The strategy is almost heresy on Wall Street: Find a top-performing investment by seeking out a mutual fund with some of the industry’s strictest ethical screening requirements.
Yet that approach, if adopted, would work in at least one case. The Amana Income Fund, which avoids not only alcohol, tobacco, and gambling stocks but also pork producers and lenders who charge interest, received a Lipper award earlier this year for outperforming 180 equity income funds ”“ screened and unscreened ”“ over the past three years.
Amana Funds dominate the relatively small niche of socially responsible investing (SRI) that aims to reflect Islamic law, or sharia. The idea is for an entire portfolio to reflect moral values from the Koran, which deems pork products unclean and regards the charging and paying of interest as immoral endeavors that foster exploitative relationships.
“If Islam forbids it, then we’re not going to buy it,” says Monem Salam, deputy portfolio manager at Amana Funds. That principle generally “keeps us out of trouble,” he says, by requiring the funds to avoid such ticking time bombs as Enron and WorldCom, which imploded in accounting scandals a few years back. Both were too heavily leveraged to pass muster at Amana.
In theory, Islamic funds face an uphill battle since about half of the stock market universe ”“ including most financial services companies ”“ is off limits to them. But in practice, Islamic funds fulfill their moral ideals in considerable measure by mimicking some revered habits of billionaire investor Warren Buffett.
For instance, because excessive stock trading amounts to gambling in the eyes of Islamic authorities, Islamic funds practice a buy-and-hold strategy that helps keep trading costs down. Also, concern about the ethics of borrowing and lending leads Islamic fund managers to avoid deeply indebted companies, such as several big-name airlines, which tend to stumble in recessions and in times of slow economic growth. Both practices are quintessential Buffett, the CEO of Berkshire Hathaway, based in Omaha, Neb.