Evaluating Islamic Investing Standards and Purification Methods

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Evaluating Islamic Investing Standards and Purification Methods

Owaiz Dadabhoy: Alright. Assalamu alaykum. Alhamdu lillahi rabbil alamina wassalatu wassalamu dua [Greetings to you. Praise be to God]. We’re going to start today with a top ten list which will take a couple of minutes and that’ll give an opportunity for others to join by that time hopefully. So, today I wanted to talk to you about the eleven habits of emotionally disciplined people. And this, actually, is about emotionally disciplined leaders, but it can be anyone. You don’t have to be quote unquote a leader to have these emotional disciplines. So, the first one is to have a stronghold on your identity. It’s okay to show your strengths and weaknesses and you know, be free with people. Obviously, we protect ourselves a little bit, but it’s okay to show some of your weaknesses as well because it allows people to then see who the real person is. Leaders understand their triggers. What is making them get triggered at work or with, you know, people just in your regular daily life. For example, it could be topics of politics and so, you know, when that comes up, you understand that you’re going to have to control that trigger. It could be there are certain toxic people and so, you know, you protect yourself against that and not get triggered. Leaders stay on purpose. They do have a goal and vision and obviously, at the beginning of the year, many people create their goals and visions for themselves, individual visions and missions for their year and beyond. And one of the good goals that you can perhaps create is how to be emotionally, you know, emotionally aware of yourself and protect yourself against getting too emotional. And this can also be a good factor for, you know, investing your money. Whether you’re investing your money or taking different kinds of risks with your money. It could be for your finances as well. Leaders stay in the moment. People stay in the moment. When we’re having this webinar today, I’m not looking at other things. I’ve turned off my phone. You know, I’ve checked out my email beforehand, so I’ve quit that. So, when you’re in the moment with your family, your relationship or something like this, we stay in the moment. We identify the emotions that overcome us and what we should do is reflect upon the fact that if there was a trigger, how we could control that next time. And I see this with children, as well, so when your children are younger, it’s a good opportunity to teach them about not getting tied up and overly emotional about things. Even with the siblings with each other, right? Because they trigger themselves sometimes. So, when they are triggered, to take a moment and say, “What happened there and how can we not do it next time?” If they can, people who want to follow these disciplines write down their thoughts on paper. Number 8 is leaders practice self-care. We know that that’s an important factor because if you’re not taking care of your whole self, then you may not be as good of a leader, or as good of a community member or as good of a family member. Number 9 is leaders see people for who they truly are. Not only self-aware, but they are aware of other people’s intentions. And obviously, intentions are something difficult to figure out in people, but you also look at them in the best way instead of looking at them as having a negative invention. Leaders have a strong support system. They have an emotional support system in place that helps them reason. You know, they go to this regularly and act as a sounding board. And the final one... it’s not a top ten, it’s a top eleven list: leaders don’t take anything personally. No one can harm you without your own consent. So, don’t let people be in your mind. Let go of that. That is the top eleven list for today. And now just to get started here, again, thank you all for joining. This is a great topic for those wanting to learn more about the history of Shariah compliant investing and where we are today with Islamic finance in America. Please let others know about this as well. Whatever you learn today. Or just the fact that there is a topic called Islamic finance and investing. Because what we find is there’s wholly too many people that still don’t know about this topic. We can speak to your local communities on any of these topics, as well, so you can invite us to speak at your mosque or at conferences or conventions. We speak at dozens of them each year. We even speak at employee groups, at tech companies, and other companies about Islamic investing through their brokerage account. This is a great opportunity to clean up our finances, including our 401(k)s through that brokerage account that I mentioned. If you don’t have one, you can ask your company to consider opening up a brokerage account so you can buy the types of investments that you’d like to buy. Also, consider creating a will or a trust so you have proper dispersements of your assets at your death through Islamic mandates. When I speak somewhere, I’ll ask how many people have a will or a trust. They’ve done everything right in their life, right? They’re praying five times a day, going to hajj, fasting the month of Ramadan, cleaning up their assets through Islamic investing, but then at their passing, they don’t have a plan for, you know, what happens to their money, and there are Islamic mandates on that. We have our speaker with us today, Monem Salam. And Monem is a fund manager at Amana Mutual Funds, Saturna Capital’s Amana Mutual Funds. So, he is Executive Vice President of Saturna Capital. Been with the company since 2003. He speaks on various topics related to Islamic investing and finance and he is the portfolio manager of the Income Fund, Amana Income Fund, and the Developing World Fund. So, he has a wealth of information. He writes on this topic and we used his writings as a basis for this presentation of Evaluating Islamic Standards and Purification Methods. If you want to find more information about his writings, they are on our website and hopefully we’ll provide that link to you as well. So, some of what we may talk about today could, you know, include some numbers. So, whatever we talk about, just always remember that past performance is not a guarantee of future results. And this is a conversation that we want to have with you today. So, with that, I’ll shoot it over to Monem Salam and thank you, Monem, for joining us today.

Monem Salam: Thank you very much. Bismillah,Alhamdu lillahi rabbil alamina wassalatu wassalamu dua. [All praises due to Allah and in the name of Allah. Praise and blessings be upon his messenger Muhammad] Allallahu alayhi wasalam. Thank you, everyone, for being able to join here today. I think this is a great topic, talking about Islamic investing itself, the history of it and also how it came about that maybe different criteria were in place. What we’ll do is we’ll start off and talk about our own guidelines first, before we branch out into other ones. Now, we do use a consultant, who has vetted our criteria. So, just to give you a brief history, not going too far back, our criteria... The Fiqh Council of North America helped us create these criteria back in the 1990s and they were finally signed off on in the early 2000s. And so, the criteria are Saturna Capital’s criteria which we use for the Amana Mutual Funds. And in order for you to have confidence in us that we are actually using these criteria, we’ve actually hired a consultant by the name of Amanie Advisors. They are based in Malaysia and they are... Dr. Mohd Bakar is one of the leading figures as far as scholars are concerned in Islamic finance. And it’s his company, his advisory service, that does that. On a regular basis, Amanie reviews our portfolios. On a quarterly basis. And then on an annual basis, they actually sign off on the Shariah compliance of the fund or the funds and those are available on our website. And maybe somebody, inshallah, can put up the link for that, if you wanted to look through that, you’re more than welcome to. So, what is it actually that we’re screening at Saturna Capital? So, we can divide them into three different screens. The first one is a business sector screen. So, what we’re doing here is really looking at it and saying, “What are the industries that are haram?” According to Shariah. And then, based on that, those are the industries that we will not invest in. So, for example, because riba is not acceptable within Islam, that would be something not allowed. Same thing with alcohol. Same thing with gambling. And other things as well. And so that’s where you come up with the kind of business screens for the Islamic criteria. Then, you have, on the secondary side, there’s a further screening from there. You have financial ratio screens. And the reason the financial ratio screens are set up is because you have all companies that in some form or another, in the United States, or pretty much all over the world, are going to be involved with some type of haram, predominantly in the form of riba. And so, the three criteria that we have. Number one is the total debt to 12-month trailing market capitalization. So, basically what is trailing 12-month market cap? Market cap means the value of a company. The market capitalization of the company at any given point. You know, back in March of last year, there were a lot of indices that don’t use the averaging, or the 12-month screening or trailing 12-months. Back in March, the company would have failed a screen because the debt stayed the same, but the market cap went down, right? And so, they violated the 33%. And then, as the market ran up in May, June, and July... in the July criteria, those were passed again. So, basically, what you ended up doing if you were following those is you would have sold low and you would have bought high. And that’s the exact opposite of what you want to do. You want to be able to buy low and sell high. So, that’s one of the reasons why, in consultation with our scholars, we chose the 12-month trailing market cap. And there are other indices that use that criteria as well. Number two is the accounts receivable to total assets. And here, what we’re trying to do is we’re really trying to look at and say, you know, if a company is in any kind of receivables or cash more than 50%, then according to Hanafi fiqh, the majority of something takes on the characteristics of the whole. And so, above 50%, you would not be able to trade the stock for a premium or a discount or that would be riba. And so, that way, giving us a little bit more cushion, we went with 45% rather than exactly 50%, in order not to violate that. And then the last screen has to do with haram revenues. We talked a little bit about, you know, the balance sheets side of it, but there’s also sometimes on the income side... if a company, maybe not in this environment... it’s been a long time, now, but maybe ten or fifteen years ago, if you remember a time that interest rates in money market funds or in bank accounts were upwards of 3%, 4%, 5%. I know it’s been a long time but that was the environment at a certain point. And so, the companies could generate a lot of income based on just the amount of cash that they have. And that would be one thing that would be put into the haram revenues. The other part of it that we look at is... there might be a company whose ancillary business, not the primary business but the ancillary business, is something that is haram. So, classic example people use, an airline, right? Selling alcohol on their plane. The airline, their business is not selling alcohol, right? Their business is to transport people from here to here, there. But they do sell alcohol. We have to calculate that revenue and if it goes above 5% then it would begin to violate our screens. And then, the third thing we actually do, and this was trying to be pioneers in our field of Islamic investing... what we did was we added environmental, social, and governance screens. Now, if you think about it from a perspective of [amin maruf nahi anil munkar], which basically means enjoining in the good and forbidding the evil, the previous two that I mentioned were all about forbidding the evil, right? We don’t do this. We don’t do that. We don’t do this. We don’t do that. And what we tried to do was kind of balance that with also how do we do good? And that’s where, along with this wave that’s happened even just in conventional investing, for looking at issues regarding environmental, social, and governance, we decided to incorporate those within our screens roughly around 2015 in the Amana Funds itself. So, what do we look for? We look for usage of energy, right? Are they recycling? How much are they using? Are there any carbon offsets? Those type of things. Water is the same thing. Social-wise, we’re looking at how are they giving back to the community? What is their labor relations, safety issues, if they’re manufacturing. All of those different things. And then governance has to do with board quality. Is it diverse? Is it independent? Those type of things. And then, we also look at executive compensation. And what that means is the executive compensation committee should not be made up of industry insiders that stand to benefit themselves if the CEO of that company gets a raise or gets highly compensated. So, we want to have that as well. And there are some, you know, also some Islamic underpinnings behind these things. And maybe if anybody has any questions, we can ask them a little bit later. But that’s the third part of our screens. 

Owaiz Dadabhoy: Monem, can you talk a little bit more about the Morningstar Globes? Many people know about the Morningstar stars, but Morningstar came out with some globes on ESG, the environmental, social, and governance. And how the Amana Funds came through on that without being told in advance what their measurements were going to be. How did it naturally kind of flow based on Islamic principles? Was that helpful in the ESG measurement?

Morningstar Sustainability Ratings
Morningstar Sustainability Rating Disclosures

Monem Salam: Yeah, absolutely. So, I think it was a few years back, Morningstar, they normally have the star rating system. 5 stars being the best, 1 star being the worst. They came up with their globe ratings. So, 5 globes being the best and 1 globe being the worst. And those were directly in line with environmental, social, and governance screens. And so, what they did was they took individual mutual funds, and they look at the individual stocks within those funds, rate the ESG score and then overall give them a rating and so, in the initial rating system that came out, both the Amana Income Fund and the Amana Growth Fund were both given 5 globes as a rating. Now, subsequently, as things happen, Morningstar actually bought a company called Sustainalytics that had their own rating system and through a process that they went through, they ended up weighting industries as far as risk of ESG. And when they did that, the Amana Growth Fund stayed at 5 globes, but the Income Fund dropped from 5 globes down to I think 2 globes if I’m not mistaken, maybe even 1. Now, it’s important to highlight that we didn’t change our screens. Right? They changed theirs. And so, what we’re looking at is, you know, we want to be very, very genuine in the screening that we have, that we use, on our own. And then really, not change them on a whim based on other peoples’ criteria. And so, we want to be able to have them based on what we consider material to the company. Right? And each of these screens that we have: the environmental, social, and governance. Depending on the industry that you’re in, they’re each given a different weighting. So, for example, an energy company will have a higher environmental weighting than a bank because energy is expending more energy. Whereas a bank might have a higher governance weighting than environmental, because they don’t pollute a lot. So, those are some things that we look at when we’re doing that, as well. Okay? So then, what we do is we take each of those screens, the three that I mentioned, right? And if you look on the right-hand side of the screen, you’ll find these environmental, social, and governance screens. So basically, overall, there’s about 5,000, you know, global stocks. We screen them for the Islamic criteria. We end up with roughly about 2,100 or so. And then when we screen them for ESG, we end up with roughly around 1,100. But then we have our own fundamental analysts that we do with our analysts. Just because something is halal doesn’t mean it’s good. We have to do our own screening to make sure that the company meets our evaluation criteria. And so, we’ll look at fundamental attributes. We’ll look at global sectors, the analysts review them, and it’s done on an analysis basis. And then, each of the companies that we own actually eventually has a stock qualification that’s done. A really deep dive into not only the ESG but also the factors when it comes to their metrics: cash flow or dividends or those types of things. And the analysts will assign a rating. And we have a recommended list of roughly about 325 stocks, and all of the portfolios that we have, including the Funds, are allowed to pick from these select 325, or so, different companies. And these 325 stocks are constantly monitored by our sixteen or seventeen analysts and they’re reviewed on an ongoing basis to make sure that they should remain on the investment list and thus remain in the portfolios.

Owaiz Dadabhoy: At any given point in... let’s just take the Amana Income Fund... so we said there are 325 on our own recommended list. How many stocks might be in that particular fund?

Monem Salam: That’s a good question. So, depending on the size of the portfolio, we’re roughly looking at between 50 and 60. You know, if we maybe have a larger portfolio might have closer to the upper end. If we have a smaller portfolio, might be closer to the lower end. Or maybe even lower. There’s no set number. But generally, to give you an idea, we try not to buy initial positions of more than 2% into a company. So that’ll roughly give you a 50-stock number.

Owaiz Dadabhoy: And Monem, you started, as we mentioned, at the top of this webinar, that you started with Saturna Capital in 2003 working with the Amana Mutual Funds. Before AAOIFI which is the first one you listed, the Accounting and Auditing Organization for Islamic Financial Institutions... before they actually started, you know, the Funds got started back in 1986, so what was some of the history behind that and also, you know, you’re looking at different types of screening organizations.... Must you pick one or the other?

Monem Salam: That’s a good question. So, I think that if you look at the evolution of it, yes, our Funds started back in 1986. And so, you know, we are the oldest in the US, and one of the oldest in the world. And so, the evolution of Islamic criteria goes parallel with two things: one is disclosure if information and number two is technology. Back in 1986, for example, when we first started, what we used to look at was basically only the first screen, which was the primary business of a certain company. As technology became better and as companies began to disclose more information, then we added the financial screening criteria, right? Because it was readily available. It was available before, but it used to take days upon days of being able to sift through papers on what the financials looked like. When technology came into being and you could do a data dump into your own software, then it became a lot easier to be able to do that. And so, then, the second criteria came about. And then, in 2015, as the ESG—the environmental, social, and governance—became more prominent, more companies began to disclose what they’re doing in reference to those, then we added those as well. Now, along the way, back in the 90s, in fact the main index, right? That actually, basically what they did was they gathered all of the primary scholars from around the world, they sat them in one room and said, “Look, we have to come up with a screening criteria that everybody can use.” And so, that was done by the Dow Jones. And a good friend of mine, and a pioneer in the field, Rushdi Siddiqui, he was the one running Down Jones Islamic Indices at the time. He was the one who gathered, particularly from Amanie, the ones that we use. There were other ones as well. And they came up with their own criteria of the Dow Jones. And for, you know, colloquially, we call that the Down Jones Fatwa, because they basically issued a ruling that said, “These are the criteria.” Very similar and we’ll get into this a little later... very similar to ours, and similar to other ones that you see here on this slide, but there are some differences as well. And then slowly, over time, because for example, some fund managers only used MSCI, MSCI said, “We’ll come up with our own criteria,” and then other managers or fund houses only used FTSE Russell—FTSE came up with their own. And each of them, genuinely, sat down with scholars, sat down with the fund owners, and said, “What is the criteria that we can use?” And some of it is, you know, what is it that you would like to see, within the boundaries of Islam? And so that’s why the criteria differ a little bit. And so, I think some of the governments, actually Malaysia very early on came up with their own criteria. Indonesia recently came up with theirs. And other ones, for example Philippines, actually lock, stock, and barrel adopted the AAOIFI criteria for Islamic screening. So, here we kind of give you a breakdown of the different indices, and if we would have put it on one slide, it probably would have been too small, so there’s another slide as well. What we tried to do was look at the different areas where each of them are the same and each of them might differ. Now, one thing that you have to keep in mind is that nobody will argue with you, for example, that alcohol should be allowed, or that riba is permissible. Or you know, the major ones, they’re pretty much all the same. So, whether you call it an industry screen or a sector-based screen or a business activity screen, they’re pretty much doing all the same, they’re just having different terminology for it. The ikhtilaf for the differences of opinion actually come in when you talk about quantitative. And again, nobody is going to argue that a little bit of debt on some of these companies is acceptable. Nobody is saying that. What they’re saying is, “What is the best way to measure how you’re going to come up with these criteria?” So, for example, if my screen is debt-to-market cap, I’ve made the determination that market cap is the best way to value a company. But for example, on the third one, you see FTSE Shariah, they use total debt to total assets. So, their Shariah board has said, “No we don’t want to use the value of a company, which is their market cap, we want to use the total assets that company has.” So, they are not differing in the idea, they’re different in the calculation methodology. And there is a difference between the two and I wanted to highlight that. And the ikhtilaf actually comes in there, from that perspective. So, we’ve kind of listed there, MSCI is another one. Malaysia has their own. S&P, you know Dow Jones and S&P merged, right? So, Dow Jones fell off and S&P stayed around. And so that’s where the criteria you see to do that. Now, remember, again, to give you a little difference: what we use for the dept criteria is the total debt to market cap with a 12-month trailing average market cap. So, S&P for example, uses 36-months. So they’ll look back 36 months, three years, to be able to make that average calculations. Not to say that theirs is wrong and ours is right, and anybody who tells you that one is right, and all the other ones are wrong is probably the same type of person that’s telling you how you should hold your hands in one way while you’re praying and that everybody else is wrong. And we know that’s not the case. There are differences of opinion of how you hold your hands when you pray. And so, in the same way, right? This is a difference of opinion when it comes to scholars when and how you determine how much debt a company has and how much becomes a violation or not.

Owaiz Dadabhoy: Do the numbers sometimes change? You know, some of them are usually 30% debt level. Some are saying 33%. Do they change their numbers from time to time?

Monem Salam: Over time, there have been changes that have been made. So, for example, AAOIFI, initially, started off with a criteria of total debt to assets, but now they actually use a total debt to market cap. And so that number, and obviously, the difference between the two might increase the universe of stocks that you have in your subset of the investing universe. It might increase or decrease it. So, there have been, sometimes, money managers who have gone back to these indices and said, “You know what? There’s not enough securities in here for me to be able to choose from.” So, then the indices went back to the scholars and said, “This is the issue we’re having. How do we kind of make it easier for them to be able to do that?” So, for example, maybe some people don’t remember this, but back in the early 2000s, the Dow Jones Islamic Markets Index... their universe in the US went from about, I think it was globally, sorry, not the US, went from about 250 stocks to 750 stocks. And it wasn’t just because everybody decided it would be more Islamic. It was because they changed their criteria to make it looser so there were more companies that were included in the universe. And again, it’s important to highlight that the scholars did approve that, and we defer to the scholars for their understanding of what it is to do Islamic investing. And I want to emphasize, again, don’t let anybody tell you that one of these is right and all of the other ones are wrong. Right? They’re all acceptable. And what you want to look at is, you know, as long as they are using a criteria, and as long as they’re being audited by whatever criteria they’re using, I think you should feel comfortable with all of the different criterias that are out there.

Owaiz Dadabhoy: Can you give us a real-life example of how the screening methodology has affected one of our portfolios, let’s say the Growth Fund. Give us an example of a stock that had to be removed based on the criteria.

Monem Salam: I don’t have to go too far back but let’s go with AOL back in the 1990s. So, they were actually bought by Time Warner, right? And a lot of these companies fall out of favor because of mergers and acquisitions. So, when Time Warner bought AOL, one of the industries we don’t invest in are manufacturers or producers of television shows. And because Time Warner was one of those, it violated the screen, and we had to end up selling it. Right? Another one to give you an example of is Amazon. You might wonder, “Amazon is an interesting one, so why would you sell that one?” Because a few years back, Amazon got a Washington State license, because they’re based in Washington. So, they got a Washington state alcohol license to be able to sell alcohol on their platform. And so, once they did that, then we ended up selling Amazon and not having it as a Shariah compliant stock.

Owaiz Dadabhoy: Thank you.

Monem Salam: And so, these are basically kind of in summary of all the different kinds of criteria that are out there. All of them look at some percentage of debt. All of them look at some percentage of cash or accounts receivables. And all of them look at some percentage of some haram revenues. Right? And they have gone through many different iterations but again, they’re pretty much all the same.

Owaiz Dadabhoy: Thank you for that, Monem. So, we are looking at the portfolios on a regular basis and sending off the entire holdings of each of the four portfolios to Amanie Advisors for their review every three months. And as Monem said, we get a signature basically certifying at the end of each year. But, you know, we’d like to also purify our own money that we have individually. So, as an individual, you’re investing in the Amana Mutual Funds or maybe some other types of investment and you want to purify further, even though Zakat is a means of purification of your money, there is a way to further purify your money. So, what we do, what we’ve come up with, and it’s in our website... I’ll show that to you as well... is a way for you to individually purify your Amana Mutual Funds. So, riba can be found when a corporation earns interest on cash deposits and realizes income from unacceptable resources and whenever this happens, and there’s a dividend, then purification can occur on that. And we look at the 10-K of the company to find where this type of haram revenue is coming from and that’s how we can determine what percentage of the dividend is going to be needing to be purified. So, if you have Islamic mutual funds, the calculations are created for you and this is the methodology that we use to determine the dollar amount of prohibited income, determine the pro rata dividends for each share class, and then determine the haram dividend amount per share. So, you don’t have to remember this calculation. We take care of it for you. The way that you can access it is through our website. You can go to our purification calculator. On the right-hand side of this particular slide, you’ll see the specific place you can go to, so you don’t have to hunt it down on our website. Once you’re here, you can place into the box—for Amana Income Fund or Amana Growth Fund—you’re going to put in how many shares you own. Whether it’s the investor share or the institutional share class, which are both of the same fund, it’s just a different, you know, ticker symbol there. And it will tell you, it will calculate for you, how much you need to purify from these assets, and the good news is because we’re so careful with the companies that we invest in, the amount of purification is very small. So, you’d have to have thousands and thousands of shares to have any kind of significant amount of purification. And you can do this purification at the end of each year or during Ramadan. The current calculations are as-of May 31st, 2020. So, the next one will come out, again, at the end of May.

Monem Salam: Owaiz, I have a trick question for you. I think maybe some people might be interested in doing this. So, we have in here the Amana Income Fund, the Amana Growth Fund, and then we also have one for Developing World. So, the question is, “Why do we not have a purification calculator for the Participation Fund?”

Owaiz Dadabhoy: That’s a great question and that’s because those particular holdings in that fund, it’s called the Participation Fund, but what we invest in is sukuk, and sukuk go through a couple of different factors before they come to market. And one of them is a review by their own group of scholars that have to give it the checkmark to certify that this particular sukuk is halal. And then, there’s a further certification at the end to make sure that it is remaining halal once it’s actually completed. So, sukuk do not have impure revenue from within them. Do you have anything to expound on that?

Monem Salam: No, I think that was a great explanation. The only thing I wanted to add was you mentioned about the time to pay it, which reminded me of something. And that is that purification, from a scholarly perspective, is not a Sadaqa. It’s not a charity. It’s a cleansing from whatever haram you have already done. So, the intent behind it should not be to take a tax write-off. It should not be for your own benefit. All of those things. It’s really kind of a shedding of those things that you’ve done haram to do that. Just keep that in mind. You know, when you calculate it and you’ve got to pay it in Ramadan, don’t count it toward your zakat or your Sadaqa. This is something you have to give away because you’re participating in something wrong.

Owaiz Dadabhoy: So, you’ve written a piece on Islamic standards, and you know, now we’re going to talk a little bit about this. And so, you can go to Saturna.com and so, the one on the left-hand side here. Evaluating Islamic standards is a great piece. We also have Islamic Investing 2.0 and Beyond Bonds and The Case for Active Management in ESG. So, do you have anything else that you wanted to add about any of these pieces that you’ve written?

Monem Salam: No, I think that you kind of said it. They are great pieces. Just the Islamic Investing 2.0 really talks about why we decided to use ESG from an Islamic perspective, so it goes into that. Beyond Bonds is really looking at, you know, sukuk as an alternative asset class. I know, Hamdulillah, it’s Islamic, but there are a lot of other people who look at sukuk as an investment vehicle. So, it gets into that. That was written by Patrick Drum, who is our sukuk portfolio manager, of the Participation Fund. So, all of them are very good in there. And then, the last one, the Active Management, you know it’s really a matter of we have to do our own active part in really screening out those companies that are ranking high when it comes to environmental, social, and governance, and then a lot of times, passively, they slip through the screens. And so, this paper makes a good case for why it’s better to do active management when it comes to ESG. 

Owaiz Dadabhoy: Alright, so you can check those out at Saturna.com. Obviously, any of the Funds that we’ve talked about today, whether it’s the Amana Income Fund, which started in 1986, the Growth Fund which started back in 1994, the Developing World Fund which started in 2009, right after the Great Recession, or the Participation Fund which invests in sukuk—only in sukuk—it’s the only fund out there like that where it’s 100% investing in sukuk. That one was started back in 2015. So, these are the folks that you can contact if you have questions, you want to email us, you want to get a little bit deeper into your own portfolio, you want to find how you can invest in the Amana Mutual Funds within your 401(k) at work or roll over an old 401(k) to make it based on Islamic principles. You can contact any of us. You have Monem’s information, my information, Sameer is in New Jersey. Amjad is in Chicago and Haitham is in Southern California. So, we thank you all for watching this portion of it, now we are going to try to address some of your questions in the chat group. Let me take a look here. Does Amana Mutual Funds make zakat...okay. In some countries that, you know, are governed by Muslims, they will take out your zakat and pay it for you. In the United States, we don’t do that. There are rules about taking your money without your authorization. So, what we can do is we can calculate your zakat for you using one of the methods of zakat calculation and then it is up to you to pay the zakat to the charity of your choice.

Monem Salam: One thing on that. Sorry. We have a zakat brochure on our website. And in order for us to be able to make that calculation, there is a small form that they have to fill out and send in. And if they can do that, then on an annual basis, we’ll calculate the zakat and send you a statement that shows how much you owe in zakat.

Owaiz Dadabhoy: Okay. One of the questions here says, “What does diversification in a portfolio mean? If I have one mutual fund with Amana, should I open different accounts?” So, I’ll just give the answer on that one. Diversification is within each individual Amana Mutual Fund. So, you just have to have an account. So, let’s say you have an IRA account with us, and you have Amana Income Fund. We’ve diversified that particular fund with different sectors of the economy. Now, if you want to asset allocate, you can also move money into the Participation Fund. Within that same account. But, you know, this brings up another topic, which we won’t go too deeply into here, but it’s really about coming up with what your financial goals are and opening up accounts based on that. Because, you know, if you are... you have a child who’s two years old and you want them to go to college when they’re 18, an education savings account could be the solution there for you. If you have your money in a regular investment account and not into a retirement account, you’re not getting the tax benefits there. So, you should consider opening up a retirement account. Let’s see. So, we have a question here. “For some of us that have 401(k)s and limited choices of funds to pick from, how do we ensure or pick target date funds that are also halal. Do you want to start with that one, Monem?

Monem Salam: Sure, I can do that. So, that’s a difficult choice that you have, right? So, first of all, you know, let’s be very clear that none of the funds that you’re going to buy are going to be Shariah compliant. They don’t have certification. Managers don’t even care what they’re buying as far as Shariah is concerned. And so, we have to start off with that fundamental understanding that what funds you’re buying in your plan are not going to be Shariah compliant. One way to do that, however, is that a lot of companies offer a brokerage option within the 401(k). And if you go into the brokerage option, then you are allowed to buy anything you want. So, you can buy the Amana Funds through that brokerage option and then make your portfolios halal. And so that’s what I would recommend doing is to really talk to your 401(k) provider. Start with your HR. And then ask them about this option and if you have it, then you can put your money into the brokerage within the 401(k). So, it’s still... you get the benefits of taxes and everything like that. And you end up investing in the Amana Funds through the brokerage option within your 401(k).

Owaiz Dadabhoy: Okay. Alright. So, somebody is asking here if they want to buy some halal stocks on their own, can Amana guide them with providing financial advice.

Monem Salam: So, that’s a good question. So, I would say financial advice is different than whether or not a company, a stock, is halal or not. So, I would kind of separate those two. What we consider—Owaiz, you and I are probably on the same page—what we consider, you know, financial advice is going to be how much do you need for retirement? When should your kids go to college? Where and how much can they afford? All of those things are financial advice. When it comes to stock picking and whether or not it’s halal or not, we do not offer that service, right? But rest assured that if we own it in our portfolio then it’s halal.

Owaiz Dadabhoy: Okay. And so, you know, we do have a listing of the stocks that we own on our website and you can find those in the annual report. However, you know, we change that every six months or so, so if we’re making a change in our portfolio, you’re not going to know about that. So, if you pick a company and you want to invest in it, then you’re going to have to make sure to come back and look at our reports and see if we have made the change. That’s why we take care of it for you. Also, of course there’s greater risk in individual stock buying. I give this story that when I speak to doctors and I ask them, you know, “What are you investing in on your own?” because you know, many of them have brokerage accounts. And they’ll tell me, “You know, health care, or pharmaceuticals or what not,” but that’s, remember, one sector of the economy. If that sector is not doing as well at a given time, your entire portfolio is affected. When we speak at technology companies and they mention that they’re investing individually as well... they have Amana Mutual Funds, and they have some brokerage account money. They’re solely investing typically in technology and again, that’s only one sector. So, it’s better to be invested in multiple sectors so you take some of the risk out of your portfolio. 

Monem Salam: Owaiz, I’ll give you an anecdotal story, if you don’t mind.

Owaiz Dadabhoy: Sure.

Monem Salam: And that is when I was living in Dallas, back in the early 2000s and even in the 1990s, there was a company over there, a Canadian company, by the name of Nortel. And Nortel’s US headquarters, I think, was in Dallas at the time. So, there were a lot of Muslims that were based in there and working for Nortel and those type of things. And they basically worked for Nortel and in their 401(k), they would have Nortel stock and then they would, you know, they had an employee stock purchase plan, so they would buy employee stocks and have a lot of their net worth in there also. You know, imagine what happened, and this really did happen, when Nortel declared bankruptcy. They lost their job. The 401(k) was zero. And their savings was zero because everything they had was in Nortel stock. And so, that’s why, I think, you’re mentioning this idea of, you know, diversifying is very important. Not in one stock but also not in one industry because I remember when Nortel was going down, so was Erickson and other companies that were in the same industry as Nortel was.

Owaiz Dadabhoy: Yeah, and you know, the case of Enron, as well, more recently and what happened in that case. The practical effect, as Monem just mentioned, you lost a lot of different parts of your financial life and the other thing that happens, then, is you have to work longer. There were some people during the Enron time where they were going to retire that year or the next year, and they ended up having to work for another five to ten years. So, definitely try to diversify your portfolio rather than just one or five or ten different stocks that you’re trying to manage on your own. Is there compounding interest involved in the profits?

Monem Salam: Okay. So, the profits are different than interest. So, let’s kind of break those out apart first. Profits are something that the company, after the revenues, and after paying for their expenses, they have money left over and that’s profit. I’m being very simplistic when I say this. You have revenues, expenses, whatever is left over is profits. So, that can go up. It can go down. It has nothing to do with interest. Interest is basically money that you earn extra on a loan. Okay? So, if I take my profits and I reinvest them back into the company, I am compounding the return. However, if it’s still considered halal because it was halal profits that I reinvested back into the company. Right? In compounding interest, obviously—interest is haram—so when I get that interest, it’s haram. And obviously, when I put it back in for more, it’s going to be haram as well.

Owaiz Dadabhoy: That’s correct. Very good. And we have a good question here, as well. How often are we checking regarding the 5% or less haram revenue screening? Quarterly? Annual? Etc. And what happens if we fail this? Right, that company fails and goes to 7% or 10%, what happens in that case?

Monem Salam: So, on a monthly basis we’re actually doing the screening of the 5,000 stocks that I told you about earlier in the presentation. And the reason is because different companies have different fiscal year-ends. And so, we have to do this on a monthly basis. On a quarterly basis is when we actually submit the portfolios to our advisor, Amanie. And then annually is the certification. Now, typically, I will tell you that a company doesn’t violate the haram revenue screen and the reason is that because there must be some fundamental thing happening as I mentioned to you earlier. Amazon got a license to sell alcohol. Right? Or there was a merger, an acquisition, and then the company became haram. So, typically, what doesn’t happen is all of a sudden, you know, let’s say Southwest Airlines began to sell so much alcohol on their planes that, you know, they failed the screen. Maybe during the Trump administration, that could happen, but definitely, probably not anymore. So, that’s something you want to keep in mind. The other part of it, also on the haram revenue side of it, would be the interest component. Right? The savings interest that they’re getting from keeping their money in money markets and as I mentioned to you, money market rates and bonds rates are so low that it would take a long time before they would actually have that number cross 5%.

Owaiz Dadabhoy: Okay. So, you know, this is a really good question as well and I think we have some information—you can correct me if I’m wrong—on our website, regarding how the 5% came into effect to begin with.

Monem Salam: So, that’s a good question. I think I have that information in Evaluating Islamic Standards. I will tell you, and let’s be honest, the 5% number is the only one that literally was pulled out of thin air. I’ll be honest with you. But why is it 5% and not something higher than that? And there are some numbers that are higher. Some people use 10%. The idea was that because there’s no, really, no percentage that we can derive from a hadith or the Quran or that type of thing, what the scholars were looking at was, “At what percentage of a company’s revenues or earnings does the nature of the company change to become that portion of it?” So, for example, our scholars said, you know, that if you have 5% of a company’s revenues are coming from this ancillary source, you’re basically changing the nature of that company. It’s no longer whatever it’s into, it’s getting into more than that. Some people said, “No, 5% is a little low, maybe 10% is the number.” Right? But somebody had to pick a number and our scholars chose 5% and somebody else chose 10%. Now, why do we do that? If you look, and I’ll get a little technical here. If you look in the book of Tahara, in the Hadith, right? You have this idea of... can you make wudu or ablution in a lake. Right? And so, there are certain criteria you have to meet before you can do that, right? The color can’t change. The smell can’t be there. So, there’s other criteria. So, if you look at it from a stock perspective, at percentage does the color or the smell of a company change in such a way that it’s no longer what the fundamental business of that company is?

Owaiz Dadabhoy: Very good. I think that’s a great, you know, example of what the scholars have to look at and how they have to derive these answers. And like you said, it is in the first publication that we mentioned. How much do we charge? What’s the annual fee for this service? I’m not sure exactly which service you’re talking about, but we have a couple of different things, right? One is the Amana Mutual Funds. You can go to our website and look up the fact sheets for each one, or just the, you know, if you look up Amana Income and Growth, you can find different percentages of what the expense ratio is. We do have the institutional share class, which has taken down the cost by about a quarter percent, so that’s been a great addition a few years ago, that we came up with.

Monem Salam: I just want to mention that speaking of this, of the fee change, we did reduce our fees back on December the 1st of 2020.

Owaiz Dadabhoy: Once again, yeah.

Monem Salam: And so, the fees are actually lower now for shareholders.

Owaiz Dadabhoy: Before I joined the company in 2008, at one point the fees on Amana Growth and Income were about 1.7%, 1.8%. Now they’re much lower than that, and the reason we can lower them is as we build up the assets under management, you know, there’s an opportunity for us to then lower the fees. And obviously, there are some mega, mega companies out there like Vanguard that can charge less than us, but that’s because they have a trillion dollars assets under management. The other place that, you know, I guess I can answer your question about fees is if you want to have an individually managed account by somebody like Monem or one of our other portfolio managers, that is a different cost structure and, in some cases, you know... once you get to a large enough amount, it’s going to be a better expense ratio than the Amana Mutual Funds, so you can take a look at that on our website as well, but basically it’s $2,500 a year and half a percent, so on a million dollars that would be .75. On two million dollars it would be .625, and it goes lower based on how much assets you hold. How do I transfer my old 401(k) and buy Amana Mutual Funds or do you have 401(k) and IRA plans that offer Amana Mutual Funds? So, if you come directly to us, you can have an IRA with us and buy the Amana Funds there. If you want to roll over—and I just had this question a couple hours ago—I want to roll over my old 401(k) to Saturna’s Amana Mutual Funds. We’ll help you through that process. I’ve given you my email address. And Haitham can give his as well here one more time. So, what you can do is you can roll that over into a rollover IRA and then you can buy the funds. The other thing that you can do is—Monem mentioned this earlier—if you have a 401(k) at work and, you know, they’ve given you 25 different funds, some of them are target date funds, which have stocks and bonds... so that’s not the best opportunity there. Or if you have stock funds, which are going to invest in everything under the sun, or, if you have a bond fund, which is strictly riba, then what you can do is ask your plan administrator or your benefits people to add a brokerage option if they don’t already have it. Now, speaking to somebody last week and he did this with his health care company that he works for. They have six different hospitals in the New Jersey area, and he asked them and about a month later they added the brokerage account. That is really fast for a company to add a brokerage account. It usually doesn’t cost the company anything, so you know, if you make a good enough pitch or if you have enough people to join you from your company that want this to be done, usually your benefits people, your HR people, will listen to you. And if you want tips on this, you can come to us as well. We can send you some examples of what you can write to your HR to have them do this for you. Do you have anything else to add, Monem? And does anyone else have any questions? Please go ahead and ask them.

Fund Fees and Rollover Risks

Monem Salam: No, I’m good. All the other services that we talked about, from zakat calculation to purification to all of the other ones, those are all complimentary for our shareholders.

Owaiz Dadabhoy: That’s right. Everything is complimentary and, you know, we’re just glad that you all have been with us and investors. Some of you have been investors, I’ve talked to some of them myself that have been investors since 1986 and, you know, we hope that you do share information about—just in general—with your nephews and nieces, your siblings, your parents, that there is such a thing as Islamic investing and there is such a thing as Islamic financing and I think, you know, we can also get the reward of helping other people to get out of what they’re currently investing in and into something that is based on Islamic principles. So, our best marketing is typically people that have already invested in the Amana Mutual Funds because they tell their circle. I went to a... I made a presentation one time in New Jersey as a masjid and at the end of the presentation I said, “You know, how many people now feel comfortable understanding this?” And everyone raises their hand. And I said, “How many of you knew of this before I came here?” And they all raised their hand. And it turns out, they told me afterwards, that it was a local brother who has since passed away who had told the entire community over and over again about the Amana Mutual Funds and for them to clean up their finances themselves. So, we thank you all for joining and for coming back month after month. We appreciate you and if you have any other kinds of topics that you’d like for us to cover, which are not housed on our website under webinars and Halal Money Matters, send me an email. [email protected] And we will consider adding those and we look forward to continuing to do this month after month. We thank you all and we hope to see you next month.

Please consider an investment’s objectives, risks, charges and expenses carefully before investing. To obtain this and other important information, which you should carefully consider before investing, about the Amana Funds in a free prospectus or summary prospectus, please visit www.amanafunds.com or call 1-800-728-8762.

Amana Disclosures
A Few Words About Risk
Amana Income Fund Holdings
Amana Growth Fund Holdings

Further Reading and Resources

Halal Investing »       Amana's Investment Process »       Purification Calculator »



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