NEW YORK - Islamic investment guidelines are some of the strictest in the world. Not only do they exclude the typical "sin" investments such as alcohol, tobacco and gambling, but Islam also prohibits earning interest. This means that companies invested according to Islamic Shariah law cannot have interest-bearing debt equal to or greater than 33.3% of their total assets.
But a family of mutual funds that invests according to Shariah guidelines has had strong performance, even in the difficult markets of this year. Alfanar Investment Holdings - a joint venture formed in 1997 by Permal Asset Management, New York, and the Saudi Economic & Development Co. - now has five mutual funds, with a total of $457 million in assets under management
Permal is a manager of managers with $8 billion under management; it monitors a group of seven money managers running a global fund under Shariah guidelines. The fund, Alfanar Investment Holdings NV, has $165 million in assets and has returned an annualized 18.2% since its inception in December 1997. Year-to-date as of Sept. 30, it had returned 2.3%.
Alfanar has four specialty equity funds that invest according to Shariah guidelines that also have had strong performance. The Essex Technology Ltd. Fund, with $173 million in assets, returned an average annualized 102.1% since inception in June 1999, and 18.8% year-to-date as of Sept. 30. The U.S Capital Growth Ltd. Fund, with $36 million in assets, returned an average annualized 19.5% since its June 1999 inception, with a decline of 8.7% year-to-date. The Alfanar U.S. Capital Value Ltd. Fund, with $40 million in assets has returned an average annualized 16.9% since its May 1999 inception and 1.2% year-to-date. Alfanar Europe Ltd., with $39 million in assets, has returned an average annualized 13.2% since its November 1998 inception and 2.9% as of Sept. 30.
Alfanar now is actively marketing the fund to new investors and hoping to gain institutional business. Thomas P. Evans, executive vice president of Permal, said the funds would be a good fit for investors in social responsibility funds. "These funds are cleaner than the ethical funds, the (so-called) green funds," he said.
"People can see that applying the (Shariah) principals doesn't lead to bad returns; it has led to superior returns."