Islamic Finance Managed By God Michael Maiello,

04.21.08, 6:00 PM ET

 In April, the Amana Trust Income Fund, with nearly $400 million under management, won a Lipper Fund Award in the equity income category for the second year in a row. Not only has manager Nicholas Kaiser managed a repeat victory over nearly 200 similar funds, he’s done it while selecting stocks that don’t violate Sharia, or Islamic law. Or maybe it’s the Sharia rules that are helping Kaiser along. Monem Salam, Amana’s chief of Islamic investments, consults with an investment committee that keeps the two Amana funds away from any company that makes more than 5% of its sales from pornography, alcohol, tobacco, pork or gambling. Also, because of prohibitions against usury, Kaiser isn’t allowed to own any financial stocks. There’s no doubt that Kaiser, who started the Amana Income and Amana Growth funds in 1989, is a talented stock picker. But he also runs two traditional mutual funds that allow him to choose his investments without concern for anything other than fundamentals. Over the last five years, Sharia-guided Amana Growth has returned 20% a year and Amana Income has returned 19%. Kaiser’s secular Sextant Growth fund, on the other hand, has beaten the market but lagged his other efforts, returning 13.4% annually. One reason that Sextant is struggling a bit at the moment is that its third-largest holding is the Charles Schwab Corp., down 25% so far this year. Though it may sound exotic, Sharia really pushes a money manager back to the basics of stock investing: Buy established, well-capitalized companies in industries that don’t invite a lot of moral or legal backlash and then hold those stocks for a long time, selling only when necessary and never as an attempt to time the market–another practice that Kaiser’s Islamic advisers consider too close to gambling. “Sharia discourages gambling and other forms of speculation, leading the Amana funds toward less volatile, larger and more seasoned companies,” says Kaiser. The Amana strategy is similar to one of the most successful and oldest mutual funds in the country. Washington Mutual (run by American Funds) was founded in Washington, D.C., in 1958. Back then, the District of Columbia required funds that wanted to invest public money to follow the “Prudent Investor Rule,” which prohibited owning tobacco or alcohol stocks, and also steered managers toward strong balance sheets and dividend-paying stocks. The result is a $75 billion fund that’s lasted 50 years in an industry where most funds don’t last five. Kaiser started his funds after clients in Indianapolis (he’s now in Bellingham, Wash.) hired him to run private accounts for Muslim investors. The funds performed well but remained small throughout the 1990s. It wasn’t until 1998 that Yusuf Talal DeLorenzo, a longtime adviser to Islamic investors and a Sharia scholar, released what has come to be known as the “Dow Jones fatwa.” This allowed for what his son–and employee at the company that manages the Amana funds–calls “an amount of permissible impurity.” Almost no company can perfectly embody Sharia principles. One of Kaiser’s favorite stocks has long been Apple, and Apple makes devices that people sometimes use to watch pornography and gamble. That’s when permissible impurity comes in. Another odd holding in Kaiser’s top 25 is McGraw-Hill. Bond and mortgage investors who relied recently on Standard & Poor’s ratings might argue that McGraw-Hill aids and abets gambling on a daily basis. McGraw owns S&P, and S&P bet that lumping a bunch of low-quality home loans together in one portfolio would turn lots of little risky securities into one high-yielding but stable instrument. Sharia investors might be doubly worried about that one since they don’t technically borrow money–even to finance home purchases. (Instead, they enter business partnerships that resemble rent-to-own arrangements.) After the Dow Jones fatwa, representatives of the Amana funds began to visit mosques around the country. Though Amana had been around a long time, the funds weren’t well-known, and new Muslim immigrants didn’t have a tradition of mutual fund investing since most assumed it wasn’t an option. Amana now has over $1 billion in its two Islamic funds. It had less than $30 million in 1998. Still, with most of its sales coming from mutual fund supermarkets like Fidelity and Charles Schwab, Amana estimates that between 60 and 70 cents of every dollar is contributed by non-Muslims. That’s too bad, because Islamic investors are a dream for mutual fund companies; since trading in and out of the stock market is akin to gambling, their assets are some of the stickiest in the industry. Amana has three competitors, but they’re minuscule, with combined assets of $50 million. That may be because these competitors are pricier than other options. Both Amana funds charge investors less than 1.4% annually, and an average diversified stock fund charges 1.5%. The Azzad Ethical Mid Cap and Azzad Ethical Income Funds each charge 2.25%. Both of the Azzad funds trail the S&P 500 over three and five years. Despite performance and costs, some investors might like the Azzad funds because they don’t invest in weapons companies and their manager, Omar Bassal, has promised to vote his proxies in accordance with Muslim law. Bassal also donates to the Arab Orphan Committee and the Boston Police Relief Association. Another fund, called Iman, invests 80% of its assets in stocks from the Dow Jones Islamic and Dow Jones Islamic Market U.S. indexes. It beats the S&P, but not the Amana funds, and it charges 1.7%. The fund has $40 million under management and is worth watching. If it continues to outperform the broader markets, as Amana did, it could grow just as quickly.


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