Islamic investment strategies are proving they’re worth a second look from Muslim and non-Muslim investors alike.
Amana Trust Income, a mutual fund managed by Bellingham, Wash.-based Amana Mutual Funds Trust in accordance with Islamic Shariah law, has increased 13.9 percent year-to-date, compared with a 5.7-percent return for the S&P 500.
It’s a star performance in a rocky investment environment, but Amana Trust Income is hardly extraordinary among Islamic funds. The Dow Jones Islamic Index is up 17.1 percent year-to-date.
So what’s the higher power behind the relative success of Islamic funds?
“These are just better stocks and healthier companies,” said William Redman, managing director and treasurer for Connecticut-based Shariah Capital Inc., which creates Shariah compliant financial products.
In fact, Shariah-compliant does not refer to the nationality of a company, but rather its way of doing business. For example, Brooklyn Center, Minn.-based Caribou Coffee conforms to Shariah Islamic law.
“The threshold for debt is lower,” Redman said. Shariah Capital chooses companies with low debt, low accounts receivable and low cash holdings, in accord with the principles prescribed by the Quran.
Shariah law also forbids the collection or payment of Riba, or excessive interest, as well as investment in companies producing goods or services like alcohol and gambling, that are off-limits to Muslims.
While the rules governing Islamic finance are thousands of years old, very recent changes have led to new opportunities.
In the past few years, financial engineers have invented new financial instruments that comply with Shariah law, yet don’t ask that the investor sacrifice diversity or higher returns. As a result, “the products available to the Islamic investor have quadrupled in the last two or three years,” Redman said, citing hedge funds as an example.
Murabaha, an Islamic money market instrument, allows Islamic investors to participate in a wider range of funds because rather than using interest, it sets an agreed-upon value. “Say I hand you a dollar,” Redman explains, “Let’s agree that in a year’s time, my dollar will be repaid to me as $1.05. That’s perfectly legal… because we agreed on the value.”
Tools like this have opened the door for many faith-conscious Muslim investors. “Before you were looking at best at a 1-percent to 2-percent return, now there’s a potential for 10-percent to 11-percent returns,” Redman said.
Islamic investing is a strategy that could prove more successful in the long-term as well. Amana Trust Income’s five year return rate is 19.5 percent, compared with12.4 percent for the S&P 500. Its sister fund, Amana Trust Growth, reported similar results.
“There’s a significant, clear trend that people want to have some level of respect given to religious considerations” when doing business, said Martin Shenkman, financial planner and principal of New Jersey-based law firm Martin M. Shenkman PC.
“There are a considerably greater number of religiously oriented investing funds, Islamic and otherwise, than there were 10 years ago, and there would have been almost none 20 years ago,” said Shenkman.
He adds that he’s seen an unprecedented rise in clients at his practice – from Buddhist to Muslim – requesting faith-based legal documents for estate planning, among other things.
Given this, Shenkman says it’s just “good business” for any financial services company to be prepared to accommodate faith-minded Islamic investors because of the “huge and growing” pool of assets owned by practicing Muslims around the world.
Redman agrees, citing the current price of oil as reason enough to court Islamic investors. “It’s a trillion-dollar market and it’s not getting smaller,” he added.