With stocks falling, credit tightening and the economy in a tailspin, mutual funds that comply with Shariah, or Islamic law, are becoming more appealing to some advisers.
"I dipped my toe into a Shariah mutual fund last week for a client," said Timothy G. Parker, president of Hudson Capital Management LLC of Ridgewood, N.J.
Mr. Parker bought shares in the $792 million Amana Trust Growth Fund (AMAGX), investing a tiny portion of his client's assets. In accordance with Shariah rules, the fund screens out companies with ties to gambling, alcohol, tobacco and pork processing.
As of last Monday, the fund had a year-to-date return of -16.39%, a three-year trailing return of 4.33% and a five-year return of 12.16%. In comparison, the fund's benchmark, the Standard and Poor's 500 stock index, was down 23.55%, and had three- and five-year returns of 3.66% and 6.49%, respectively.
For some advisers, going into a Shariah fund has less to do with religious observance than surviving the mess that has hit the financial sector: The Quran prohibits paying or receiving interest; investments in financial services firms are generally eliminated from Shariah-based funds too. Firms with large amounts of debt on their balance sheets are also largely avoided — which has kept these funds largely safe from the credit crunch and tumultuous markets that have rocked many mainstream mutual funds.
"I didn't look at it from a Shariah perspective," said Mr. Parker, whose firm manages $15 million. "But being out of lenders hasn't been a bad thing, especially recently."
Though economic turmoil has also hit the returns on Shariah funds, their five-year total returns have also managed to fare better than the S&P 500 and their peers. Sectors selected instead of financials include industrials, technology and energy.
Managed by Saturna Capital Corp. of Bellingham, Wash., the Amana Trust Income Fund (AMANX) and the Amana Trust Growth Fund are the largest funds that invest according to Shariah law in the United States, with the former containing some $531 million in assets, noted David Kathman, a mutual fund analyst at Morningstar Inc. of Chicago.
The Amana Trust Income Fund brought in a year-to-date return of -14.35%, a three-year return of 4.97% and a five-year return of 13.20% as of last Monday.
Other Islamic funds include the Azzad Ethical Income (AEIFX) and Azzad Ethical Midcap funds (ADJEX), both managed by Azzad Asset Management Inc. of Falls Church, Va.
As of last Monday, AEIFX had $6.11 million in total assets, with a year-to-date return of -27.85, a three-year return of -5.73% and a five-year return of -0.13%. ADJEX, a $3.42 million fund, earned -27.70% year-to-date, -4.75 over three years and 2.91% over five years.
Year-to-date through last Monday, the Amana Trust Income fund lost 14.35% of its value, but the five-year total return was 13.20%. Meanwhile, its sister growth fund lost about 16.39% year-to-date but had an annualized five-year total return of 12.16%. Falling commodities prices have hurt the funds as of late, but overall performance in the last few years has raised interest among investors, he said.
"That kind of performance attracts assets, not just from Muslims but from other people," Mr. Kathman said. "People want those returns, and they don't mind the restrictions, which haven't hurt the fund. They've done very well amid the turmoil."
However, the Shariah funds aren't perfect, and when the financial sector inevitably picks up, participating investors may be left out in the cold. To combat this, advisers have looked at various ways to increase clients' involvement in financials without leaving the Shariah mutual fund, such as finding an exchange traded fund with participation in that sector.
Selecting individual financial stocks is also an option for clients, said Robert K. Haley, founder and president of Advanced Wealth Management of Portland, Ore.
"It's easier for me to hit my target, whether it's over- or underweight, in the portfolios where I pick the stocks," he noted. "Many mutual funds have been overweight in financials, and it's difficult to avoid that when it comes from an industry love affair with a sector."
Though advisers expect that Shariah-based investing will be-come more popular, a number of obstacles keep the strategy from becoming the next big thing.
For one thing, some clients may have ethnic or political sensitivities that might keep them from being interested in a Shariah fund.
"We're at war, and generally, America seems to feel that it's at war with Islam," said Mr. Haley, whose firm manages $75 million. "When we see ourselves at war with Islam, investing in something associated with Islamic principles is an immediate turnoff." Such sentiment could keep Shariah investing from becoming mainstream among advisers too, which could be good news for those who want to enter the sector.
E-mail Darla Mercado at [email protected].
