Social Funds' Ethics Lead to Outperformance

Amana Growth(AMAGX Quote) has been outpacing almost all its competitors lately. The fund returned 13.1% annually during the five years ending in September, more than 8 percentage points ahead of the S&P 500, according to Morningstar.

Portfolio manager Nick Kaiser accomplished that feat by avoiding financial stocks, which have been among the biggest losers this year. Does Kaiser deserve praise for brilliant foresight? Not necessarily. Designed to serve Muslims, Amana never buys financial stocks because Islamic law forbids the lending of money bearing interest.

Amana's showing underlines the success of socially responsible funds, which invest according to a variety of ethical guidelines. Some social portfolios steer clear of gambling stocks, others invest only in so-called green companies. During the past decade, domestic equity funds that invest according to social criteria have returned 4.7% annually, more than a percentage point better than the S&P 500. In the downturn of the past year, social funds lost 2 percentage points less than the benchmark. ...