Morningstar Advisor - February/March 2009 - 49

ment, a publicly traded investment firm. Their clients included service organizations such as the Islamic Society of North America, headquartered in a suburb of Indianapolis. Eventually, a group of local Muslim businessmen asked Unified to start an investment fund for them. Although Kaiser is not himself Muslim and knew little about Islamic investing at the 22000 time, he readily agreed and soon became well 18500 versed in this highly specialized field. “I said I could manage an Islamic mutual fund for them 15000 if they would teach me about Islamic investing,” 11500 he says. “It worked out well for both sides.” His clients were so pleased with Kaiser that they stayed with him when he went west to start Saturna. Now, Saturna has $1.5 billion in assets under management, up more than tenfold since the beginning of 2005. Most of that is invested according to Sharia (Islamic law), though Kaiser also manages the secular Sextant Growth SSGFX and Sextant International SSIFX funds, which are small but growing. A tight-knit group of fewer than 50 employees has helped the firm expand into such areas as retirement planning and education savings accounts. Most recently, the firm launched the Saturna Trust Co., which helps American Muslims manage their estates in accordance with Sharia. Kaiser’s right-hand man in Bellingham is Monem Salam, who joined Saturna in 2003 as its director of Islamic investing. Salam is in charge of making sure that the Amana funds are Sharia-compliant. At first glance, the two men could not seem more different. The 62-year-old Kaiser speaks rapidly in his soft but gruff-sounding voice, with an unmistakable dry wit. Salam is a devout Muslim, more than 25 years younger than Kaiser, with a somewhat more intense, deliberate manner, but also an adventurous streak. He grew up in Texas as the son of a pilot, and his pursuit of a private pilot’s license as a Muslim was recorded in a documentary recently shown on PBS. Despite their different demeanors, Kaiser and Salam are very much at ease together, and both 8000 of them become more animated when talking about Islamic investing principles and doing right by their clients. “A mutual fund is actually the ideal vehicle for investing according to Sharia,” Salam says, “because everybody is treated equally.” That equality extends to things like brokerage commissions. Saturna doesn’t use any soft dollars, and a few years ago, the firm started doing all portfolio trades for free through its in-house broker-dealer, Saturna Brokerage Services. The Amana funds have “good, tough board members who keep us on our toes,” Kaiser says. “They ask the right questions, and the tougher they are, the better I like it.” Principles and Profits Nick Kaiser Amana Trust Growth AMAGX $22K 15 S&P 500 04 05 06 07 08 09 Category 7 Large Growth Morningstar Rating Expense Ratio (%) 1.29 5-Yr Anl Total Rtn (%) 6.15 5-Yr Anl TR % Rank Cat 1 On the surface, many principles of Islamic investing are similar to those found in other socially responsible funds. The Amana funds can’t invest in companies that get a significant amount of their revenue (generally more than 5%) from alcohol, tobacco, gambling, or pornography. The funds extend this restriction to companies that produce pork products. Kaiser and Salam work with a board of Islamic scholars, which gives advice on what is halal (permitted) and haram (forbidden). They tend not to allow much leeway. A few years ago, Kaiser sold Target TGT after discovering that the discount retailer had started selling alcohol in its stores; he sold grocer Albertson’s for similar reasons. The most obvious difference between the Amana funds and secular SRI funds is that the Amana offerings are prohibited from paying or receiving riba (interest), which is forbidden in the Quran. That eliminates essentially all financial stocks from the portfolio, as well as conglomerates that have significant financial arms, such as General Electric GE. An ultrastrict interpretation might also eliminate companies with any debt on their balance sheets, leaving very few options to invest in. But Sharia scholars agree that the Quran allows some debt in certain circumstances, as long as it’s not excessive QQQQQ Minimum Investment $250 Data as of Dec. 31, 2008. and it’s part of a greater good. The Amana funds can hold companies with debt up to 33% Jan-04their market capitalization, though in Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 of practice Feb-05funds generallyFeb-07Jul-07inFeb-08Jul-08 Feb-04Jul-04 theJun-05 Feb-06Jul-06Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Apr-04 Oct-04 May-05 May-04 Jun-04 Aug-04 Jul-05 Apr-06 Oct-06investNov-07 May-08 Nov-08 Aug-05 May-06 Nov-06 May-07 Oct-05 Jun-06 Aug-06 Apr-07 Oct-07more Oct-08 Aug-07 Apr-08 Aug-08 conservative companies than that. Nov-04 Dec-04 Apr-05 Nov-05 Dec-05 All these restrictions stem from broader principles of Sharia, which is ultimately an ethical system designed to promote social and economic justice. The prohibition on riba is actually a prohibition on all unwarranted gains, meaning those in which risk or ownership is not shared. Speculation is also forbidden by Sharia; not only does this eliminate gambling stocks from consideration, but scholars also say that it prohibits excessive trading in a portfolio, which is one reason why the Amana funds have extremely low turnover, averaging under 10% annually. Muslims are also required by Sharia to pay a certain amount of their income (up to 10%) in zakat (charitable contributions). Saturna provides statements for its Muslim clients to make it easier to calculate the zakat they owe. MorningstarAdvisor.com 49

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Morningstar Advisor - February/March 2009

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