Investment returns on an Islamic-principled mutual fund in the United States: further evidence for the cost-of-discipleship hypothesis

Samuel A. Mueller

In a previous article in this journal, I tested a hypothesis derived from Iannaccone’s (1988) formal model of church and sect, that deviation in ethical standards away from the norms of the surrounding culture should be costly. To do this, I examined a set of ten mutual funds that applied various “ethical” screens to the possible investments they could make. After adjusting for risk, only one of the ten funds had a five-year return above the average for its type (and that by only a very small margin), while nine underperformed their category averages by a mean margin of over one percentage point per year.

The purpose of this note is to provide further evidence for the cost-of-discipleship hypothesis in the form of the returns on the Amana Income Fund,(1) a mutual fund based in Bellingham, Washington, and organized in 1984, which was developed specifically to cater to the investment needs of the growing Islamic community in the United States. As an Islamic fund, its prospectus forbids investment in gambling and liquor stocks,(2) and most important, there is an absolute prohibition against the acceptance of interest payments, which are regarded as usury under Islamic law.

The fund’s focus is therefore on stocks that pay high dividends, since dividends, amounting under Islamic law to the sharing of profits from a joint business enterprise, are a legitimate product of endeavor. Any cash the fund has is kept in a noninterest-bearing account,(3) and on the lone occasion in the fund’s history on which the fund received an interest payment, it was promptly returned to its source. The fund uses other strategies, such as the sale of call options on stocks it already owns, to enhance its returns; it also seeks to profit, like other equity funds, from capital gains on the prices of the stocks it owns.

Although the fund was organized in 1984, it became active only in mid-1986, and annual return data are available only since the start of 1987 (Jacobs 1993:190, 333). Jacobs classifies it as an equity income fund. Over the six-year period of this study, the average such fund had an annualized return of 9.9 percent. Amana, however, had annualized return of only 6.9 percent, and in none of the six years did its return meet the return of the average equity income fund.


Investment Returns on Relevant Funds and Indexes, 1987-92

(in percents)

Fund or Index

Equity Income Vanguard Government Money

Year Amana Fund Index Index 500 Fund Market Fund Index

1987 -8.6 -0.1 4.7 5.8

1988 13.6 13.7 16.2 6.8

1989 18.1 18.7 31.4 8.5

1990 -3.4 -3.1 -3.3 7.6

1991 23.6 24.6 30.1 5.6

1992 1.9 8.5 7.5 3.3


Six-Year Period 6.9 9.9 13.7 6.3

Source: Jacobs 1993:189, 190, 222.

These data, however, do not adjust for risk. Relative to the stock market as a whole, as represented by the returns on the Vanguard Index 500 Fund,(4) both Amana and the equity income average are less risky than the overall market. Specifically, beta (as measured against the Vanguard Index 500) is 0.851 for Amana and 0.728 for the equity income fund average. (See Mueller 1991:117-19 for a discussion of risk adjustment techniques.) The appropriate procedure in evaluating returns adjusted for risk is to subtract from a fund’s (or an index’s average) return the risk-free return (here taken as the return on United States government money market funds), and to divide the surplus return by the fund’s (or the index’s) beta, the measure of risk.

Government-only money market funds returned an annualized average of 6.3 percent in the six-year period of this study (Jacobs 1993:190). Amana, therefore, gained only 0.6 percentage points per annum more than the risk-free return, while the average equity income fund returned 3.6 percentage points above this measure of risk-free return. To take risk into account, however, requires that these excess returns be divided by the relevant betas. Such a procedure raises the annualized excess return for the Amana Income Fund to 0.7 percentage points, and it increases the annualized return on the average equity income fund to 4.9 percentage points.

The difference between these two risk-adjusted measures, 4.2 percentage points, is larger than any of the similar figures computed for any of the ten funds in my original article. Amana Income Fund’s performance thus provides further evidence for the cost-of-discipleship hypothesis; i.e., to live (and invest) by a set of standards different from those of the surrounding culture entails opportunity costs.

1 The fund has no current or historical relationship with the well-known Amana Colonies in Iowa. The Arabic word amana means “trust.”

2 The fund has no explicit restriction against tobacco stocks, but it has never held any. (Interview with management, 15 June 1993.)

3 On December 31, 1992, 11 percent of the fund’s $8.2 million in assets were in cash (Jacobs 1993:191).

4 The Vanguard Index 500 Fund holds all of the stocks in the Standard Poor 500 Index in proportion to their weights in the Index. Since it has expenses the Index itself does not, it is used here as a standard of comparison, representing the amounts a typical retail investor could expect to make by investing in the market as a whole.


Iannaccone, L. R. 1988. “A formal model of church and sect.” American Journal of Sociology 94:S241-68.

Jacobs, S. 1993. Handbook for No-Load Fund Investors, 1993 ed. Hastings-on-Hudson, NY: No-Load Fund Investor.

Mueller. S. A. 1991. “The opportunity cost of discipleship.” Sociological Analysis 51:111-24.

Samuel A. Mueller University of Akron

COPYRIGHT 1994 Association for the Sociology of Religion

COPYRIGHT 2004 Gale Group

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