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.
So the return on a Muslim investor’s investment is OK as long as it’s not called “interest”?
Actually – even US tax law differentiates between “interest/bondholder” and “dividend/shareholder”. With the latter you are a part-owner of the business and share in the profits. With the former, you are a creditor and claim interest payments independent of the profitability of the business.
#1 Frank van Halsema,
That is essentially correct. To all those who say that Muslims from the Middle East, or at least the Arabic world, are “just like us”, although true in some arenas, there are also quite stark cultural differences which I have observed despite the fact that I know very little about the Koran and have never personally traveled there.
I have posted about one of these on SFIF, and read a complementary response, that, while not reporting identical attitudes among some Muslim cultures, did indicate that their approach to what God wills for each of us is distinctly different from that of any Christian community with which I am familiar.
The truly sad thing, which is also a “vicious circle”, is that the things essential to much of the Muslim world in order to effectively address poverty are the same as those that non-Muslim societies, including our own, need for long-term prosperity: the Rule of Law and the liberty which that generally implies, property rights, and a truly free market. Unfortunately, the latter is built on the ideas of risk and return, and of entrepreneurial enterprise, both of which, but especially the latter, often involve credit.
And the Muslims are not, in general, unaware of this need. Many of the Sephardic jews of Spain settled there under Muslim rule well prior to the reconquista, and provided, among other functions, a banking service. In my understanding, it is perfectly acceptable for a Muslim to pay interest for a loan, it is just not acceptable for her to earn interest on a loan.
This could prove to be a very large obstacle to the solution of material inequity in much of the Muslim world.
So the Koran is “…requiring the funds to avoid such ticking time bombs as Enron and WorldCom”
Too bad it does not require them to avoid “ticking time bombs” altogether.
Zing!!