I recently read an interesting article on Shariah, or Islamic Law, based investing and I found it very interesting. The article titled, “Profiting From Morality” was in November’s Issue of Investment Advisor Magazine. Within the Article it mentioned one estimate that this niche has somewhere in the range of $900 to $1 trillion of assets invested! While I have found that at least some Catholic Based Investments seemed simply silly because they don’t go far enough into the doctrine the few funds I found seemed to take the doctrine much more literally.
What is Sharia or Shariah Investing?
I think as a basic introduction to Muslim based investing the Wikipedia’s simple definition of Sharia Investment Restrictions will be sufficient,
The payment or receipt of interests are considered usury and unjust. Debt is also disapproved making investments in highly leveraged companies unacceptable. Funds cannot pay fixed or guaranteed return on capital. Instead of borrowing and lending, Islamic finance relies on sharing the ownership of the assets and therefore risk and profit/loss.
Companies involved in prohibited business activities cannot be part of a Shariah fund strategy. Prohibited business activities can relate to food (production and sales of alcoholic beverages including pubs and restaurants, pork products, tobacco), gambling (casinos, on-line gambling, betting, lottery schemes), adult oriented (video, magazines, on-line material, strip clubs), dubious, immoral and illicit trades (prostitution, drugs).
Islam forbids gambling in any form. Consequentially, derivatives, forwards, options and futures are prohibited. Other forbidden practices include short selling, margin, and scalping trading.
Day trading is considered akin to maisir. Marketable securities generally have a multi-day settlement period, during which time the underlying instruments, while cleared, are not formally registered in the name of the purchaser. As day traders do not wait for settlement to complete, they are using a type of credit cushion provided by their broker. Day traders also very commonly rely on a margin account to finance their trading activity.
My skepticism is whether one can actually invest in American companies that truly follow the rules. When I research Catholic based Investments I found that it was just B.S. since they invested in banks that obviously fund everything and anything as well as the U.S. Government which clearly does not follow Catholic Laws and traditions under President Obama (or most previous presidents for that matter).
An Example of a Sharia Fund
Within the article that got my attention they mentioned the Iman Fund claiming it was “one of the few mutual funds in the United States with a strict Islamic investing Mandate.” The Fund Manager, Mohamad Nasir, is quoted in the article talking about the growing and maturing niche. According to the Iman Fund Website’s
The Fund seeks growth of capital while adhering to Islamic principles. The Iman Fund comprises investments that meet Islamic principles. Under the normal circumstances, the Fund invests its net assets in domestic and foreign securities chosen by its Investment Advisor that meet Islamic principles. Islamic principles generally preclude investments in certain industries (e.g. alcohol, pornography and gambling) and investments in interest bearing debt obligations or businesses that derive a substantial amount of interest income. Any uninvested cash will be held in non-interest bearing deposits or invested in manner following Islamic principles. Under normal circumstances, the Fund plans to fully invest its assets in securities that meet Islamic principles. The Investment Advisor is advised by a board of trustees of prominent Islamic scholars and community leaders from the United States.
According to Google Finance (as of 12/5/11) the top 10 holdings are
- Kinross Gold Corporation (KGC) 3.12%
- Microsoft Corporation (MSFT) 2.95%
- Johnson & Johnson (JNJ) 2.77%
- The Coca-Cola Co (KO) 2.52%
- Exxon Mobil Corporation (XOM) 1.94%
- Chevron Corp (CVX) 1.91%
- Steris Corporation (STE) 1.79%
- Apple, Inc. (AAPL) 1.76%
- PetSmart Inc. (PETM) 1.75%
- Fastenal Company (FAST)1.63%
I am sure that one can make an argument against some of the companies on the list, but the hypocrisy doesn’t anywhere as blatant when compared to the Catholic Fund I looked at in the past. Interestingly, Nasir mentions in the article that,
If we buy a stock today that meets our debt ratio of 10% and the debt ratio goes up next month, we will get out of the stock,” Nasir says. “We feel we need to monitor our holdings constantly and, within a reasonable time, get out of them if they don’t meet our investment principles.
So lean companies that don’t partake in perceived socially detrimental behavior? Sharia may be an option for anyone not just Muslims!
I will be up front an honest I have absolutely no experience with faith based investing nevertheless one based on Muslim law, but the topic seemed interesting.