Which Religion Picks the Best Stocks?

Posted on October 26, 2008

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David Van Biema, TIME Magazine

Which faith plays the market best when it seems headed for the financial equivalent of purgatory? That may sound like a whimsical question, but there are, in fact, mutual funds tailored to a number of religions and denominations. Their track records won’t answer the question of which investment strategy best ensures eternal salvation, but they have certainly had an impact on some believers’ nest eggs — and they provide a window into how each faith understands appropriate investment.

Muslim Investors

For centuries Muslims were either out of the Western stock market or burdened with a certain amount of guilt. The Koran states, “Whatever you give as riba so that it might bring increase through the wealth of other people will bring you no increase with Allah.” Since riba means “interest,” this was a powerful dampener on investment for the pious. In 1998, however, the influential scholar Yusuf Talal DeLorenzo released the so-called “Dow Jones Fatwa”, which allowed believers to invest in funds with a degree of what one of his sons termed “permissible impurity”.

Shortly afterward an Islamic-investment group called the Amana Funds made a mosque-to-mosque push for business. Amana’s funds avoid stocks with above 5% stakes in alcohol, pork or tobacco. None of these is tightly connected to a major market dynamic, and during the long-running bull market Amana’s success owed less to its distinguished Islamic legal team than to its head stock-picker, non-Muslim Nicholas Kaiser. But as Mohen Salam, Amana’s director of Islamic investing, points out, “during a bear market, and particularly during this credit crisis,” other Islamic restrictions have kept Amana away from the most radioactive issues. It avoids investment banks such as Lehman Brothers because of the limitation on interest-oriented business. Along the same lines, says David Kathman, a mutual fund analyst at the Morningstar research group, Amana “won’t own companies with too much debt on their balance sheets, because if you have too much debt you’re paying interest on it.” The top three holdings of its large growth fund are tech titan Apple, fertilizer giant Potash Corp. and freight railroad firm Norfolk Southern. […]

The faith side of religious funds is aimed at decreasing sin rather than increasing profit, and doing that well doesn’t guarantee a strong return on investment. Amana’s Salam, observing that there are several other Muslim groups that have not fared as well during the crisis as his own, explains “After you’ve screened for the Islamic criteria, you still end up with 50% of the market available,” and from then on “it’s a matter of good stock-investment skills.” Kathman has written, “If you decide to invest in any of these funds, it should be because you agree with the moral principles underlying the fund,” not because you think those principles will be the ones that assure a good return.

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