Nicholas Kaiser's Amana Income Fund is outperforming the U.S. stock market this year by following the laws of the Koran. Managed in compliance with Islamic principles known as sharia law, the fund was the best performer of 19 U.S. mutual funds tracked by Bloomberg that are governed by social or religious principles.
The fund can't own shares of financial institutions such as banks that charge interest. Banking stocks are trailing the Standard & Poor's 500-stock index in 2005. Energy stocks, the benchmark's top performers, aided by record oil prices, are among its largest holdings.
"Under the current circumstances, the restricted selection helps us to look for good stocks," Kaiser, 59, said from his office in Bellingham, Wash. The $41.6 million fund owns shares of Exxon Mobil Corp. and BP PLC, the world's two largest publicly traded oil companies.
Amana Income, named for an Islamic term meaning "to have faith," gained 25 percent in the past 12 months, almost triple the S&P 500's 9 percent return.
The assets of the Amana Income Fund and the Amana Growth Fund, also run by Kaiser, increased 64 percent in the 12 months ended May 31 to a combined $95 million. The growth fund climbed 24 percent in the past year.
Inflows into so-called socially responsible funds rose 40 percent faster than net investments in professionally managed funds between 1995 and 2003, according to a study released by the Social Investment Forum, a Washington-based trade group. Updated figures are due in November.
"There is still very strong interest in socially responsible investing," said Amy Domini, chief executive of Domini Social Investments LLC in New York. Her firm oversees the Domini Social Equity Fund, the category's largest, with $1.26 billion in assets.
Kaiser, a Bellingham native, doesn't practice Islam, has never been to the Middle East and doesn't speak any Arabic. Kaiser said he was approached in 1984 by the North American Islamic Trust, a Burr Ridge, Ill., group that oversees assets of the Islamic Society of North America, the Muslim Students Association of the United States and Canada, and other organizations.
"I had no idea about Islamic funds then," he said.
Two years later, after working with the trust's directors and scholars to form an investment strategy based on Islamic law, he helped start the Amana Mutual Trust Fund.
He screened 3,700 companies at the direction of Fiqh Council of North America in Leesburg, an advisory board of the Islamic Society. About 45 percent passed.
Aside from a six-month break in 1989, Kaiser has managed the Amana funds since then. Some of his own money is invested in the funds, advised through Saturna Capital Corp., a firm he founded in 1989.
Sharia scholars on the council prohibit investments in businesses that charge interest or have a debt ratio greater than a third of their assets. Industrial companies that have financing units, such as Ford Motor Co. and General Electric Co., are among those failing the test.
The funds also can't invest in companies that generate more than 5 percent of operating income from un-Islamic activities, including pork processing, tobacco, liquor, pornography and gambling operations.
For the income fund, Kaiser favors companies that pay above-average dividends. Energy stocks, including Exxon Mobil and BP, account for 12.4 percent of assets. Utilities such as FPL Group Inc. are his biggest industry holding at 16.4 percent.
The S&P 500 Energy Index has jumped 25 percent this year, the best performance among the benchmark's 10 industry groups. Utility stocks, whose index has climbed 14 percent, are second best. The gains compare with a 2.8 percent loss in the S&P 500 Financial Index and a 0.6 percent drop in the overall index.
Amana Income's stake in utilities is almost five times the industry group's 3.4 percent share of the S&P 500. The fund's holding of energy producers is about a third higher than their 9.1 percent weighting in the benchmark.
Shares of FPL Group Inc., the biggest U.S. generator of electricity from wind, have a dividend yield of 3.3 percent, above the index's 2 percent average. The Juno Beach, Fla., company's stock has climbed 35 percent in the past year.
Exxon Mobil, based in Irving, Tex., has gained 17 percent this year. American depositary receipts of BP, based in London, have risen 13 percent. The fund also owns shares of USEC Inc., the world's largest producer of enriched uranium for nuclear power, which have jumped 55 percent this year.
The market-beating performance in 2005 contrasts with that of the second half of the 1990s, when the fund trailed the S&P 500 as financial stocks rose faster than the benchmark. The fund had an average annual return from 1995 to 1999 of 17 percent, below the index's average of 28 percent for same period.
Kaiser said the difference in those years amounted to what he called "the cost of being a Muslim." "If you want to invest socially responsibly, there are costs involved for the performance," he said.
This year, the costs have turned into benefits.