Shariah-compliant investors avoid companies that get more than 5 percent of revenue from "haram," or forbidden, activities. However, if the company's main business touches on something forbidden, even if it contributes only a small amount to sales, then it's out.
Case in point: A few years ago, an analyst at Kaiser's firm, Saturna Capital, noticed alcohol for sale at a Target store in California. A few calls to the company revealed that the retail giant was testing out alcohol sales in the state. "If your business is buying wholesale and selling retail, then the alcohol is your business even if it's a small piece," said Kaiser. He booted Target.
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Similarly, Amazon began selling wine in 2012. Wine doesn't account for a big part of the Amazon's revenues, but "because they made such a big hoopla over it, we had to sell it," said Mohamad Nasir, general manager with Allied Asset Advisors, which runs the $60 million Iman Fund.
Next there is the murky issue of interest, or "riba."
Shariah portfolios exclude highly leveraged companies, setting the threshold for debt at no more than a third (33 percent) of a company's market cap. During the recession, said Nasir, the Iman fund made a number of changes to its lineup. As stock prices fell, companies' market caps did, too, but their debt remained the same, leading to a higher ratio of debt to market cap, he noted.