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On an autumn morning in Bellingham, Wash., an eclectic audience of scholars, bankers and investors gathers in a conference room at Western Washington University. The topic is Islamic finance, and the sponsor is Saturna Capital, a Bellingham company whose Amana mutual funds have invested in accordance with Islamic law since 1989.
The mood among the conferees is relaxed and collegial -- at least until Mahmoud Amin El-Gamal, the first speaker, starts shaking the foundations of their financial beliefs.
Some interpretations of Islamic law, or sharia, impose strict limits on borrowing money and earning interest, putting America's Muslims at a disadvantage in everything from buying a house to saving for retirement. Many people in this room have designed financial products to try to ease this so-called cost of being Muslim.
But El-Gamal, a professor of economics and statistics at Rice University in Houston, isn't satisfied with their results. By trying to apply sharia to the complexities of the markets, he argues, these loans and funds wind up being inferior to the products they aim to replace. When their architects present them as the only legitimate way to invest, they merely compound the problem, he says.
They imply that "you will fry in hell if you use conventional tools," says El-Gamal. "There is something very unseemly about using religion that way."
Such criticism isn't uncommon when mutual funds try to marry religion and investing. But the Amana funds can rebut it in a way that a lot of religious funds can't -- with a remarkable track record. Indeed, while thousands of mutual funds scramble to show even ho-hum returns, Amana Trust Income (AMANX) and Amana Trust Growth (AMAGX) have become two of the top-returning funds available, period. They've done so even though they shun companies that profit substantially from such industries as alcohol or pork processing, and even those that carry a lot of debt. Together, the rules put almost half of the stocks in the market off-limits.
Nonetheless, over the past three years, each fund has been the No. 1 performer in its style category, according to fund tracker Morningstar, with the growth fund and income fund posting annualized returns of 20% and 21%, respectively, over that span.
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Curiously, the man behind these stellar returns has no Islamic beliefs whatsoever. (One clue: his impressive wine cellar, a no-no for any devout Muslim.) A career portfolio manager, Nicholas Kaiser brings a lot of ingenuity to the table; when Amana launched its funds 18 years ago, for example, Kaiser didn't like the record-keeping software on the market, so he wrote his own. As for matters of faith, Kaiser says that after being raised Episcopalian, he is "more of a skeptic" now. "It's what makes me a good investor," he says.
To be sure, the funds struggle to satisfy some observers, especially Muslims who disagree with how the funds' mission incorporates the principles of the faith. Similar issues surround most religious funds, a small but growing niche these days with $16.4 billion in assets. The funds as a group have slightly underperformed their peers over the past one, three and five years. They often face higher trading and administrative costs than bigger funds, and religious screens rule out many good stocks.
"It's the challenge of having one hand tied behind your back," Morningstar analyst David Kathman says. But in Amana's case, he adds, at least some religious values coincide with smart investing.
Setting the limits
Saturna Capital occupies a small gray building across the street from a food co-op in the center of Bellingham. Here, only the subtlest clues signal that the company differs from its secular peers. The receptionist's desk looks like every other receptionist's desk in America, but the woman behind it is reading a guide to Islamic investing. Seemingly unfurnished spaces double as rooms where observant employees adjourn for prayers -- the paper kneeling mats are a tip-off.In a frame above the door in Kaiser's office is a line of Arabic text. "It says buy low, sell high," Kaiser explains, very seriously. Then he laughs. "Actually, I have no idea what it says." Only later does a visitor learn that it's a quote from the Quran.
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Yaqub Mirza, a physicist and prominent figure in the U.S. Muslim community, got the idea for the Amana funds while he was running an Islamic investing club in the 1980s. Mirza recruited Kaiser, who had proved himself as a capable value investor while running the Unified Management fund family. Kaiser embraced the opportunity, but he insists that the Islamic angle has little impact on his thinking: "I manage the portfolio. This is a business."
While Kaiser takes care of the stock picking, Monem Salam focuses on religious compatibility. Salam, whose family moved to the U.S. from Pakistan when he was 9, used to manage money for wealthy Muslim clients of Morgan Stanley (MS, news, msgs). He still plays that role at Saturna, but he also consults with clerics and members of the funds' board to figure out which companies are off-limits.
Amana's recent success isn't due exclusively to religion. For example, the funds have outperformed the Dow Jones Islamic Fund (IMANX), which also uses Islamic screens, by at least 8 percentage points a year over the past five years. Once the list of candidates is whittled down, Kaiser digs into picking stocks, and in recent years he has deftly spotted some market darlings. Once, on a ski lift at Whistler, British Columbia, he overheard a woman saying that her daughter had paid $3 for a head of organic lettuce. Kaiser already liked organic stores because their margins are higher than those of traditional grocers. Eventually, he bought shares of Whole Foods Market (WFMI, news, msgs) for around $16; when he sold it three years later, it had soared into the $40s.
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