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INVESTING FUNDS

INSIDER INTERViEW NiCHO LAS KA iSER, iMONEiM SALAIVI

I M A K I N G I M O N E YT H E i S L A M I C W A YA N E P I S C O P A L I A N A N D A M U S L I M J O I N F O R C E S T O T R O U N C ET H E M A R K E T S . B y M a n u e l S c h iffre s

B E L L I N G H A M , W A S H . , A P IC TU R E S QU Eseaside community near the Canadianborder, is about the last place you'dexpect to find a multihillion-dollarmutual fund company. Even moresurprising is that the firm. SaturnaCapital, runs two stock funds that haveproduced terrific results despiteorperhaps because ofa requirement thatthey adhere to sharia, or Islamic law.

Nicholas Kaiser, Saturna's chair-man, launched Amana Income in1986 after he was approached by agroup of Muslim businessmen whilehe was with another firm. Kaiser, anEpiscopalian, got the gig even thoughhe knew nothing about Islamic prin-ciples. In 1994 he started AmanaGrowth. The funds, which are opento all, now have combined assets of$2.7 billion. Over the past ten yearsthrough August 6, Amana Income re-turned 5.7% annualized, and Growthgained 3.8% annualized. Over thesame period. Standard & Poor's500-stock index lost 0.8% a year.

We visited Kaiser at Saturna's head-quarters. Joining the interview wasco-manager Monem Salam, his adviseron Islamic matters. An edited tran-script of the conversation follows:KIPLINGER'S: DOES THE KORAN SPECIFI-CALLY BAN INVESTING IN COMPANIES THAT

DEAL IN SUCH THINGS A S ALCOHOL, PORKA N D INTEREST, O R A R E iVIANY O F THESEPROHIBITIONS BASED O N SCHOLARLYINTERPRETATiONS? SALAM: T h in g s lik ep o r k , a l c o h o l a n d g a m b l i n g a r e c l e a r l ym e n t i o n e d in t h e K o r a n . T h e idea forn o t i n v e s t i n g in p o r n o g r a p h y is b a s e do n t h e K o r a n ' s p r o h i b i t i o n a g a i n s tl e w d n e s s and f o r n i c a t i o n . T o b a c c ois not m e n t i o n e d , but t h e K o r a n s a y sy o u s h o u l d n o t h a r m y o u r b o d y, a n dI s l a m i c s c h o l a r s h a v e i n t e r p r e t e dt h a t to m e a n y o u ' r e not a l l o w e d toi n v e s t in t o b a c c o .WHA T IF A COMPANY GETS ONLY A SMALLPART OF ITS BUSINESS FROM PROHIBiTED

Scruples ScorecardWH AT'S ALLOWEDThe Amana funds share some traitswi th socially saeened funds.

Type of bus inessTobaccoAlcoholGamblingArmamentsPork productsCompanies thatcharge interestHighly leveragedcompanies

TraditionalsociaiiyscreenedfundsNoNoNoNoYesYesYes

AmanafundsNoNoNoYesNoNoNo

ACTIVITIES? SALAM: T h e r e is a 5 % cu t -off. If a c o m p a n y g e t s l e s s t h a n 5 %of i t s r e v e n u e s f r o m a c t i v i t i e s t h a ta r e haramthat i s , f o r b i d d e n w e m a yb e p e r m i t t e d to o w n it. F o r e x a m p l e .S o u t h w e s t A i r l i n e s s e l ls a l c o h o l oni t s f l igh t s , b u t t h a t ' s a n c i l l a r y to itsp r i m a r y b u s i n e s s o f t r a n s p o r t a t i o n .T H E MOST INTRIGUING RULE I S T H E PROHI-BiTiON AGAINST INVESTING IN A COMPANYTHAT CHARGES INTEREST. W H Y I S THAT?SALAM: In I s l a m , a n y l o a n y o u m a k e isc o n s i d e r e d a c h a r i t a b l e ac t . I t ' s not ab u s i n e s s t r a n s a c t i o n . T h e K o r a n s a y st h a t if y o u g i v e s o m e b o d y a l o a n , y o us h o u l d n ' t e x p e c t to get a n y r e t u r nf r o m t h a t p e r s o n ; G o d w i l l r e w a r dy o u for i t . O ne of t h e b y p r o d u c t s ist h a t t h e r e c a n be no p r e m i u m or d i s -c o u n t on a n y d e b t o b l i g a t i o n . So ify o u ' r e t r a d i n g m o n e y , w h i c h is w h a ta d e b t o b l i g a t i o n i s , you t r a d e it at p a r .A N D THAT MEANS Y OU CAN'T OW N BONDSSALAM: Z er o in b o n d s and z e r o in anyi n t e r e s t -p a y i n g c a s h - t y p e i n v e s t m e n t ss u c h as T r e a s u r y b i ll s . KAiSER: A n dt h a t n o r m a l l y h u r t s us b e c a u s e itm e a n s w e c a n n o t i n v e s t ou r c a s h .WHAT ABOUT THE NOTION OF NOT BEINGABLE TO INVEST IN HIGHLY LEVERAGEDCOMPANIES, THOSE THA T CARRY A LOT

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OF DEBT ON THEiR BALANCE SHEETS?SA LA M: T h e to t a l d e b t o f a c o m p a n yA m a n a i n v e s t s i n h a s t o b e l e s s t h a no n e - t h i r d o f i t s m a r k e t c a p i t a l i z a t i o n .B e c a u s e t h e d e b t c a r r i e s i n t e r e s t ,w e d o n ' t w a n t t o i n v e s t i n c o m p a n i e st h a t h e a v i l y u s e d e b t t o f i n a n c e t h e i ro p e r a t i o n s .YOU HAD A BiG C ASH POSITION IN LATE2 0 0 8 - 3 5 % iN AMANA iNCOME. THAT'SA LOT OF MONEY THAT W ASN'T EARNINGANYTHING. KAISER: Z e r o i s b e t t e r t h a na lo s s o f 3 0 % . W e t e n d t o b e e s p e c i a l l yc a u t i o u s i n t b e I n c o m e f u n d . W e ' r en o t t r y i n g t o b e a t t h e m a r k e t i n t h a tf u n d . W e t r y t o b e a t t h e m a r k e t i nt h e G r o w t h f u n d.

MONEM, DO YOU HAVE VETO POWER OVERTHE COM PANIES THAT NICK CAN INVEST IN?SALAM: I t 's m o r e o f a d i s c u s s i o n a m o n ga n a l y s t s a n d t h e p o r t f o l i o m a n a g e r st h a n a n y o n e p e r s o n f l a t l y s a y i n g y e so r n o . K AISER : A l l e g i a n t T r a v e l ( s y m b o lA L G T ) i s a g o o d e x a m p l e . T h e c o m -p a n y i s b a s e d i n L a s V e g a s a n d f l i esg a m b l e r s t h e r e a n d t o o t h e r l e i s u r ed e s t i n a t i o n s a t d i s c o u n t p r i c e s . I t ' so n e o f t h e fe w s u c c e s s f u l a i r l i n e s . A i r -l i n e s a r e i n t e r e s t i n g b e c a u s e t h e y c a nb e l e v e r a g e d a n d m a k e a l o t o f m o n e yo n t h e u p s i d e , b u t t h e y a r e r e a l l y r i s k y .W e b o u g h t s o m e s h a r e s o f A l l e g i a n tfo r A m a n a G r o w t h , b u t t h e n w e i n v e s -t i g a t e d f u r t h e r a n d f o u n d t h a t b e c a u s eo f s u b s i d i e s f r o m c a s i n o o p e r a t o r s , t h e

NICK KAISER,RIGHT, PICKS THESTOCKS FOR THEAMANA FUNDS,AND MONEM SALAMMAKES SURE THEYMEET ISLAMIC STANDARDS.

c o m p a n y f a il e d o u r 5 % s c r e e n , s o w eh a d t o g e t r i d o f it . W e c a n o w n i t inS e x t a n t G r o w t h , a n o n - I s l a m i c f u n dw e r u n , a n d i t ' s a c t u a l l y a b i g p o s s e s -s i o n i n t h a t f u n d .HOW MANY COM PANIES QUALiFY FOR THEAMANA FUNDS? SALAM: T h e r e a r e a b o u t2 , 0 0 0 U . S . - t ra d e d c o m p a n i e s p l u sm a n y m o r e fo r e ig n f i rm s t h a t a r ehalal, o r p e r m i s s i b l e , a n d t h a t a r e r e a -s o n a b l y l i q u i d . F r o m t h e r e , w e s c r e e nf u r t h e r b a s e d o n S a t u r n a ' s c r i t e r i a .K AISER : S a t u r n a ' s a n a l y s t s h a v e a na p p r o v e d l i s t o f 2 2 5 s t o c k s . A l l o f o u rp o r t f o l i o s h a v e t o b u y s t o c k s fr o m t h a tl i s t . O f t h o s e 2 2 5 , m a y b e 1 2 5 a r e halal,m e a n i n g w e c a n b u y t h e m f o r t h eA m a n a f u n d s . T h e Is l a m i c fo c u s h e l p sb e c a u s e i t f o r c e s u s t o r e a l l y k n o ww h a t a c o m p a n y i s d o i n g .SO WHAT GETS A STOCK ON THE APPROVEDLIST? KAISER: W e ' r e b a s i c a ll y G A R P[ g r o w t h - a t - a - r e a s o n a b l e - p r i c e ] i n v e s -t o r s . W e l o o k a t f iv e y e a r s o f e a r n i n g s .W e lo o k b a c k m o r e t h a n w e l o o k f o r -w a r d b e c a u s e , t o b e h o n e s t , n o b o d yk n o w s w h a t t h e f u tu r e h o l d s . A p p l e( A A P L ) , w h i c h w e h o l d i n A m a n aG r o w t h , i s o u r p e r f e c t s t o c k . I t h a sd e l i v e r e d fi v e y e a r s o f c o n s i s t e n t e a r n -i n g s g r o w t h a n d f iv e y e a r s o f c o n s i s -t e n t s u r p r i s e s i n e a r n i n g s g r o w t h .A n d A p p l e ' s p r i c e - e a r n i n g s m u l t i p l e ,a t a b o u t 1 8 o r 1 9 t o d a y , c e r t a i n l y l o o k sr e a s o n a b l e . W e l i k e G o o g l e ( G O O G ) ,w h i c h i s a l s o i n t h e G r o w t h f u n d .WHAT IST HE MA IN DIFFERENCE BETWEENTHE GROWTH AND INCOME FUNDS? KAISER:T h e h o l d i n g s i n I n c o m e m u s t p a y ad i v i d e n d . W e t r y t o bu y s t o c k s t h a ty i e ld a t le a s t a s m u c h a s t h e S &P 5 0 0 .OF THE 125 STOCKS ON YOUR A PPROVEDLIST THAT ARE CONSIDERED HA LAL, HOWMANY PAY DIVIDENDS? KAISER: Ma y b e75 % t o 8 0 % - w e lik e d iv i d e n d s . T h eI n c o m e fu n d i s t h e h a r d e r o f t h e t w ofu n d s t o m a n a g e b e c a u s e w e c a n ' to w n m a n y o f t h e c o m p a n i e s t h a t p a yd i v i d e n d s . T h e y ' r e o ft e n b i g b a n k s o r

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I N V E S T I N G ' ' FUNDS

u t i l i ti e s , w h i c h c a r r y a lo t o f d e h t . W ee n d u p l o o k i n g a t a lo t of c y c l i c a l c o m -p a n i e s . T h e y m a y w a n t t o h a v e d e b t ,b u t b a n k s d o n ' t l ik e t o l e n d to f i r m sw i t h c y c l i c a l e a r n i n g s s t r e a m s . S ow e ' v e i n v e s t e d a lo t in b ig m i n i n gc o m p a n i e s . T h e y h a v e c y c l ic a l e a r n -i n g s , p a y d i v i d e n d s a n d m e e t o u r d e b tr e q u i r e m e n t s . E x a m p l e s a r e B H PBi l l i ton ( B H P ) a n d R i o T i n t o ( R T P ) .W e a l s o b o u g h t T e c k R e s o u r c e s( T C K ) , ab i g C a n a d i a n m i n i n g b u s i -n e s s t h a t d o e s n ' t p a y a d i v i d e n d , forA m a n a G r o w t h in J a n u a r y 2 0 0 9 .

DOES TECK RESOURCES MINE FOR GOLD?KAISER: Go ld , c opp er , coa l coal isw h a t w e w e r e a f t e r in t h i s c a s e . A n -o t h e r b i g n a t u r a l - r e s o u r c e s c o m p a n yi n G r o w t h isP o t a s h C o r p o r a t i o n ofS a s k a t c h e w a n ( P O T ) .A L L O F TH E R E S O U R C E S C O MP A N I E S A R EB A S E D O U TS I D E TH E U . S. K A I SE R : Y e s ,Amana Growth and Amana Incomeeach have a bout 20% of asse ts in for-eign s tocks. That h as generally helpedour performance in recent years .D O Y O U M E E T W I T H C O M P A N Y O F F I C I A L S ,O R D O Y O U M O S TL Y S T U D Y D O C U M E NT S ?KAISER: Bo th , but mos t ly i t 's based ons tudying a l l the pu bl ic ly avai lable in -

Top Holdings

f o r m a t i o n p r e s s r e l e a s e s , S E C f i l i n g s ,all t h e s t u f f t h a t ' s a v a i l a b l e o n t h e I n -t e r n e t in s o m e s h a p e o r f o r m . A n d w ej o i n in o n a n a l y s t c a l ls .WHAT EDGE DO YOU AND YOUR RELATIVELYSMALL COMPANY HAVE OVER THE FUNDINDUSTRY'S GIANTS? KAISER: I ' v e b e e nd o i n g t h i s a l o n g t i m e , a n d I g u e s s I ' ma c a r e f u l i n v e s t o r . A n o t h e r e d g e is t h a tw e d o n ' t s p e n d a lo t o f e f f o r t s t u d y i n gleveraged capital s tructures becausew e're not allowed to invest in thosekinds of companies . So we really k noww hat the busin ess is. SALAM: Becauseof our Islamic criteria, we're forced tolook closely into the revenue sourcesand balance sheets of companies .H A S YO U R I N A B I L I TY TO I N V ES T IN F I N A N -C I A L C O M P A N IE S H E L P ED T H E P E R F O R -M A N C E O F T H E A M A N A F U N D S ? K A I SE R : I tc e r t a i n l y h e l p e d o v e r t h e p a s t d e c a d e ,a l t h o u g h it h u r t i n t h e ' 9 0 s h e c a u s ef i n a n c i a l s t o c k s d i d v e r y w e l l t h e n .WHAT'S AN EXAMPLE OF A STOCK Y OU'VEADDED LATELY? KAISER: C h u r c h &D w i g h t ( C H D ) , t h e m a k e r o f A r m &H a m m e r p r o d u c t s , i s o n e . I t ' s g o t as t r o n g b a l a n c e s h e e t a n d g o o d g r o w t h .T h e c o m p a n y h a s h a d a s l e e p y h i s t o r ya n d is s t a r t i n g t o w a k e u p , a n d i t s

S A M E L IM ITA TIO N S , D IF F E R E NT STRATEGIESThe main difference between Amana Growth and Amana Income is that the latter m ust inve st,in stocks that pay dividends. That clearly makes Income the more conservative of th

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p r o d u c t s a r e b e g i n n i n g t o m o v e . A t 18t i m e s e a r n i n g s , t h e s t o c k is r e a s o n a b lv a l u e d , g i v e n a 2 0 % r e t u r n o n e q u i t ya n d a n n u a l e a r n i n g s g r o w t h of 2 0 % .P l u s , t h e s t o c k p a y s a n i c e d i v i d e n d .YOUR PORTFOLIO TURNOVER IS EXTREMELLOW, IN SOME YEARS AS LITTLE AS 2 % .WHAT PROMPTS YOU TO SELL A STOCK?KAISER: F o r s t a r t e r s , i t ' s a g a i n s t I s l a mt e n e t s to s p e c u l a t e o r g a m h l e . W e ' r el o o k i n g fo r c y c l i ca l - ty p e g r o w t h ,m a y b e a s l o n g a s a p r o d u c t c y c l e . L e t ' ss a y i t ' s a t e c h c o m p a n y t h a t h a s d e v e l -o p e d a l e a d e r s h i p p r o d u c t b e f o r e i t sc o m p e t i t o r s a r e a h l e t o e n t e r t h e s a m es p a c e . T h e c o m p a n y w i l l h a v e a c o u p lo f q u a r t e r s o r e v e n y e a r s of s t r o n gc o m p e t i t i v e a d v a n t a g e . W e ' l l s e ll w h ea c t u a l d e v e l o p m e n t s d o n ' t m e e t o u re x p e c t a t i o n s f o r t h e b u s i n e s s .WHAT ARE YOUR VIEWS ON THE ECONOMYKAISER: W e d o n ' t s e e c o r p o r a t e e a r n -i n g s i m p r o v i n g m u c h ay e a r f r o m n o wb u t t h e y ' l l h e n o w o r s e , e i th e r . C o m -p a n i e s h a v e a l r e a d y c u t a lo t o f ex-p e n s e s , a n d t h a t h a s b o o s t e d e a r n i n g sW e s ti l l d o n ' t k n o w w h a t w i l l h a p p e nt o i n c o m e - t a x r a t e s in t h i s c o u n t r ya n d in E u r o p e a n c o u n t r i e s , w h i c hh a v e s o m u c h d e b t . T h e w o r l d i s n o wl e a r n i n g t h a t e v e n t u a l l y y o u h a v e top a y for a l l t h a t d e b t . W e a r e n o l o n g e rg o i n g t o h a v e t h e d e h t - f u e l e d g r o w t ht h a t h a s b e e n a h a l l m a r k of W e s t e r ne c o n o m i e s s i n c e W o r l d W a r I I . T h e r ec e s s i o n w e j u s t w e n t t h r o u g h w a s t h eb i g g e s t s i n c e t h e ' 3 0 s , a n d i t ' s g o i n g t ot a k e a fe w y e a r s t o w o r k i t s e l f o u t .GIVEN WHAT'S HAPPENED SINCE 9/11,HAS EITHER OF YOU TAKEN FLAK FORBEING INVOLVED WITH THE AMANA FUNDSKAISER: N o , t h o u g h I b e l i e v e o u r r e g u -l a t o r s h a v e e x a m i n e d u s d i l i g e n t l y .SALAM: I t ' s i m p o r t a n t t o r e m e m b e rt h a t A m a n a i s n o t a n I s l a m i c f u n dc o m p a n y . W e ' r e a f u n d c o m p a n y t h a te m p l o y s I s l a m i c v a l u e s . A n y b o d y c a nb u y o u r fu n d s . I f y ou l i k e o u r v a l u e sa n d y o u l i k e o u r r e t u r n s , b u y o u rfunds. KAISER: W e b e l i e v e t h e m a j o r i t yof o u r i n v e s t o r s a r e n o t M u s l i m , i

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