is the type of stock that most growth managers have loved the past several years. It's enjoyed stable growth, and yet the company has regularly reimagined its business model to keep pace with new technologies and innovations. Over the last five years, the shares soared an average of 32.6% a year.

Nicholas Kaiser, co-manager of the $2.2 billion Amana Growth Fund (AMAGX), was also a big fan of Amazon (AMZN). The retail pioneer had been a staple of his fund for years.

But last November, Kaiser decided to sell it all. What prompted Kaiser to call it quits was Amazon's expansion into a new business line that could actually help its stock price rise even more: beer and wine. That violated a core requirement of the Amana fund: its investments must be consistent with Islamic principles.

"We hated to sell that one," Kaiser concedes. "We'd owned it for about a decade, and it's one that we had done very well with."



At first blush, Amana Growth looks much like any other large-cap growth fund. Its top holdings are sprinkled with high-quality growth names: Google, Oracle, Apple, IBM. But financial services are conspicuously absent. So, too, are some retailers like Amazon, Walmart and Target, because they violate the fund's mandate to avoid businesses that derive more than 5% of sales from alcohol, pornography, gambling or pork - activities and foods that are haram, or forbidden.

"Yes, it does restrict our universe in many ways," Kaiser acknowledges. "The good thing is that we probably know our companies quite well, and we try to make sure they're not doing something they shouldn't be."

In 1984, when Kaiser ran a midsize investment management firm in Indianapolis, he was approached by an Islamic investing club to put the group's money to work in accordance with the principles of Shariah, the Islamic moral code. Two years later, he launched the Amana Income Fund (AMANX) and, in 1994, the Growth Fund. His current firm - Bellingham, Wash.-based Saturna Capital Management, of which he is chairman - also manages the Amana Developing World Fund (AMDWX). Going by the last names of his investors, Kaiser estimates that only about 12% of his shareholders are Muslim.

In picking stocks, Kaiser is guided by a six-member advisory committee of academics and businesspeople. In addition to outright bans on certain types of activities, they have mandated that Kaiser avoid leverage, thereby bypassing any stocks whose debt-to-market-cap ratio exceeds 30%. The result is a portfolio of high-quality names with large piles of cash.

"We're very much focused on technology because this sector doesn't have a lot of debt," Kaiser says about the fund's 42% allocation to the sector. If the cash is a by-product of some other business and not an attempt to make profit, it passes muster.



Investing the Islamic way seems to be working for Kaiser, an Episcopalian. For the 10 years ended Feb. 28, Amana was up 12.5% a year on an annualized basis, according to Morningstar; that puts it in the top 2% of large growth funds. For the last five years, the fund is up 5.6%, besting 68% of its competitors. Avoiding financial stocks helped Amana Growth avoid the brunt of the financial crisis.

While the cautious approach to balance sheet strength wins approval from Muslims, the strategy can sometimes falter. As financials have rallied, the fund has suffered. Over the last 12 months, it's up 6.8%, while the S&P 500 is up 13.5%. "The companies that have done well when we're printing money like crazy are financials and highly levered companies, and those are the ones we don't have," Kaiser says.

Amana also doesn't trade much, holding its stocks around five years on average. "We're not supposed to gamble with the fund," Kaiser says. "It's OK to invest for the long term, though."

As a result of the low turnover and other strategies, Amana Growth gets high marks for tax efficiency. Morningstar assigns a tax cost ratio of 0.03% to the fund over the last 10 years, meaning that 0.03% of the fund's performance goes to taxes. That places it in the top 2% of the category.



As with many other growth funds, Amana's top holding is Apple (AAPL). It's not hard to see why. Kaiser has been a strong supporter of the stock for a dozen years, as the company moved away from desktop computers into category-crushing mobile devices.

For years, Apple dominated the mobile device industry it helped create, with earnings soaring quarter after quarter. But the stock's recent plunge - a drop of roughly 37% since its September high - has many wondering whether the company's best days are behind it.

Not so fast, Kaiser says. Apple might be past the days of triple-digit earnings gains, but it continues to be a growth juggernaut. "It's more like what Microsoft was in 1999," he says. "It's still got a strong earnings growth record, and that's going to continue. ... I don't think [the innovation] is slowing."

More likely, Kaiser believes, Apple's board will approve a dividend increase and stock split to increase shareholder value and to deal with the $137billion cash hoard on its balance sheet.

If anything, Apple's $441 price tag as of Feb. 28 and forward P/E ratio of 8, according to Morningstar, make it more of a bargain than before. "We don't see any long-term risk here," he says.

The portfolio also includes Google (GOOG), the fund's No. 2 holding. Over the 12 months ended on Feb. 28, Google shares were up 29.6%. Still, its forward P/E ratio is just 15. Kaiser waited a few years after Google's 2004 initial public offering to see a sustained pattern of earnings growth before buying the stock. He now believes Google's Android mobile phone operating system can drive earnings growth as online ads and search become less profitable.

In fact, the research firm IDC reported that, in the fourth quarter, Apple's share of the tablet market slipped below 50% for the first time. Because Android can run on any manufacturer's device, the potential market share for that operating system is much larger. Android has a 70% market share of the smartphone business, with Apple's iOS snagging 21%.

Kaiser believes Google's stock has room to rise. "They continue to refine the product to make it more useful for users," he says. In the fourth quarter of 2012, Google's earnings minus some costs were $10.65 a share, compared with $9.50 a year earlier.



The health care sector, with its low levels of leverage and steady growth, is another natural fit for the portfolio. But Kaiser bypasses some of the slow and steady growers in the pharmaceutical sector for racier biotech names such as Amgen (AMGN). The passage of the federal health care overhaul made the sector even more attractive, Kaiser says.

"It's bringing 30 million more people into the health care system," he says. "I don't think the government is intending to take away all the profit from businesses."

Amgen has had strong sales with its rheumatoid arthritis drug Enbrel and an osteoporosis therapy, Prolia. Aranesp, its an anemia drug, continues to be a money maker, even though sales of the drug, given primarily to chemotherapy patients, were down 9% in 2012. Amgen's net profit fell in the fourth quarter to $1.01 a share, from $1.08 a year earlier. Nonetheless, Amgen's stock continues to reach new highs. The shares returned 36.9% over the last 12 months, according to Morningstar.



Ilana Polyak, a Financial Planning contributing writer in Northampton, Mass., has also written for The New York Times, Money and Kiplinger's.



Nicholas Kaiser

Amana Growth Fund


Credentials: A.B. in economics, Yale University; M.B.A., University of Chicago

Experience:Portfolio manager, Amana Growth fund (1994-present); chairman and chief investment officer, Saturna Capital Management (1989-present); president, Unified Management Corp. (1976-1989)

Ticker: AMAGX

Inception of fund: February 1994

Style: Large growth

AUM: $2.2 billion

3-year and 5-year performance as of Feb. 28: 9.75%, 5.56%

Expense ratio: 1.13%

Front load: None

Minimum investment: $250

Alpha: -2.18 vs. S&P 500

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