Islamic mutual funds

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TEXT OF INTERVIEW

Tess Vigeland: There are almost 3 million Arab-Americans in the U.S. Most are Christian, but the Muslim population is growing and because Islamic finance is kind of tricky, we're devoting some time to explaining the nuances of buying a mortgage, setting up a student loan and even managing your stock portfolio.

Scott Jagow: Yeah, but Tess, the one thing I keep hearing about is the restrictions on stock picking.

Vigeland: That's right; there are all kinds of rules, so there are a couple of strictly Islamic mutual funds out there to make it easier for people. One is The Amana Funds and they've been around quite a long time, a couple of decades actually.

Jagow: Do you know how they perform?

Vigeland: Much better than your average mutual fund, actually. I wish I had invested in them. For the Income Fund, the 5-year return is about 19 percent.

So to find out more about Amana we're joined by Monem Salam. He's the head of Islamic investing for Saturna Capital, which manages Amana.


Vigeland: Mr. Salam, welcome to the program.

Monem Salam: Thanks you very much for having me.

Vigeland: Now, The Amana Funds invest according to Islamic law -- Sharia. What do you actually look for when picking a stock?

Salam: Well, there's actually two basic criteria that we're looking for. The first one is trying to avoid companies that are making their revenues primarily from something that's forbidden in Islam, as alcohol -- Muslims are not allowed to drink it; we're also not allowed to invest in it -- and the same could go for gambling companies, pornography, pork products and the one that's fairly unique to Islamic investing which you don't find in other ethically-based funds are financial companies, so we don't have any banks, insurance companies and those types as well.

Vigeland: And is that because of the laws against interest?

Salam: That's correct.

Vigeland: Tell us a little bit about Amana. I know there are other Muslim mutual funds, but how did you get started?

Salam: Well, Amana actually started about... it's the oldest and largest in the U.S. It was started back in the 1980s and what basically happened was in Indianapolis, there was an investment club that was formed for local Muslims in that area.

Vigeland: An investment club just like your average people gathering to invest together?

Salam: Yes, that's right; just a regular, average investment club made up of Muslims and when they started it, they realized that there was such a big demand for it and they couldn't really keep up with it and pretty soon, they became so big that they couldn't be an investment club anymore, so they went to the local mutual fund expert -- his name was Nicholas Kaiser -- and they approached him and said "Hey, we'd like to start a fund" and he said "Well, I know a lot about starting funds, but I have no idea about Islamic investing, so if you can teach me about Islamic investing, I'll teach you how to start a fund."

Vigeland: And what is it worth now?

Salam: It's a little bit under a billion.

Vigeland: And what did it start at?

Salam: The initial, I think, deposits were about $250,000.

Vigeland: Wow! And how are the funds performing currently?

Salam: The funds are doing great. Under the past three or four years, we've also had a very good performance as well. We have our own fund management criteria which is a value-style investing, and so we're long-term holders. We don't sell a lot of companies; we try to buy for the long-term and because of that we kind of have spotted the commodities boom a little bit early. We stayed in and we've been able to benefit because of that.

Vigeland: Given the fund's performance, I wonder what other non-Islamic funds might learn from this kind of screening process?

Salam: One of the things they can learn from us is how we actually do our research, because we have to really know where the revenues are coming from for our company, because one of our criteria, for example, is a total debt to market capitalization and when you talk about total debt, you have to also include off-balance sheet debt as well, and so we really have to investigate a lot to figure out exactly how much debt a company has and then really look at whether we can buy it. I think it's helped us and saved us a number of times. Case in point, for example, would be a WorldCom or Enron. We did invest in Enron initially. We saw that their debt levels were getting high, especially when they factored in the off-balance sheet debt and we sold it and shortly thereafter, you know, everything exploded in Enron.

Vigeland: For listeners who are hearing about this for the first time and thinking to themselves, "Wow, I might want a piece of that," is it fairly easy to invest in Sharia-compliant funds, either through, say, a 401(k) or even a 529 plan?

Salam: No, it's very difficult. What we've tried to do over the past years is work with a lot of companies to allow The Amana Funds to come in, however, we haven't been very successful. So when we go out and we educate Muslims and otherwise about investing, what we tell them is there are alternatives that are available. An alternative to a 401(k) would be an Individual Retirement Account, an IRA. An alternative to a 529 plan would be an Education Savings Account, an ESA. It's just a matter of getting educated about how you can access The Amana Funds through them.

Vigeland: What is the objection that you find from mutual fund providers to including you as an option?

Salam: Well, the majority of the objections are in misunderstanding exactly what the fund is. A lot of times, people think that we only invest in companies that are Muslim or that are Islamic and that's not the case. The other reason, also, is that we are a no-load fund. There's no commissions that you pay on the front-end or on the back-end and a lot of times, the bottom line for the broker is "how do I get paid?" and if he can't get paid, he doesn't want to offer the fund.

Vigeland: Monem Salam is director and vice president of Islamic investing for Saturna Capital. Thanks so much for your help today.

Salam: Thank you very much.

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