PUTTING FAITH IN RELIGIOUS MUTUAL FUNDS
Socially responsible investing has become increasingly popular in recent years, with lots of mutual funds available for investors who want to keep their portfolios in line with their ethical beliefs. Most such funds avoid alcohol and tobacco stocks, but what they do beyond that varies quite a bit from fund to fund. Probably the fastest-growing subset of SRI funds is religious mutual funds, most of which are tailored to members of a specific denomination or religion, and some of which are associated with organized churches. Such funds have grown from less than $500 million in total assets 10 years ago to more than $17 billion today.
Like the broader category of SRI mutual funds, religious funds vary quite a bit in the screening criteria they use, though there are some broad similarities. They can be divided into three main categories: Catholic funds, Protestant funds, and Islamic funds. These funds won’t necessarily perform better than their mainstream peers, and they can be pricier to boot. But they can give peace of mind to those who prefer not to own investments that conflict with their religious beliefs. . .
Our final group of religiously oriented funds are those that invest according to Islamic principles. Some of these funds’ screening criteria are similar to those used by many of the Christian funds we saw above, including prohibitions on alcohol, tobacco, gambling, and pornography. However, they also feature some restrictions based on Islamic law and not found in most Christian denominations, notably prohibitions against pork and paying or receiving interest. Avoiding companies involved in pork production is not too hard, but avoiding interest is harder, given its ubiquity in the world financial system. These funds generally avoid financial companies, where interest is central to the business, and try to minimize the importance of interest in the rest of their portfolios.
The largest and most successful Islamic mutual funds are Amana Trust Growth (NASDAQ:AMAGX – News) and Amana Income (NASDAQ:AMANX – News), whose combined asset base has risen from $37 million in 2002 to around $450 million today. Both funds are managed by Nick Kaiser of Saturna Capital, who is aided by assistant manager Monem Salam and a panel of Islamic scholars. Not only does Kaiser avoid financials, he also avoids companies that have too much debt on their balance sheet or that get more than 5% of their revenue from any of the forbidden activities noted above. He also doesn’t trade much, partly because of his long-term investment perspective but also because excessive stock trading would be considered a form of gambling, which is forbidden by the Koran. None of this has hurt the funds’ results; in fact, they have put up great numbers, with Amana Growth sporting one of the best records in the large-growth category over the trailing three-, five-, and 10-year periods. Kaiser was one of the finalists for Morningstar’s Domestic-Stock Manager of the Year in 2006.
The Azzad funds–Azzad Ethical Mid Cap (NASDAQ:ADJEX – News) and the large-growth Azzad Ethical Income (NASDAQ:AEIFX – News)–are much smaller than the Amana funds, with only $4 million apiece in assets, but they are based on similar principles. Manager Omar Bassal uses proprietary software to screen out companies that get significant revenue from alcohol, tobacco, any meat products, gambling, pornography, interest, “unethical forms of entertainment,” and weapons of mass destruction. The screens also explicitly eliminate all banks, financial services, and insurance, but the Ethical Income fund has a significant stake in real estate investment trusts, which Morningstar classifies as financials. Azzad also uses shareholder advocacy to advance its views and contributes to charities such as the Arab Orphan Committee and the Boston Police Relief Association.
Finally, the Dow Jones Islamic Fund (NASDAQ:IMANX – News) is advised by Allied Asset Advisors, a subsidiary of the North American Islamic Trust. At least 80% of the fund’s assets are invested in stocks from the Dow Jones Islamic Market Index and the Dow Jones Islamic Market U.S. Index, with the rest chosen by manager Bassam Ossman from companies that are also compliant with Islamic principles. These indexes are determined by a Shariah Advisory Board using principles similar to what we have just seen: They eliminate companies whose primary business involves alcohol, tobacco, pork, interest, weapons, and all entertainment, including gambling, movies, hotels, and pornography.