Scott Valpey

AZZAD/Dow Jones Ethical Market Fund

by Marla Brill
MFI Publisher

Scott Valpey, manager of the AZZAD/Dow Jones Ethical Market Fund, thinks it’s time for a mutual fund that pays attention to Islamic principles.

“There are about 2.5 million Muslim households in America, and Muslims make up one-fifth of the world’s population,” he says. “We believe that a majority of them truly desire to have their money managed according to Islamic principles.”

As it stands now, what Valpey hopes will become a wave of investor enthusiasm for Islamic investing is barely a drop in the mutual fund bucket. His fund, launched in November 2000, has less than $1 million in assets, and isn’t yet open to the general public.  The oldest and largest Islamic mutual fund, The Amana Income Fund, was founded in 1986. Despite a respectable track record and a 15-year history, it has only $23 million in assets.

The AZZAD/Dow Jones Ethical Market Fund is based on the two-year-old Dow Jones Islamic Market Index, which was created for people who wish to invest according to Shari ah Law guidelines, the body of law governing the Muslim religion. (Although his fund uses the Dow Jones name because of its association with the Islamic Index, it has no affiliation with that firm.)

Certain businesses are incompatible with Shari ah Laws, so their stocks are not considered suitable for Islamic investing. These incompatible businesses lines include alcohol, tobacco, pork related products (McDonald’s gets the boot because is sells Sausage McMuffins), and entertainment, which includes hotels, casinos, cinema, pornography, and music.

Companies involved in financial services are also excluded because of the Islamic prohibition against earning or paying interest.  For that reason, the fund may also not invest idle cash awaiting investment in interest-bearing securities as other funds do.

 “I am a Christian and in my religion there is also a strong prohibition against interest,” says Valpey. “The Bible does seem to allow interest to be charged on commercial loans, so there is a moderate difference here between our faiths”

Unlike many socially-responsible funds, this one doesn’t screen out oil or chemical companies because of environmental concerns. In fact, its largest holding is Exxon Mobil. It also owns chemical stocks such as E.I. DuPont and Dow Chemical. Valpey says they are included because “we do not believe these companies have corporate policies designed to harm the environment, and most of their problems with environmental issues are related to accidents. As an ethical fund manager we are concerned about the environment and we are concerned about ethical/social issues, but it’s very difficult to quantify some of these subjective areas.”

To find the investment universe for this enhanced-index fund, Valpey screens out non-US companies from the Dow Jones Islamic Market Index, leaving a 65-company universe. He allocates 75 percent of the portfolio into those stocks, then puts the remaining 25 percent in the ones with the highest dividend yields. Because of the composition of the index, the fund tends to be weighted toward consumer, technology, energy, drug, and health care companies.

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