Nicholas Kaiser's Amana Income Fund outperformed the U.S. stock market so far this year by complying with the laws of the Quran. The fund can't own...
Nicholas Kaiser’s Amana Income Fund outperformed the U.S. stock market so far this year by complying with the laws of the Quran.
The fund can’t own shares of financial institutions such as banks that charge interest. Banking stocks are trailing the Standard & Poor’s 500 Index in 2005. Energy stocks, the benchmark’s top performers amid record oil prices, are among its largest holdings.
“Under the current circumstances, the restricted selection helps us to look for good stocks,” Kaiser said from his office in Bellingham, Wash.
The $41.6 million fund owns shares of Exxon Mobil and BP, the world’s two largest publicly traded oil companies.
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Amana Income, named for an Islamic term meaning “to have faith,” gained 25 percent in the past 12 months, through July 6, almost triple the S&P 500’s 9 percent return. The fund was the best performer of 19 U.S. mutual funds tracked by Bloomberg that are governed by social or religious principles. The average fund in the category declined 3.3 percent in the same period.
The assets of the Amana Income Fund and the Amana Growth Fund, also run by Kaiser, increased 64 percent in the 12 months ended May 31 to a combined $95 million. The Amana Growth Fund climbed 24 percent in the past year. Both funds are managed in compliance with Islamic principles, known as Shariah law.
Inflows into so-called socially responsible funds rose 40 percent faster than net investments in professionally managed funds between 1995 and 2003, according to a study released by the Social Investment Forum, a trade group in Washington, D.C. Updated figures are due in November.
Kaiser doesn’t practice Islam, has never been to the Middle East and doesn’t speak any Arabic. He screened 3,700 companies at the direction of Fiqh Council of North America in Leesburg, Va., an advisory board of the Islamic Society of North America. About 45 percent passed.
Kaiser said he was approached in 1984 by the North American Islamic Trust, a Burr Ridge, Ill.-based group that oversees assets of the society, the Muslim Students Association of the U.S. and Canada, and other organizations.
“I had no idea about Islamic funds then,” he said.
Two years later, after working with the trust’s directors and the council’s scholars to form an investment strategy based on Islamic law, he helped start the Amana Mutual Trust Fund.
Shariah scholars on the council prohibit investments in businesses that charge interest or have a debt ratio greater than a third of their assets. Industrial companies that have financing units, such as Ford and General Electric, are among those failing the test.
The funds also can’t invest in companies that generate more than 5 percent of operating income from un-Islamic activities, including pork processing, tobacco, liquor, pornography or gambling.
For the income fund, Kaiser favors companies that pay above-average dividends. Energy stocks, including Exxon Mobil and BP, account for 12.4 percent of assets. Utilities such as FPL Group are his biggest industry holding at 16.4 percent.
The market-beating performance in 2005 contrasts with the second half of the 1990s, when the fund trailed the S&P 500 as financial stocks rose faster than the benchmark. The fund had an average annual return from 1995-99 of 17 percent, below the index’s average of 28 percent for same period.
Kaiser said the difference in those years amounted to what he called “the cost of being a Muslim,” or COBM for short.
“If you want to invest socially responsibly, there are costs involved for the performance,” he said. This year, the costs have turned into benefits.