Iman Fund (IMANX) Review | Practical Islamic Finance

In this article, we’ll provide an in-depth review of the Iman Fund (IMANX), offered by Allied Asset Advisors. Founded in 2000 in the U.S., this mutual fund has $150+ million in assets under management (AUM) as of writing and is one of the few established mutual fund options for Muslim investors. By the end of this article, you will gain a clear understanding of the Iman Fund (IMANX) and be able to determine whether it is a worthwhile mutual fund investment for your needs.

Allied Asset Advisors’ Iman Fund

The background behind the Iman Fund can be found on the fund’s page:

Iman Fund is distinct among other available halal investment options because it is managed by Allied Asset Advisors (AAA), an SEC-registered investment advisor that is a wholly-owned subsidiary of the North American Islamic Trust (NAIT). NAIT is a tax exempt 501(c)3 national nonprofit organization established in 1973 as a waqf (trust/endowment) institution serving the American Muslim community. 

Iman Fund

In short, Iman Fund is offerred by the AAA, which is a subsdiary of NAIT.

About Allied Investment Advisors

Established in 2000, Allied Asset Advisors, a SEC-registered firm, offers investment services to individuals, families, and various organizations. They also provide portfolio management to nonprofits, endowments, and businesses, aiming to foster financial sustainability.

While the Iman Fund (IMANX) serves a broad investor base, they also offer separately managed portfolios to meet specific organizational investment policies and objectives.

Iman Fund (IMANX) Overview

Investment Objective

The Iman Fund seeks growth of capital while adhering to Islamic principles.

Investment Strategies

In terms of the fund’s investment strategies, the Iman Fund aims to grow its investments by putting money in stocks of both domestic and foreign companies that comply with Islamic principles, avoiding businesses related to alcohol, pornography, and gambling, among others.

The fund’s advisor, Allied Asset Advisors, selects stocks they believe will grow in value over time, focusing mainly on “growth” stocks. They may sell stocks whenever they deem fit, especially if better investment opportunities arise.

Uninvested cash is kept in non-interest bearing deposits or invested following Islamic guidelines. While the fund usually avoids emerging markets, exceptions are made for securities traded on U.S. exchanges.

For further details on which accounts, brokerages, and/or countries the IMANX mutual fund can be accessed, see their literature or contact their team.

Shariah Compliance

The Iman Fund, managed by Dr. Bassam Osman and the Allied Asset Advisors team, claims to meticulously adhere to Islamic principles in its investment strategy. The fund focuses on halal stocks believed to perform well in the long term, grounded in factors like anticipated value and earnings growth. The adherence to Islamic principles involves avoiding investments in prohibited businesses and interest-bearing debt.

Continuous monitoring ensures ongoing shari’ah compliance, with regular reviews by the Shari’ah Board. The fund also claims to employs a halal screen with strict financial ratio guidelines to assess potential investments, staying true to Islamic principles while aiming for capital growth. For more specifics, it’s worth visiting their “Halal Investing” page, where they discuss their screening methodology for investing in halal stocks within Iman Fund.​

In essence, the Shariah compliance filters are standard, excluding obviously haram stocks and favoring those not overly leveraged. Yet, these methods might not be comprehensive. Solely industry-based screening could overlook important ethical factors such as environmental impact or employee treatment. Moreover, the financial criteria regarding debt and cash holdings thresholds might not be deeply rooted in Islamic teachings. A more refined approach is suggested for selecting halal stocks, where human judgement enhances the ethical and financial objectives of Shariah-compliant investing.

Fund Fees and Investment Minimums

Fund Fees

The annual fund operating expense ratio for IMANX are broken down in the table below:

As stated in the Fund’s most recent Prospectus dated September 30, 2023.

The expense ratio of 1.35% is significant, and without a doubt on the higher end, as actively managed funds typically range between 0.50% – 1.0%. To illustrate the impact of this expense ratio, let’s say you start with an initial investment of $100,000 in IMANX, and assume a 10% average annual return. The results after 10 years are shown below:

• Future Value after 10 years (including fund fees): $229,243.65
• Total Fees Paid: $30,130.60

Now, let’s compare this to an alternative fund with a 0.50% expense ratio (the norm for comparable halal ETF alternatives), assuming the same 10% annual return:

• Future Value after 10 years (including fund fees): $247,822.76
• Total Fees Paid: $11,551.37

The difference in fees paid over these 10 years is $18,579.23. This difference is quite substantial and can compound significantly over longer terms or with larger investments. Point being, the fees should be a major concern when investing in IMANX, especially over the long term.

It’s therefore crucial to assess Iman Fund’s fees-adjusted performance over time and whether it offers compelling value compared to a more affordable halal ETF alternative with a similar growth-centric equities emphasis.

Investment Minimums

According to Iman Fund’s propsectus, the minimum to open a regular account is $250. However, for tax-sheltered accounts and Coverdell Education Savings Accounts, the minimum is only $100. If you want to add additional capital to your account, in all cases the minimum is $50.

Performance

Iman Fund’s performance-to-date has not been impressive, marked by consistent periods of underperformance relative to the market (aka the S&P 500 Index). This is shown in the table below:

Iman Fund: Average annual total returns, load-adjusted. Month-end Performance, as of September 30, 2023

Note that the returns in the table above provide a picture of the fund’s “load-adjusted return” performance, which includes the fund’s expense ratio.

However, this calculation is missing the impact of taxes on the fund’s trades.

Morningstar reports the 3-year tax cost ratio for the fund is 2.0%. This means, that on average each year over the last 3 years, investors lost 2.0% of their assets in the fund to taxes. This is above the Morningstar average of 1.92%, and even if it wasn’t, is enough to tell you that IMANX is certainly not a tax-efficient mutual fund… Especially considering the fact that you would not experience this loss with a halal ETF alternative.

The more accurate tax-adjusted returns are shown in the table below:

Morningstar: Tax-adjusted average annual total returns, load-adjusted. Month-end Performance, as of September 30, 2023

As you can see, IMANX failed to beat the market over the 15-year, 10-year, 5-year, and 3-year periods by significant margins, although performing above the market over the last year. This is all based on an average annualized performance basis, after adjusting for taxes and fees.

Clearly, IMANX is not an attractive mutual fund for capital appreciation, at least based on the fund’s prior 15 years. It’s worth highlighting the 5-year and 1-year periods as well, in which IMANX could barely keep up with the average historical rate of inflation in the U.S., which is around ~2% and has been much higher in recent years.

Beyond the fund’s historical performance, it’s also worth noting the 1.37% portfolio yield (dividends collected from portfolio holdings), which, although small, is above that of its category average and index (of 0.74% and 0.80% respectively, according to Morningstar). Although this is above the average, this yield does not adequately compensate for the fund’s poor performance.

While it’s essential to understand that past performance is no guarantee of future returns, Iman Fund (IMANX) has historically done poorly to outpace the market, even if we were to ignore taxes.

Portfolio

Amana Trust Growth Fund has 103 holdings in its portfolio, with ~38% of assets in its top 10 holdings, which is slightly top-heavy. 102 holdings are in equities (86.64% U.S. equities, 12.74% non-U.S. equities), with the other holding being cash (the remaining 0.62%).

The table below breaks down the fund’s top 10 holdings:

Iman Fund: Top 10 Holdings (as of June 30, 2023)

The table below breaks down the fund’s sector allocations:

Iman Fund: Sector Allocations (as of June 30, 2023)

As you can see, the fund is relatively concentrated within technology and health care, which is typical of halal growth-oriented funds.

Turnover Rate

The fund’s reported portfolio turnover on Morningstar is 71.90%, which is relatively high, and may explain the fund’s poor 3-year tax ratio of 2.0% (as discussed prior). This means that 71.90% of the fund’s portfolio has been replaced over the past 12 months, which implies the fund’s managers are uncomfortable with their investments (likely due to poor historical performance) and may be making more rushed trades.

Portfolio Metrics

There are multiple portfolio metrics investors can assess when evaluating the risk-adjusted performance of a fund. Five standard metrics for portfolio analysis as detailed below for IMANX:

Morningstar: Fund Statistics and Explanations (as of September 30, 2023). *N/A = Not applicable.

As the table above shows, and following the pattern of what we know already, IMANX is performing worse than its category average, and significantly worse than the market (aka the S&P 500 Index). In terms of key risks, IMANX has an alpha of -5.97, which means that it sigifncantly underperforms its benchmark, and an R-Squared value of 82.35, which implies that ~18% of its underperformance is due to individual stock/sector picks than overall market trends. Clearly, these statistics once again suggest that the fund is not a good option for beating the market, which is a commonly cited motivation for investing in any actively traded fund.

Fund Managers

The three fund managers and their backgrounds are summarized below:

• Dr. Bassam Osman: Dr. Bassam Osman, Chairman & Portfolio Manager of Iman Fund, has led since its 2000 inception. With 40 years in Islamic finance and a background as a neurologist, he also serves on the NAIT board.
• Mohamed I. Nasir: General Manager and Chief Compliance Officer, has a decade with Allied Asset Advisors and previously led the American Islamic Economic & Finance Institute.
• Salah Obedallah: President & Treasurer, holds an additional role as the AML Officer for AAA and Iman Fund. With 25 years in management, he founded The Islamic Center of Passaic County and currently leads Allied Asset Advisors.

Conclusion

In summary, Iman Fund (IMANX) offers an investment option that appears to be in line with Islamic principles but falls short in performance, making its 1.35% expense ratio unjustifiable. The fund’s risk-adjusted return, tax costs, and performance are all downsides, with the fund’s ~70% portfolio turnover raising additional converns.

In essence, the high costs of IMANX should correlate with superior returns, but this hasn’t been the case. For a long-term, performance-driven mutual fund alternative, we prefer AMAGX/AMIGX.