Amana, which is part of Saturna Capital, offers four mutual funds that follow Islamic finance principles. The two largest are the $1.4 billion Amana Income fund (AMANX), which focuses on capital preservation and the generation of current income, and the $2.2 billion Amana Growth fund (AMAGX), which aims at double-digit earnings growth. AMANX, which has seen returns of 13.2% for the first seven months of this year, invests mainly in areas including health care, industrials, consumer defensive stocks, technology and basic materials. AMAGX has about half its holdings in technology stocks and has seen returns of 22.1% through July.
The funds follow investment guidelines in accordance with the Quran, says Scott Klimo, chief investment officer at Saturna and portfolio manager of the Amana funds, employing Shariah advisers to ensure its holdings meet those criteria. That means the funds avoid investing in a number of sectors, including tobacco, alcohol, gambling, weaponry and pornography.
Perhaps most significant from an investing perspective, the funds avoid any business based on interest, meaning they don’t feature traditional financial services. They also look for companies with low debt levels. There is a strong overlap between Shariah investing and ESG (environmental, social and governance) investing more broadly, Mr. Klimo says, adding that Amana also is focused on the integrity of management at the companies it invests in.
Investing by these principles has brought financial benefits, according to Amana. For example, avoiding financial firms was a boon during the global financial crisis, while companies with low debt levels can fund their own operations, making them more stable financially. These traits have attracted investors from beyond the Muslim community, according to the company’s research: Only 40% to 45% of Amana’s investors are Muslims, says Mr. Klimo.
While AMAGX in particular has had a strong performance over the past five years, investors should be mindful of the funds’ lack of diversification, says Kiril Nikolaev, an analyst at MutualFunds.com: AMANX holds 44 stocks, while AMAGX has 33. This can create concentration risk. Because funds with few holdings typically are skewed toward a small number of sectors, they can suffer disproportionately when those sectors enter a downturn.
However, that hasn’t been the Amana funds’ experience, Mr. Klimo says. The annualized standard deviation of returns seen by the funds—a gauge of volatility—has been lower than that of the S&P 500 over the past 15 years, he notes.
Source: The wall Street Journal