One of the charms of our country is all of the stuff we don’t ask. Our federal census does not, and has not since the 1950s (quick thanks to David Moran for his insight into census history), asked people about their religious preference or practices. That’s good because it’s none of the guvmint’s damned business. It’s also bad because religion is an important element of our individual and collective culture; in the absence of official estimations, a host of (sometimes laughably inept) unofficial calculations substitute.
The Pew Research Center (2018) estimates that there are “3.45 million Muslims of all ages living in the U.S. in 2017, and that Muslims made up about 1.1% of the total U.S. population.” Pew is both professional and cautious, and their explanation of their methodology struck me as clear and reasonable so I’m willing to take it as a decent ballpark estimate.
Faithful Muslim investors are constrained to follow sharia law in selecting their investments. While the term “sharia” immediately triggers negative associations in most Americans’ minds – black burkas, oppression, extremism and all that – as an investing discipline its remarkably sensible and benign:
- Avoid investing in morally offensive activities, including businesses that sell porn, violent video games, alcohol and so on.
- Avoid gambling with your money, which means no short-selling, no high-turnover strategies and no weird derivatives
- Avoid usury, which means you can’t loan money and charge people interest on it
- Avoid deeply indebted, economically suspect companies, which led Enron and WorldCom to get booted from sharia-compliant indexes long before they could hurt investors.
As a philosophical matter, it’s simple and straightforward. Khalique Zahir, a plastic surgeon from McLean, Va. Describes it as “Basically just safe, intelligent investing. With halal investing, you’re investing in a company that has at least 50 percent of its value in hard cash. It’s not in some hypothetical dot-com kind of thought processes. It doesn’t matter if you’re Muslim or non-Muslim — you just don’t like to lose your capital.” (Retirement Savings, the Muslim Way, New York Times, 6/30/2017) Conservative ESG investors, regardless of issues of religion, would generally feel at home.
As a practical matter, it’s really complicated. What do you do with a company that’s 98% to the good, 2% to the bad? What happens if the ratio is 90/10? How do you harness the good part of lending – providing capital to towns, colleges or businesses – without running afoul of rules that forbid predatory activity?
In the US, the investment industry has largely catered to the needs of high net worth investors. There are a bunch of sharia-compliant separately managed accounts to accommodate the needs of your average neurosurgeon or successful entrepreneur.
For normal folks, though, the options have been incredibly slim. If you go to Morningstar’s UK website and enter “sharia” or “Islamic” in the search bar, you’ll find 13 funds and 10 ETFs available to European investors. In the US, the same search – until recently – returned zero and zero.
While options for American retail investors interested in a sharia-compliant investment vehicles are limited, the roster has slowly expanded and has always included some exceptionally strong choices. The most prominent family of sharia-compliant funds are the Amana Funds, run by the same advisor who provides the Sextant and Saturna funds. The newest entrant is the only ETF available to American Muslim investors, Wahed FTSE USA Shariah ETF (HLAL) which launched on July 15, 2019.
Two things strike me as I review these funds:
- Their ratings – star and otherwise – are not particularly reliable. Morningstar and Lipper have to put these funds in some peer group, but having a fund which doesn’t invest in bonds placed in a short-term bond group, is inherently suspect. Likewise, an equity fund that structurally avoids the most speculative parts of the market is going to look weak during periods of froth and high valuations.
- Their investors tend to be abnormally loyal. While investors have fled in droves from active income and equity funds, the flows into Islamic funds have typically been somewhere between steadily positive to just slightly negative. The ban on “speculation” means that investors want managers who buy-and-hold and are, themselves, held to a similar standard. That discipline is good for investors and advisors alike.
Nine funds for Muslim (and other risk conscious ESG) investors
Amana Growth (AMAGX): the oldest, largest and best equity option available. The general constraints we outlined above translated to a portfolio that has no basic materials, real estate, telecom, energy, or utilities (because they typically are high debt companies), a lot of technology stocks, and a bias toward quality. As part of the “don’t speculate” restriction, the fund went into the 2008 market collapse holding 30% cash which helped a lot. The only red flag: long-time manager Nick Kaiser is 70 and has been slowly handing responsibility over to a new generation. Whether they meet his high standard is yet to be seen. Four-star rating from Morningstar, a “Bronze” analyst rating, $2.2 billion in assets, $250 minimum initial investment.
Amana Developing World (AMDWX): launched in September 2009, we were really enthused about it as an option for cautious investors interested in tapping into the emerging markets. Good news: it’s by far the least volatile emerging markets equity fund in existence. Bad news: it’s made no money for its investors over the decade; annual returns have averaged just 0.1%. Why? First, it often holds five times as much cash as its peers. Second, it’s forbidden from investing in the financial sector, the largest sector in the EM indexes. One star from Morningstar, a “Neutral” analyst rating, $33 million in assets.
Amana Participation (AMAPX): launched in September 2015, AMAPX tries to generate non-equity income through investing in sukuk. Sukuk are bond-like structures which don’t run afoul of the “no interest!” stricture; globally, there’s a $250 billion industry. Since sukuk are only used in Islamic finance, it functions something like a short-duration emerging market bond fund. Since inception it has returned an average of 2.2% annually with low volatility, a standard deviation of 1.7%. One star from Morningstar, a “Neutral” analyst rating, $85 million in assets.
Amana Income (AMANX): launched in August 1986, AMANX invests in large, steady, dividend-paying companies. Lipper categorizes it as an “equity income” fund, which seems fair. It has the same manager and most of the same strictures as Amana Growth. In the short term, it tends to have just slightly higher or just slightly lower returns and volatility than its peers; over the long term (for periods ranging from full market cycles to 10- and 20-year windows), it tends to handsomely outperform by blunting the effects of sustained bear markets. Two stars from Morningstar as a “large blend” fund, a “Bronze” analyst rating, $1.4 billion in assets.
Arabesque Systematic USA Institutional (ASUIX): launched in May 2017, this is a quant fund – that is, one whose portfolio choices are driven by machine intelligence – that invests in ESG-stocks and cash. The goal is decent returns with below benchmark risks; one explicit sub-goal is “to limit maximum drawdowns to less than 25%.” It has a strong record over its first couple years: up 9.6% annually against 1.5% for its Lipper peer group. It won’t receive its first Morningstar star rating until June 2020, a “Neutral” analyst rating, $41 million in assets. The major downside is a $50,000 minimum initial investment.
Azzad Ethical (ADJEX): launched in December 2000, the managers describe it as an “enhanced index fund that invests in mid-sized growth stocks.” It’s sub-advised by Ziegler Capital Management of Chicago. The fund tends to trail its peers by a point or two (for example, it’s returned 13.5% a year over the past decade while its peers clocked in at 14.8%) but also tends to have noticeably lower volatility. Two stars from Morningstar as a “mid growth” fund, a “negative” analyst rating, $92 million in assets, $1,000 minimum initial investment.
Azzad Wise Capital (WISEX): launched in May 2010, it describes itself as “the first halal, socially responsible fixed income fund in the United States” and is managed by Federated Investment Management, a huge firm based in Pittsburgh. (Huzzah!) The fund has averaged 2.0% a year with a standard deviation of 1.7%, which is quite low. Three stars from Morningstar as a short-term bond fund, a “neutral” analyst rating, $143 million in assets and a $4,000 minimum initial investment.
Iman K (IMANX): launched in June 2000, Iman invests primarily in large US stocks with predictable overweights in technology and healthcare and no exposure to utilities or financials. It has been modestly outperforming its peers over the past 1-, 3- and 5-year periods after having modestly underperformed them in the past 10-year and since inception timeframes. High active share and a surprisingly high portfolio turnover (72%). Three stars from Morningstar as a large-growth fund, a “neutral” analyst rating, $125 million in assets and a $250 minimum initial investment.
Wahed FTSE USA Shariah ETF (HLAL): launched in July 2019, HLAL is a passive ETF which will track the FTSE USA Shariah Index. The index has a noticeable overweight in oil & gas, as well as the predictable overweight in tech and healthcare. The expense ratio is a perfectly reasonable 0.5%.