Cultural Competence a Must in Islamic Investing
Compiled by the DiversityInc staff
© 2006 DiversityInc.com®
July 19, 2006
If you thought managing mutual funds was difficult, try managing funds for Islamic investors. All Islamic investments are subject to two conditions. Islamic scholar Mufti Muhammad Taqi Usmani says: Instead of a fixed return tied up with face value, they must carry a pro-rated profit actually earned by the fund. Neither the principle nor the profit rate is guaranteed.
Also, the amounts pooled together must be invested in ventures that align with Shariah, Islam’s code of principles. The investment channels, as well as the terms reached with fund managers, must conform to the Islamic principles.
What does this mean? Fund managers cannot invest in financial firms that earn interest, such as banks and brokerages, tobacco or alcohol companies, or any adult-entertainment business such as gambling or pornography. Companies steeped in debt are avoided, but so are those with too much cash on hand, according to an article in The Wall Street Journal (WSJ).
Nicholas Kaiser, president of Bellingham, Wash.–based Saturna Capital Corp, manages two Islamic mutual funds. Saturna’s $200-million Amana Trust Growth consistently is among the highest-performing stock funds tracked by investment-research firm Morningstar. The 12-year-old fund has returned 18.1 percent and 7.6 percent on the past three and five years, respectively, according to the WSJ. To date, the fund holds just under 70 stocks, of which nearly 25 percent are non-U.S. companies. Kaiser also manages Amana’s Income Fund, which invests only in dividend-paying common stocks under the expectation it will have more stable stock prices. Both Amana’s Growth and Income Funds are supervised by an Islamic Advisory Board to ensure accordance with Shariah principles.
The inherent restrictions have both limited and assisted his fund management. While it cuts some potential high-performers from the get-go, it also avoids possible troublemakers. For example, Kaiser dropped Enron Corp. before its volatile lawsuit banished it from the stock market because its excessive debt violated Islamic investing principles. He also sold America Online stock when the Internet giant announced plans to merge with Time Warner in January 2000. The acquisition, completed a year later, involved roughly $182 billion in stock and debt.
