Islamic law prohibits the collection and payment of interest. That means mutual funds aimed at Muslim investors must avoid financial services stocks.
This proved to be a winning formula in 2007, when Wall Street finally paid the price for several years’ worth of predatory lending to financially strapped homeowners.
During the long housing boom, mortgage banks loosened their lending criteria, making it possible for people with poor credit to buy homes they ultimately couldn’t afford. Many of these mortgages had low introductory rates that reset after several years, pushing monthly payments up. Some sported onerous prepayment penalties.
Doesn’t sound very halal.
As long as housing prices kept rising, many borrowers were able to refinance before rates reset, keeping payments low. But as the real estate market softened, more and more fell behind on their payments, ultimately defaulting. . .
Muslim funds’ aversion to the financial sector largely inoculated them from the mortgage crisis, keeping them healthy as the contagion spread across broad swathes of domestic stock and bond funds.
While the S&P 500 remained up 4.9% for the year through Friday, three funds that invest according to the Koran have significantly outperformed the benchmark. The Amana Trust Income Fund (AMANX) return of 13.3% through Dec. 21, beating the S&P 500 by 8.4 percentage points, while its sibling, the Amana Trust Growth Fund (AMAGX), gained 11.7%.
And the Dow Jones Islamic Index Fund (IMANX) climbed 14.7% so far this year. It is run by Allied Asset Advisors of Burr Ridge, Ill.
Among other Muslim funds, the Azzad Ethical Mid Cap Fund (ADJEX) gained 11.95% so far this year, and the Azzad Ethical Income (AEIFX) rose 8%. Both are managed out of Falls Church, VA.
The Amana funds, managed by Saturna Capital of Bellingham, Wash., are also ahead of the S&P 500’s annualized return for the past three and five years, earning them five-star ratings from Morningstar.
The Amana Trust Income Fund, with $339 million in assets, posted the fourth highest return this year of large-cap value funds tracked by Morningstar, helped by its large holdings of technology, healthcare, and commodity stocks.
Monem Salam, Amana’s deputy portfolio manager, says a lot of the money coming out of financials is entering technology. And Amana has been building this position all year long. Apple is the largest holding of the Amana Trust Growth Fund.