Portfolio allocation (no bonds allowed), please suggest

[mikep]

For the safer side of the portfolio and you can't have bonds you might want something like Vanguard's Market Neutral fund hedge fund. -- with a lower minimum from somewhere else. I know nothing about it except that it has a 2.8% ER (high due to the dividend rules on short sales) and is relatively uncorrelated with the rest of the stock market. It also has a 250K minimum which is prohibitive for most investors. "Vanguard Market Neutral Fund seeks to provide long-term capital appreciation while limiting exposure to general stock market risk". Any experts on this fund??

VG also has some Admiral share only funds of safter stocks such as materials, consumer staples etc. that are still equities but tend to perform better through downturns.

Commodities/CCF may be another alternative, but it might earn interest from roll return, and they have their own risks, etc. It might give some inflation protection (along with REITs).

[Houston101]

I've looked at the Amana funds and have come away pretty impressed. Granted, they are not passive funds (and they have expense ratios that prove that), but they seem to behave very well and are diversified enough that they haven't had the same risk as most active funds.

I looked at those too but like you said they are not passive fund and have higher expense ratios. Not really the boglehead style of investing.

[DTSC]

I know whole life policies are not favored by many here, but might they not satisfy the OP's requirements?

[dave.d]

Could you do merger arbitrage? For example, go to Yahoo finance and look at a company called ADC Telecomm (ticker ADCT). It's being bought by Tyco for $12.75 a share, expected to close at the end of the year, currently selling for $12.65. There is a contract for the purchaser to buy the shares, but your interest would be equity, not debt.

The annualized return is low but similar to a short-term bond, suggesting similar risk. This would be modest trouble to manage, but there are websites that publish lists of companies being purchased, from which you could assemble a diversified portfolio that would be likely to earn a low, steady return (although many deals are risker than my example). Just a thought.

[leonard]

So - I think it cannot be done honestly with other than physical assets.

jej

I understand that almost every company has some interest income, but I am compromising on that as long as I don't have any direct stake in interest bearing assets like bonds etc.

If you own stock, you are an owner of a company. If the company owns an interest bearing asset and receives interest, then you are receiving interest directly. Nothing is being "passed through".

[JTravers]

So - I think it cannot be done honestly with other than physical assets.

jej

I understand that almost every company has some interest income, but I am compromising on that as long as I don't have any direct stake in interest bearing assets like bonds etc.

If you own stock, you are an owner of a company. If the company owns an interest bearing asset and receives interest, then you are receiving interest directly. Nothing is being "passed through".

There are Shariah tests that Islamic finance scholars have developed for determining the acceptability of an investment. One is that its gross income cannot be made up of more than 5% interest income. As long as the interest income a company generates is less than 5% of gross income, it is considered de minimus and holding stock in that company is acceptable.

[JTravers]

For the safer side of the portfolio and you can't have bonds you might want something like Vanguard's Market Neutral fund hedge fund. -- with a lower minimum from somewhere else. I know nothing about it except that it has a 2.8% ER (high due to the dividend rules on short sales) and is relatively uncorrelated with the rest of the stock market. It also has a 250K minimum which is prohibitive for most investors. "Vanguard Market Neutral Fund seeks to provide long-term capital appreciation while limiting exposure to general stock market risk". Any experts on this fund??

Shorting, in general, is not allowed in Islamic finance because you cannot sell that which you do not own. Even putting that aside, the act of borrowing shares (which you need to do in order to short them) wouldn't be permissible since it involves paying interest on the value of the borrowed shares.

[JTravers]

I looked at those too but like you said they are not passive fund and have higher expense ratios. Not really the boglehead style of investing.

You have to do the best you can with the tools currently available. Maybe in the future more ETFs will be available that follow Shariah indexes, but until then it seems like the Amana funds behave better than most other Shariah-compliant funds out there (IMANX, ADJEX).

One thing that looks interesting as a bond substitute is a new fund recently released by Azzad Funds called the Wise Capital Fund (WISEX). This is a fund that should be watched to see if it can achieve its goals. High expense ratio, though. Hopefully, it'll get lowered the way ADJEX was recently lowered to 0.99%.

[JTravers]

Could you do merger arbitrage? For example, go to Yahoo finance and look at a company called ADC Telecomm (ticker ADCT). It's being bought by Tyco for $12.75 a share, expected to close at the end of the year, currently selling for $12.65. There is a contract for the purchaser to buy the shares, but your interest would be equity, not debt.

The annualized return is low but similar to a short-term bond, suggesting similar risk. This would be modest trouble to manage, but there are websites that publish lists of companies being purchased, from which you could assemble a diversified portfolio that would be likely to earn a low, steady return (although many deals are risker than my example). Just a thought.

Seems like a reasonable substitute. The only problem would be that the specific risks involved are different than bond risks and would show up at different times. Also, keeping your asset allocation on track may be difficult because of the varying deal flow. But, yes, if a deal has a 100% probability of completion, the returns should theoretically mimic short-term interest rates.

[sometimesinvestor]

Two people have have suggested the Amana funds and I certainly would at least read the prospectus to see how they address the issue of investing while conforming to SHaria law.

[Houston101]

There are Shariah tests that Islamic finance scholars have developed for determining the acceptability of an investment. One is that its gross income cannot be made up of more than 5% interest income. As long as the interest income a company generates is less than 5% of gross income, it is considered de minimus and holding stock in that company is acceptable.

It doesn't make sense though! Beer is also not permitted in Islam but I haven't seen any Islamic Scholar say that you can drink it as long as there is only 5% concentration.

I am not an expert on Islamic finance but I don't get it.

[JTravers]

It doesn't make sense though! Beer is also not permitted in Islam but I haven't seen any Islamic Scholar say that you can drink it as long as there is only 5% concentration.

I am not an expert on Islamic finance but I don't get it.

There are Islamic legal rulings that go into all the details. If I can find any that are specifically about the 5%, I will post a link.

And, BTW, there are legal rulings that determine at what % concentration "filth" (i.e., najasa) permeates something. For example, urinating in a bath tub isn't the same as urinating in the ocean (as far as the purity of the water is concerned). But this is probably getting off topic

[Houston101]

There are Islamic legal rulings that go into all the details. If I can find any that are specifically about the 5%, I will post a link.

And, BTW, there are legal rulings that determine at what % concentration "filth" (i.e., najasa) permeates something. For example, urinating in a bath tub isn't the same as urinating in the ocean (as far as the purity of the water is concerned). But this is probably getting off topic

I understand what you mean, if you come across anything please post it here.

[leonard]

So - I think it cannot be done honestly with other than physical assets.

jej

I understand that almost every company has some interest income, but I am compromising on that as long as I don't have any direct stake in interest bearing assets like bonds etc.

If you own stock, you are an owner of a company. If the company owns an interest bearing asset and receives interest, then you are receiving interest directly. Nothing is being "passed through".

There are Shariah tests that Islamic finance scholars have developed for determining the acceptability of an investment. One is that its gross income cannot be made up of more than 5% interest income. As long as the interest income a company generates is less than 5% of gross income, it is considered de minimus and holding stock in that company is acceptable.

There is a shariah definition of "gross income"? Interesting idea to have a non-secular definition of gross income. Must be tough to reconcile to GAAP.

Anyway, 5% seems arbitrary to me, but then I don't have to follow the logic to its conclusion.

[Houston101]

There is a shariah definition of "gross income"? Interesting idea to have a non-secular definition of gross income. Must be tough to reconcile to GAAP.

I don't understand why is that such a surprise. Modern finance did not invent the concept of Gross Income. Trade & business has been around almost since the dawn of mankind and the birth place of Islam was a huge center of trade.

Not only Islam but Judaism and Christianity will tell you how to interpret certain business transactions. You might not find the definition directly in Quran or Bible but that should be no surprise because scholars usually look at how certain transactions were done at that time in the past and how they would apply to the present if the same logic/reasoning is applied now.

[JTravers]

There are Shariah tests that Islamic finance scholars have developed for determining the acceptability of an investment. One is that its gross income cannot be made up of more than 5% interest income. As long as the interest income a company generates is less than 5% of gross income, it is considered de minimus and holding stock in that company is acceptable.

Another standard that is frequently applied instead is that all revenue from impermissible sources should be kept to less than 5% of total revenue (I'm still searching for an explanation of the reasoning behind the 5% rule; I know I've read it somewhere but tracking it down now is proving difficult).

[Alex Frakt]

How about lowering volatility by using covered calls on a diversified selection of highly-liquid, but shariah compliant stocks? A covered call means you buy (or already own) a security and you sell an option to someone else to buy your security at a given price in the future (since you have to own the shares, I assume it passes the no-shorting test). The premium you receive for selling your option gives you some protection if the share price decreases. What you lose is the potential for large increases if the stock goes up because the buyer of the option will force you to turn over the security at the agreed price.

Here's an article on using deep in the money covered calls - http://seekingalpha.com/article/111840- ... ered-calls - which gives the most bond-like results.

[JTravers]

How about lowering volatility by using covered calls on a diversified selection of highly-liquid, but shariah compliant stocks? A covered call means you buy (or already own) a security and you sell an option to someone else to buy your security at a given price in the future (since you have to own the shares, I assume it passes the no-shorting test). The premium you receive for selling your option gives you some protection if the share price decreases. What you lose is the potential for large increases if the stock goes up because the buyer of the option will force you to turn over the security at the agreed price.

Here's an article on using deep in the money covered calls - http://seekingalpha.com/article/111840- ... ered-calls - which gives the most bond-like results.

Thanks for the suggestion. However, I don't believe trading in derivative securities is permissible due to problems with the derivatives contract itself, as well as the fact that buying or selling a contract is not permissible.

[bigROI]

With all do respect to the OP I have found this concept of no interest completely irrational. I hope to remain true to their structure they don't receive any interest on their checking or savings else they are defeating the purpose as well but then throwing away good money at the same time (also consider the bank is lending your money out making interest at the same time). In some way a vehicle they own is receiving interest unless they are pure cash and not investing. I have to use the analogy of a theoretical post "I want to win the Indy 500 with 1/2 a pit crew". Sure you could win but you have set yourself at a severe disadvantage right off the line and probably could only win by luck.

Many people forget that the sacred texts for many of religions were written and edited by man - who are with inherent flaw. I don't think the Koran took into account inflation circa it's creation - most payment was probably made in gold or silver at the time. I myself am a God fearing person but all the technicalities of religions have been created by man who wants to exert control, this transcends all faiths. I am amused by those who are more concerned with worshiping their religion then God. Something to consider deeper for those who consider themselves spiritual.

[stratton]

Well, I find it interesting even if won't be investing this way.

A Shariah fund avoids financials and it appears they avoided a lot of the resulting problems. I wouldn't be surprised if the non-interest requirements might also be an indirect filter for higher quality companies.

Paul

[JTravers]

Sure you could win but you have set yourself at a severe disadvantage right off the line and probably could only win by luck.

Depends on your definition of "win."

Many people forget that the sacred texts for many of religions were written and edited by man - who are with inherent flaw. I don't think the Koran took into account inflation circa it's creation - most payment was probably made in gold or silver at the time. I myself am a God fearing person but all the technicalities of religions have been created by man who wants to exert control, this transcends all faiths. I am amused by those who are more concerned with worshiping their religion then God. Something to consider deeper for those who consider themselves spiritual.

With all due respect, I don't think you know what the Quran and Islamic law has and hasn't taken into account. The Islamic concept of rib'a (which is commonly translated into "interest " or "usury") is entirely different than inflation. Islamic finance does not disregard the time value of money.

I find it completely irrational that you're trying to turn this into an anti-religion rant. Please try to stay on topic.

[bigROI]

Sure you could win but you have set yourself at a severe disadvantage right off the line and probably could only win by luck.

Depends on your definition of "win."

Many people forget that the sacred texts for many of religions were written and edited by man - who are with inherent flaw. I don't think the Koran took into account inflation circa it's creation - most payment was probably made in gold or silver at the time. I myself am a God fearing person but all the technicalities of religions have been created by man who wants to exert control, this transcends all faiths. I am amused by those who are more concerned with worshiping their religion then God. Something to consider deeper for those who consider themselves spiritual.

With all due respect, I don't think you know what the Quran and Islamic law has and hasn't taken into account. The Islamic concept of rib'a (which is commonly translated into "interest " or "usury") is entirely different than inflation. Islamic finance does not disregard the time value of money.

I find it completely irrational that you're trying to turn this into an anti-religion rant. Please try to stay on topic.

By win I mean to get a maximum return on investment while mitigating appropriate risk using whatever vehicles that present themselves. To remove one will reduce your agility of position - something that would pain most all boglers. My rant is not antireligios, it is anti-mingle religion and finance. I think the only way one who has to maintain their standards on this one is to bank with a strictly Shira abiding institution, witch I think most here may not have experience. The poster may want to also visit some religion forums and find the place that gets the most praise. Here you could easily get guided into a investment that is in conflict with your principals.

offensive religious comments deleted by admin alex. If you can't address the question asked, then don't post.

[JTravers]

By win I mean to get a maximum return on investment while mitigating appropriate risk using whatever vehicles that present themselves. To remove one will reduce your agility of position - something that would pain most all boglers.

And I think the OP's definition of win would include a caveat that he would like to "win" while also trying to adhere to the principles his religion dictates he should live by. Not everyone is trying to maximize returns above all else.

My rant is not antireligios, it is anti-mingle religion and finance.

I think the original poster made it clear that he did want to mingle the two. If you don't have an answer for his query, I don't understand why you would bother trying to convince him otherwise. If applying his religious principles to the financial side of his life gives him peace of mind, who are we to dismiss it as inappropriate?

I think the only way one who has to maintain their standards on this one is to bank with a strictly Shira abiding institution, witch I think most here may not have experience.

Good point. But this is the "Help with Personal Investments" forum, so I don't think it's unreasonable to pose the question. There are many knowledgeable people on this board, knowledgeable in things far beyond what one would expect. If no one can answer the question, so be it; the discussion will die a natural death.

The poster may want to also visit some religion forums and find the place that gets the most praise. Here you could easily get guided into a investment that is in conflict with your principals.

True, but maybe he likes the Bogle way and was curious to see if anyone knew of a way for him to apply it despite his restrictions. No harm in asking.

[Houston101]

Here you could easily get guided into a investment that is in conflict with your principals.

Most of the posters on this forum are really smart people and actually with the exception of the interest issue the financial issues discussed on this forum are quite in line with Islam. e.g. spending within your means, no gambling with your money, investing in health and family etc. I can go on & on but I think you got the point.

[Valuethinker]

Here you could easily get guided into a investment that is in conflict with your principals.

Most of the posters on this forum are really smart people and actually with the exception of the interest issue the financial issues discussed on this forum are quite in line with Islam. e.g. spending within your means, no gambling with your money, investing in health and family etc. I can go on & on but I think you got the point.

Heh... Mohammed's family were traders .

What I did enjoy was 'a investment that is in conflict with your principals'.

Indeed, many of my investments would conflict with my high school Principal-- send me straight to his office .

In addition, many of my investments have caused me to lose capital, another conflict with my principals .

[JTravers]

Indeed, many of my investments would conflict with my high school Principal-- send me straight to his office .

In addition, many of my investments have caused me to lose capital, another conflict with my principals .

[JTravers]

I found a couple possible Shariah-compliant bond substitutes.

University Islamic Financial offers 1, 2, and 5 years CDs that share profits from its Shariah-compliant mortgage business.
http://www.universityislamicfinancial.com/deposit_rates.html

The only downside is that the rate of profit-sharing ("interest") is reduced in months where they take a loss on a mortgage. You can see that all of the profit was wiped out in August and there was a slight reduction in September.
http://www.universityislamicfinancial.com/file/PDF%20Forms/SHAPEAccountPerformance.pdf

I also stumbled across the WISE Capital Fund.
http://azzad.net/new/products_mutual.aspx

I'm a little leary of this, though, because Azzad Funds has a worse track record than the Amana funds when it comes to equity investing, and they don't seem to have a lot of information about the fund on their website. The best explanation I could find was this video.
http://azzad.net/new/azzad_videos.aspx

Here are the holdings in WISEX according to Morningstar. Looks like they are holding a lot of cash while trying to fill the portfolio with available sukuk (aka "Islamic bonds").
http://portfolios.morningstar.com/fund/holdings?t=WISEX&region=USA&culture=en-US

Not sure why they are holding those random stocks, but I imagine the portfolio will slowly get filled with income producing investments as they are able to buy them.

Hopefully, more options will become available in the future.

One thing that I saw that is a little disheartening is that the only passive index Shariah-compliant ETF, the JETS Dow Jones Islamic Market International Index Fund, is liquidating due to low assets.
http://www.indexuniverse.com/sections/news/8081-javelin-to-shut-shariah-based-islamic-etf.html

In addition, the registration for the ShariahShares ETFs has been pulled. They were going to offer a FTSE Shariah US Index and a FTSE Shariah Developed ex US Index.
Original application
Deregistration

[JTravers]

Good news about the ShariahShares ETFs. I emailed the CEO, and he told me that they are planning to roll out the ETFs in 2011. This will be a great option for Muslim investors that want to follow the Boglehead principles.

[samsway]

Since I am in a similar situation, let me ask you this. Has anyone considered sector specific investing excluding financials and consumer discretionary? That generally eliminates nearly all of the companies that would be forbidden. Granted that nearly all companies have some degree of debt... but nothing is ideal in this world. We try to approach the ideal and hope to achieve it some day

[sometimesinvestor]

While you are getting good advice in this forum I think you should look at the Amana funds at least to see what they invest in.

Here is a link to the holdings of the Amana income fund (its almost all dividend paying stocks)

http://www.amanafunds.com/retail/amanx_portfolio.shtml

The fund did relatively well in 2008 because of its lack of banks and other financials . It beat the S+P 500 for both the 5 and 10 year period in part because of its 08 performance but not for the three year period which does not include 08.. Its one year performance while not great is over 9% Its expense ratio is 1.2%

[Alex Frakt]

Note this is a restarted 2.5 year old thread. Check post dates before responding.

[Nomadix]

Interested to know if OP ever came to a conclusion on best portfolio allocation considering his needs?