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Fatima Iqbal: The benefits of investing in socially responsible stocks can be measured several ways. The first of these is that the investor is preparing for his or her future by getting a competitive return on an investment in the relatively transparent and liquid investment vehicles that are found in the US equity market.
The second benefit is in joining a growing movement within society. According to the Forum for Sustainable and Responsible Investment, one out of every six dollars under professional management in the United States is invested in a socially responsible way. Over the past few decades, socially responsible investing (SRI) has grown faster than the broader universe of professionally managed investments in the United States, topping $6.5 trillion at the end of 2014.
The last (and possibly most important) benefit is the peace of mind that comes with knowing that your investments are consistent with your ethical worldview. As a society, we have become more conscious of the effects of our consumption activities on the planet and others. Our investment opportunities should reflect those same concerns.
MutualFunds.com: Can you give us some insight into the criteria on how stocks are chosen for the Azzad Ethical Fund?
Fatima Iqbal: The stock universe is first narrowed down to stocks that pass our social responsibility screens. For the Azzad Ethical Fund, around 55% of the stocks in the benchmark pass our screens.
We then apply our quantitative scoring system to the stocks that remain. This scoring system takes a look at stocks in regards to four dimensions:
The last step is to perform a fundamental evaluation. This is, in effect, confirming the story behind what the numbers tell us. We realize that in some sectors, numbers do not tell the whole story, and digging deeper using various research sources helps us to understand the drivers behind a company.
MutualFunds.com: The Azzad Ethical Fund (ADJEX) was launched in 2000 and the Azzad Wise Capital Fund (WISEX) was launched in 2010. Has social media had an impact on the trend of ethical investing?
Fatima Iqbal: Social media is an increasingly important tool helping to construct the narrative about socially responsible investing. We are hearing more and more frequently that the younger generation is at the forefront of investing according to their values. And since they are also native users of social media and the “sharing society” we now live in, they seem to be more likely to talk to others about their investment choices through social networks like Facebook and Twitter. We have made a concerted effort at Azzad to be present on social media and to advocate for conscientious capitalism.
MutualFunds.com: What are some of the best sectors for investors trying to avoid “sin stocks” in their portfolio?
Fatima Iqbal: This depends on how one defines “sin.” The traditional categories of “sin stocks” include alcohol, weapons, tobacco, and gambling, among others. When we screen out these big offenders, one gravitates towards the technology and health care industries, and to a lesser extent, the consumer discretionary sector.
Ethical investments are available in most sectors, however. Avoiding alcohol and tobacco does not preclude you from making a good, responsible investment in the consumer staples space. Health-food distributors, for example, operate in that space, too.
MutualFunds.com: The Azzad Wise Capital Fund has international exposure and also contains bonds as part of the allocation mix. What are your thoughts as this relates to global investing and the fact that interest rates are falling in many parts of the world? How are you positioning the fund for the current economic environment?
Fatima Iqbal: While we see interest rates falling in many parts of the world, the Azzad Wise Capital Fund is not directly invested in major areas of concern like Europe and Japan. The Fund invests in only US dollar denominated securities to protect against currency fluctuations. Further, country diversification is an important characteristic of this Fund, especially during this challenging economic environment. We invest in various corporate and sovereign sukuk (an asset-backed form of fixed income), not conventional bonds. Those sukuk, which are treated like bonds by credit ratings agencies, offer differing maturities with shorter durations. The Fund, which is classified as a short-term bond fund, maintains a relatively low duration overall.
MutualFunds.com: Could you share with us the key investment themes you see as being most impactful on the Funds’ performance?
Fatima Iqbal: The Azzad Ethical Fund’s bottom-up stock-picking focus precludes it from focusing too heavily on over-arching themes. We are looking for companies with good long-term growth prospects, with management teams that have shown the ability to make the most out of such opportunities. Over time, we believe those types of companies should outperform their peers.
However, following the Great Recession, we have identified a number of stocks that, in addition to meeting the investment criteria outlined earlier, would directly benefit from the United States moving back towards full employment, as well as names that would benefit from the increased utilization of health care in the US. The recent stretch of outperformance by biotech stocks helped the Fund throughout 2014, as did consolidation within that industry.
For the Azzad Wise Capital Fund, we see four main investment themes impacting the Fund’s performance in the near future. First, US interest rates and their impact on emerging market fixed income will be a large driver. Second, individual security selection (sukuk picking) will be important both from a fundamental perspective as well as duration (curve) selection. We also expect the impact of oil and commodity prices on emerging market fixed income sentiment, especially as it concerns the MENA region, to impact the Fund. Finally, the overall soundness and quality of the individual banking and financial systems in the MENA region will be important to the Islamic banking portion of the Fund, especially in terms of their asset quality, bank capital, liquidity, and overall risk concentration.
Fatima is also a published writer and frequent speaker at conferences and seminars in the United States and abroad. She has served as a subject matter expert by such media outlets as the Associated Press, CNNMoney, and The Wall Street Journal.
Fatima resides in the suburbs of Chicago with her husband and children. Besides her work at Azzad, she serves as a director of the Diwan Foundation, a non-profit organization for students at Cornell University.
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