Cultural Competence a Must in Islamic Investing

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.

“When companies merge and take on a lot of debt to make their acquisitions, we often have to re-evaluate,” Kaiser told the WSJ.

Shariah principles, which favor long-term stability over immediate gain, also discourage frequent trading. That nixes the Wall Street firms, such as Merrill Lynch, which closed yesterday at 67.50, up more than 20 percent from its closing price five years earlier.

But market diversification has many companies expanding their product lines, which makes it difficult for fund managers such as Kaiser to maintain strict accordance with Shariah. How does Kaiser, who is not Muslim himself, manage to reap profit and retain Muslim investors? It’s a matter of cultural competence. “Through a process of education, we come up with reasonable rules,” Kaiser told the WSJ.

Kaiser works with Islamic scholars to devise policies most Muslim investors find acceptable. The Amana fund doesn’t invest in firms whose debt makes up a third of its market value, and no more than 5 percent of a company’s revenue can come from non-Shariah compliant operations, such as selling alcohol.

“We do have to know our companies, and that’s probably the biggest benefit we get out of thinking about things as an Islamic investor,” Kaiser told the WSJ.

But cultural competence transcends Islamic fund management. Socially responsible investment practices, which coordinate selections with company values, are on the rise. Last year, these assets were worth $2.29 trillion, up from $639 billion in 1995, according to the Social Investment Forum. Market trends indicate that cultural competency will become a business imperative for fund managers who seek to diversify client portfolios.