches and motors to manufacturing and climate-control devices. It’s posted 55 years of dividend hikes, and has little long-term debt. Schwartz and Platte believe that the shares, now at $49.25, are a bargain. “The stock price came under pressure recently because of a drop in orders, but we are not worried about their long-term prospects,” Platte explains.

Earnings per share are expected to rise to $3.55 in fiscal 2012, ending in September, from $3.24 in 2011, before rising to $4 in 2013. The dividend yield is 3.4%, and should grow 8% to 10% annually as earnings improve, he says. “Their share count is dropping rapidly as they return cash to shareholders in the form of dividends and share repurchases,” says Platte.

A final pick that’s also experienced some selling of late: Arizona-based Microchip Technology (MCHP), whose long-lasting microcontrollers are used in a variety of devices like thermostats and refrigerators.  The stock has come down from its 52-week high due to an inventory glut, and to weaker economic growth in Europe and Asia, but Schwartz and Platte see these as short-term issues. “It has $7 of net cash per share on a $36 stock,” Platte says.  Ave Maria’s average cost is $32.93. They see the 2012 fiscal year ending March 31 producing earnings of $1.86 and $1.99 in 2013.

“Microchip has raised dividends quarterly every year since [it] started issuing dividends in 2002,” he says.

For Ave Maria, that’s just divine.  

E-mail:
editors@barrons.com

By LESLIE SCISM

For years, teachers in Albany, Ga., invested in tax-advantaged savings programs known as 403(b)s just as many educators elsewhere do: Instead of getting a menu of stock funds or other investment choices from their employer, like those offered in corporate 401(k) plans, the teachers listened to pitches from insurance agents pushing their various companies’ programs.

Now, the district, Dougherty County School System, has done something that counts as revolutionary in this corner of the investing world: Over resistance from many commission-paid agents, administrators have created a single district 403(b) that is similar to a 401(k).

In 2010, they used competitive bidding to select an exclusive provider, a unit of American International Group Inc. Then, advisory firm Invest-N-U put together a menu of low-cost stock and bond funds, along with a retirement-income annuity.

“What we had was a multitude of vendors, maybe 13, and everyone was coming in saying, ‘Mine is the best,’ ” says Robert Lloyd, the district’s executive director of finance and operations. “My concern is to give our staff the best possible tools” to maximize retirement income, and narrowing investment options and cutting out agents was deemed the way to go, he says.

The move puts Dougherty County in the vanguard of what consultants say is a massive wave of change for 403(b)s.

Stirring the Pot

When 403(b) plans were introduced in the 1950s, federal law restricted participants to insurance products. Congress later authorized mutual funds, but annuities remained popular because insurance agents make sales calls at schools much more frequently than mutual-fund providers, a 2009 Government Accountability Office report found. Annuities typically include minimum-income guarantees or other downside protections, plus a death benefit. While these features are valued by many teachers, they make the products pricier than low-cost mutual funds and reduce upside potential.

Ray Bartkus

Most districts, meanwhile, have taken a hands-off approach; in essence, the 403(b)s in many places are akin to individual retirement accounts.

Much of the current change is being driven by Internal Revenue Service rules that began taking effect in 2009 and that give plan sponsors administrative and compliance responsibilities for employees’ 403(b) investments.

Change also is coming as growing numbers of teachers face cuts to their traditional pensions, giving them more incentive to sock away money in 403(b)s, consultants and school officials say.

With pension cutbacks, 403(b) plans are becoming a greater part of assets necessary to fund retirement and thus “need to be far more robust than, ‘Let’s have a bunch of insurance agents show up in the cafeteria’ ” to sell annuity contracts after school, says Kent Novell, principal at consulting firm Retirement Research Inc.

Some three million elementary- and secondary-school employees across the U.S. had about $109 billion in 403(b)s as of 2010, according to estimates from consulting firms. The 403(b) category also includes some nonprofit, governmental and religious organizations, as well as colleges, though many of these other employers already are running their plans like 401(k)s, consultants say.

Low-cost insurer and fund firm TIAA-CREF, which has long dominated the higher-education sector, sought to stir the pot of change in elementary and secondary schools with a report in late 2010 that concluded an educator in a 403(b) that screens providers to hold down fees can potentially accumulate tens of thousands of dollars more in retirement wealth over a career than a colleague in a plan that doesn’t screen and has high fees.

Insurance agents noted that TIAA-CREF has a vested interest in the matter: It would like to expand in the K-12 market.

To which Bruce Corcoran, a TIAA-CREF executive, responds: “TIAA-CREF’s interest in increasing access to lower-cost retirement-plan options is well-aligned with teachers and can help provide them with thousands and thousands of dollars of additional retirement savings.”

Agents Push Back

With thousands of school districts across the U.S. taking different approaches, it remains far from certain what kind of 403(b) will evolve as the standard, consultants say.

An average school district now has five to 10 providers seeking the business of its employees, down from 40 before the IRS rules took effect, according to Boston-based consulting firm Cerulli Associates.

Some of that reduction has taken place as districts band together and use their combined buying power to get lower prices in request-for-proposal processes that shrink the number of providers eligible to offer products to educators. In Michigan, for example, more than 200 districts formed a consortium that operates with a half-dozen “core” providers, each with its own menu of investment options.

Some statewide 403(b)s also are similarly stressing low costs, including one being set up in North Carolina.

But change isn’t always easy. Dougherty County’s conversion effort dragged out over three years, Mr. Lloyd says. Agents sent letters criticizing the concept to teachers and school-board members, and one agency hired a lawyer who questioned the process on multiple grounds, prompting the district to retrace some steps, according to Mr. Lloyd and public documents.

“You’ve got teachers trying to retire with a reasonable standard of living, and people, probably making a lot more money than they are, trying to push them into inferior products” to earn high commissions, Mr. Lloyd says.

Ken Love, an agent in Georgia for Life Insurance Co. of the Southwest, defends his role, saying “participation will drop without representatives educating employees on the need and importance of a 403(b) plan. Our mission is educating the educators on 403(b)s.”

In some states, longstanding laws are holding up change. In May, a senior official with the Los Angeles Unified School District asked California’s insurance commissioner to support revision of a law that essentially allows “any willing provider” to sell 403(b) investments there, according to The Wall Street Journal’s review of the official’s letter. The letter said that the plan’s oversight committee wanted to reduce the list of 27 vendors to “a more manageable number,” but that insurers had warned litigation “would likely ensue.”

A spokesman for the commissioner says the matter is among issues under consideration for the 2012 legislative calendar.

To be sure, not all school officials are in favor of limiting choice, saying teachers like the financial advice that commissions make possible. Some support an effort under way by the American Society for Pension Professionals and Actuaries and the National Education Association, among others, to create a model disclosure form to allow apples-to-apples comparisons of products’ costs and benefits.

In some cases, teachers say the changes are raising their costs instead of lowering them because the firms their districts hired to oversee the 403(b)s charge fees.

“I’m a big advocate of low fees, and the new regulations have caused an extra layer of fees,” says Richard Nichols, a high-school teacher in suburban Chicago. But he says he understands the need for strengthened monitoring of 403(b)s because “I do not think a lot of the other teachers search out the low-cost providers.”

Ms. Scism is a news editor for The Wall Street Journal in New York. She can be reached at leslie.scism@wsj.com.

By SARAH E. NEEDLEMAN

Four years ago, executives of Burgerville, a regional restaurant chain, agreed to pay at least 90% of health-care premiums for hourly employees who work at least 20 hours a week. Today, the executives say the unusual move has saved money by cutting turnover, boosting sales and improving productivity.

Burgerville’s experience is notable for the food-service industry, where turnover is high and fewer than half of chains offer health insurance for part-time hourly employees, according to People Report, a research firm. The chains that do offer benefits pay on average 49% of the cost for employees working at least 30 hours a week, People Report says.

Burgerville

Michael Vine, left, general manager, and Christopher Phillips, a crew member, at a Burgerville restaurant in Vancouver, Wash.

Burgerville’s initiative “not only improves quality of service but it saves money by not having to replace staff as frequently,” said Darren Tristano, executive vice president at Technomic Inc., a Chicago consulting and research firm for the food industry.

Burgerville, a 39-restaurant chain based in Vancouver, Wash., and owned by closely held Holland Inc., has long followed a distinctive path. It offers hormone-free meat, uses wind energy to power its stores and prints nutritional information on its receipts.

Its move to pay more health-care costs began with a 2005 employee survey, in which health costs unexpectedly registered as the top concern. At the time, Burgerville offered limited coverage to hourly employees, who had to pay premiums of roughly $42 a month for an individual and $105 a month for a family, plus annual deductibles of up to $1,000.

Only about 3% of Burgerville’s hourly workers were enrolled, said Chief Executive Jeff Harvey. Low enrollment in health plans is common among restaurants, where operators typically don’t spend enough on insurance to keep employee premiums affordable, said Victor Fernandez, a senior analyst for People Report.

In absorbing more of the costs, Burgerville’s annual health-care bill nearly doubled, to $4.1 million from $2.1 million. But company leaders figured the move would boost recruiting and retention.

Under Burgerville’s plan, individual hourly workers can enroll in a health-maintenance organization for $15 a month, with no deductible. A worker and spouse pay $30 monthly; family plans cost $90. Salaried employees, whose plans didn’t change significantly, pay $84 a month for individual and $240 monthly for family coverage, and have an annual deductible of $500.

Executives say the plan paid for itself, and more. Turnover in 2006 plunged to 54%, from 128% in 2005. That’s a big deal when it costs an average of $1,700 to replace and train a restaurant worker, according to People Report.

Mr. Harvey believes part-time hourly employees work harder to qualify for more hours, which are assigned on a priority system based on performance. Employees must work 20 hours a week to qualify for the health plan. “As soon as employees realized the value of the health-care benefit, they started to work to win the 20 hours,” Mr. Harvey said.

Burgerville says that work ethic translates into higher revenue. Sales rose 11% in 2006 after the plan was implemented, with the average check rising to $7.41 from $6.90. Last year, the average check reached $8.50, and employee turnover fell to 52%. Annual revenue at the chain is about $70 million.

Christopher Phillips joined Burgerville two years ago from KFC, owned by Yum Brands Inc., largely because of the health plan. Mr. Phillips, 34 years old, didn’t use KFC’s health plan because he said it cost too much. Now he pays $30 a month to cover himself and his wife. He said he can afford the payments while making $9 an hour at a Vancouver, Wash., restaurant.

Today, 98% of Burgerville’s 579 eligible hourly employees and 97% of its 161 eligible salaried employees are enrolled in its health plans.

Michael Vine, 47, joined Burgerville in September 2008 as general manager of the Vancouver restaurant, after four years as a managing partner at a Bonefish Grill restaurant, part of a casual-dining chain. He thought about leaving the restaurant industry but changed his mind after hearing about the health benefits. “I was sold,” he said.

Mr. Vine takes three prescription medicines daily and pays $240 a month to cover his family of four. He said he previously paid $865 a month for similar coverage at Bonefish Grill.

Burgerville employees will likely have to pay more for health care at some point due to rising insurance costs and possibly national health-care reform, said Mr. Harvey. He said the company is exploring a wellness program. “One thing we can control are the [health-insurance] claims themselves,” said Mr. Harvey.

Write to Sarah E. Needleman at sarah.needleman@wsj.com

Printed in The Wall Street Journal, page B4