Nicholas Kaiser, co-manager of the $2.2 billion Amana Growth Fund (AMAGX), was also a big fan of Amazon (AMZN). The retail pioneer had been a staple of his fund for years.
But last November, Kaiser decided to sell it all. What prompted Kaiser to call it quits was Amazon's expansion into a new business line that could actually help its stock price rise even more: beer and wine. That violated a core requirement of the Amana fund: its investments must be consistent with Islamic principles.
"We hated to sell that one," Kaiser concedes. "We'd owned it for about a decade, and it's one that we had done very well with."
At first blush, Amana Growth looks much like any other large-cap growth fund. Its top holdings are sprinkled with high-quality growth names: Google, Oracle, Apple, IBM. But financial services are conspicuously absent. So, too, are some retailers like Amazon, Walmart and Target, because they violate the fund's mandate to avoid businesses that derive more than 5% of sales from alcohol, pornography, gambling or pork - activities and foods that are haram, or forbidden.
"Yes, it does restrict our universe in many ways," Kaiser acknowledges. "The good thing is that we probably know our companies quite well, and we try to make sure they're not doing something they shouldn't be."
In 1984, when Kaiser ran a midsize investment management firm in Indianapolis, he was approached by an Islamic investing club to put the group's money to work in accordance with the principles of Shariah, the Islamic moral code. Two years later, he launched the Amana Income Fund (AMANX) and, in 1994, the Growth Fund. His current firm - Bellingham, Wash.-based Saturna Capital Management, of which he is chairman - also manages the Amana Developing World Fund (AMDWX). Going by the last names of his investors, Kaiser estimates that only about 12% of his shareholders are Muslim.
In picking stocks, Kaiser is guided by a six-member advisory committee of academics and businesspeople. In addition to outright bans on certain types of activities, they have mandated that Kaiser avoid leverage, thereby bypassing any stocks whose debt-to-market-cap ratio exceeds 30%. The result is a portfolio of high-quality names with large piles of cash.
"We're very much focused on technology because this sector doesn't have a lot of debt," Kaiser says about the fund's 42% allocation to the sector. If the cash is a by-product of some other business and not an attempt to make profit, it passes muster.
Investing the Islamic way seems to be working for Kaiser, an Episcopalian. For the 10 years ended Feb. 28, Amana was up 12.5% a year on an annualized basis, according to Morningstar; that puts it in the top 2% of large growth funds. For the last five years, the fund is up 5.6%, besting 68% of its competitors. Avoiding financial stocks helped Amana Growth avoid the brunt of the financial crisis.
While the cautious approach to balance sheet strength wins approval from Muslims, the strategy can sometimes falter. As financials have rallied, the fund has suffered. Over the last 12 months, it's up 6.8%, while the S&P 500 is up 13.5%. "The companies that have done well when we're printing money like crazy are financials and highly levered companies, and those are the ones we don't have," Kaiser says.
Amana also doesn't trade much, holding its stocks around five years on average. "We're not supposed to gamble with the fund," Kaiser says. "It's OK to invest for the long term, though."
As a result of the low turnover and other strategies, Amana Growth gets high marks for tax efficiency. Morningstar assigns a tax cost ratio of 0.03% to the fund over the last 10 years, meaning that 0.03% of the fund's performance goes to taxes. That places it in the top 2% of the category.
As with many other growth funds, Amana's top holding is Apple (AAPL). It's not hard to see why. Kaiser has been a strong supporter of the stock for a dozen years, as the company moved away from desktop computers into category-crushing mobile devices.
For years, Apple dominated the mobile device industry it helped create, with earnings soaring quarter after quarter. But the stock's recent plunge - a drop of roughly 37% since its September high - has many wondering whether the company's best days are behind it.
(Financial Planning / 01 April 2013)
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com