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Funds live by Muslim tenets
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November 5, 2001: 1:36 p.m. ET
Amana funds look for solid stocks that adhere to Islamic principles.
By Andrew Stein
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NEW YORK (CNNmoney) - It's shaping up to be the worst year in history for mutual funds, and fund manager Nicholas Kaiser has a double challenge - picking stocks that post positive returns while adhering to Islamic investing principles, and he's doing it at a time when Islam has been in the spotlight following Sept. 11.
Kaiser is portfolio manager of the Amana Income and Amana Growth funds, which are among a handful of funds that operate according to Islamic guidelines. The funds avoid stocks with interests in alcohol, gambling, and pornography, which are forbidden in Islam.
"Most of the investors are American citizens and interest has remained strong," Kaiser said.
The income fund, tiny with $20 million in assets, is off 15.4 percent year to date as of Oct. 31, but is beating the benchmark S&P 500 by 3.9 percent, according to fund-tracker Morningstar. The growth fund, with about $24 million in assets, is down 23.43 percent in the same time.
Catherine Hickey, an analyst with Morningstar, said the funds have held up pretty well, and that their investing mandate hasn't narrowed their selection.
Indeed, the funds hold positions in bread-and-butter blue chips such as ExxonMobil (XOM: down $0.37 to $39.39, Research, Estimates), Qualcomm (QCOM: down $0.44 to $53.08, Research, Estimates), Bristol-Myers Squibb (BMY: up $0.23 to $53.27, Research, Estimates), Cisco (CSCO: up $0.64 to $17.90, Research, Estimates) and Intel (INTC: up $0.68 to $26.96, Research, Estimates).
Limited reaction
Kaiser said the only effect on the funds from the Sept. 11 attacks and the U.S. bombing in Afghanistan has been some asset depreciation because of market losses.
Kaiser said the funds have not received any negative reaction to their investing principles since Sept. 11, nor have they had any accounts frozen.
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"The outflows that we've seen have mostly been because people need money, but we have new accounts opening every day," he said.
A niche market?
Hickey said religious-based mutual funds have a small but devoted following.
"There isn't a mad rush to get in them," Hickey said. "But there seems to be a real, real interest."
Kaiser said the market for religious-based funds has grown so much that there is a Dow Jones Islamic Market USA index, which tracks Islamic-compliant stocks.
Islamic investing principles
Avoiding investments in alcohol, gambling, and pornography is common practice for socially responsible funds, yet most allow investments in fixed-income securities and banks.
Islamic-based funds avoid interest-bearing investments such as bonds and CDs because Islam discourages debt in a business partnership, Kaiser said.
"When two Muslims go into business, they are encouraged to go in as equals," said Kaiser. "Debt is prohibited, as one party would have leverage over another. In an Islamic business deal, both parties share the risk."
Charitable donations are also a large part of Islamic investing. Kaiser explained that once a Muslim achieves the financial state of nisab, or the point where all basic expenses can be paid for, a percentage of the additional money saved should be used as a charitable donation, or zakat.
The exact amount of zakat paid is a personal choice, but Kaiser says it is calculated like a capital gains tax. Therefore, a percentage of the capital gained on assets is to be used as zakat, not a percent of the principal assets.
The fund's Web site has a tool where people can calculate the charitable contributions encouraged by Islamic tenets.
Reaching an agreement
Looking for stocks that are profitable and acceptable to the faith can be a challenge, said Kaiser, who is not Muslim. An unpaid Islamic board of directors oversees the Amana funds and decides which stocks would qualify.
The income fund, which invests in more conservative stocks, owns names like American Home Products (AHP: unchanged at $56.00, Research, Estimates), Verizon (VZ: down $0.15 to $51.20, Research, Estimates), and BP Amoco (BP: up $0.48 to $48.58, Research, Estimates). The growth fund owns higher-risk growth stocks such as Oracle (ORCL: up $0.51 to $14.96, Research, Estimates), Genentech (DNA: up $1.28 to $53.84, Research, Estimates), Symbol Technology Communications (SBL: up $0.70 to $13.84, Research, Estimates), and Microsoft Corp (MSFT: up $1.87 to $63.27, Research, Estimates) .
"I had a conversation with two board members a while ago," said Kaiser. "One said he didn't like companies with debt. I went through the S&P 500 and said 'OK, there are 35 of those.' And the other said he objected to companies with too much cash (as it may be used in an interest-bearing investment). 'Well,' I said, 'that leaves zero.'"
Kaiser said his investment team and the advisory board eventually reach an understanding of stocks that are good investments and adhere to Islamic principles.
"Each Muslim makes up his own mind about investing," said Kaiser. "There is no Pope to set guidelines and each Muslim interprets investing in his own way. We have funds that adhere to Islamic principles, but the interpretation is personal."
One stock on which the fund reached agreement was with Southwest Airlines (LUV: up $0.72 to $17.03, Research, Estimates). The advisers had previously objected to a position in Albertson's (ABS: down $0.23 to $32.11, Research, Estimates) because the company sells beer and wine. Although alcohol only accounts for 3.5 percent of the company's sales, the board said the company's objective is to sell the alcohol along with its other products.
The advisers did say that a position in Southwest Airlines was acceptable, however, even though the carrier offers beer and wine on its flights. The board believed the company's main objective was to get passengers from point A to point B, not to sell alcohol.
Kaiser said the board has recently been discussing its position in Microsoft (MSFT: up $1.87 to $63.27, Research, Estimates). The issue is the company's huge cash balance.
"If the advisers see the cash going to business activities, that is all right," Kaiser said. "But if it believes too much cash is in interest-bearing investments, that may be objectionable." 
* Disclaimer
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