Nicholas Kaiser, chairman of Saturna Capital Corp., is used to investing within tight parameters. So when the Amana Funds asked him back in 1994 if he could manage a new equity growth fund targeting Muslim investors in the U.S., it wasn't a stretch for the now 66-year-old portfolio manager.
“We've managed money for a variety of clients with different needs,” said Mr. Kaiser, who was already managing another fund following Islamic finance principles for Amana. “It's normal for us to deal with specific client objectives.”
In the case of the Amana Growth Fund (AMAGX), the boundaries of Mr. Kaiser's mandate are fairly straightforward. He can't invest in companies that derive a significant part of their business from activities unacceptable to the principles of Shariah law. That means no investments in companies involved with pork products, alcohol, tobacco, pornography, gambling and, most significantly, financial services that derive interest income from lending activities.
Mr. Kaiser also avoids companies carrying debt of more than one-third of their market capitalization. And he's prohibited from “speculating” and using or writing call or put options.
Another challenge is managing his cash. With Islamic law prohibiting the earning of interest, the fund's cash is truly in cash. That prohibition doesn't matter as much with currently low interest rates, but it can be significant in other environments.
“It has really hurt us previously not being able to earn interest on our cash,” Mr. Kaiser said. “Our bank likes us a lot.” He currently holds 4.3% of the fund's assets in cash.
While these restrictions clearly limit Mr. Kaiser's flexibility, the prohibition against investing in banks and insurance companies has been a boon for his fund over the past 10 years, primarily because he avoided the bloodbath in banking stocks during the financial crisis.
The fund has a 10-year average annual return of 12.2%, according to data from Morningstar Inc., which has a four-star rating for the fund. That's 4 percentage points better than the S&P 500 and 4.4 percentage points better than Mr. Kaiser's peers in Morningstar's U.S. OE Large Growth fund category.
The fund's five-year performance is just under a percentage point better than the average fund in the large-growth category and half a percentage point better than the S&P 500.The outperformance has attracted investors beyond the U.S. Muslim community. The fund now has $2.2 billion in assets, and Mr. Kaiser estimates that only about 10% to 12% of investors in it are Muslim.
“The fund has become attractive to more people because it seems to work,” Mr. Kaiser said. “In the last decade, a lot of investors are saying, "We'll give up the glory of 2007 to miss a 2009.'”
However, what helped the fund previously is now hurting it. With the recovery of the financial services sector, the fund's banking restriction has hit its performance, compared with competitors'. Over the past three years, the fund has underperformed the S&P 500 by 4.1 percentage points and its peer group by 2.1 percentage points.
“In a market fueled by easy monetary policy, financial stocks have been driven up,” Mr. Kaiser said.
He characterizes his investing style as conservative-growth-oriented, or “growth at a reasonable price.” His process begins with a monthly screen of 10,000 U.S. and foreign stocks — about 50% to 60% of which are weeded out because of his fund's restrictions. A team of 15 analysts recommend the best picks of the remaining stocks.
HOT ON TECHNOLOGY
Mr. Kaiser typically holds about 70 stocks at any one time, and technology currently represents his biggest sector concentration at just over 41% of the fund.
“We expect the technology sector to pick up with the economy,” he said. Health care stocks, followed by industrials, are his next-largest sector weightings.
Mr. Kaiser, a former governor of the Investment Company Institute and a past chapter president of the Financial Planning Association, does a lot of international traveling — largely to research foreign stocks for both the Amana Growth Fund and the Sextant International Fund, which he also manages. He has visited 19 countries in the last five years and plans to continue exploring new markets and cultures.
“It's been so interesting to learn just how broad a worldwide religion Islam is,” said Mr. Kaiser. “My work has enabled me to learn a lot about history and long-term trends, and that's helped with my investing.”
[email protected] Twitter: @aoreport
