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To Tame Portfolio Upside, Consider Some Trendy New ETFs…

December 20, 2007

The Wall Street Journal’s personal finance guru Jonathan Clements is keen on some of the new fangled ETFs mutual fund companies are churning out by the fistful:

Wall Street has rolled out some 600 exchange-traded index funds, those stock-market-listed products that have exploded in popularity. Many, however, merely mimic existing mutual funds -- or are so narrowly focused that they're of little use to prudent investors.

But lately, all that's changed. ETF sponsors have launched intriguing funds in four key sectors, offering ordinary investors some great new ways to diversify"

The article notes the fabulous diversification offered by new ETFs investing in foreign real estate, international small caps, commodities, and foreign bonds:

Foreign Real Estate
iShares S&P World ex-U.S. Property (WPS)
SPDR DJ Wilshire International Real Estate (RWX)
WisdomTree International Real Estate (DRW)

International Small Caps
iShares MSCI EAFE Small Cap (SCZ)
SPDR S&P International Small Cap (GWX)
WisdomTree International SmallCap Dividend (DLS)

Shares S&P GSCI Commodity (GSG)
PowerShares DB Commodity (DBC)
iPath Dow Jones-AIG Commodity (DJP)
iPath S&P GSCI Total Return (GSP)

International Bonds
SPDR Lehman International Treasury Bond (BWX)

Adding these funds will add diversity: your boring U.S. stock, bond, and money market funds will go up in coming years while the new ETFs will go down. That’s diversity we can do without.

The mutual fund industrial complex generally only launches new funds when there is excess demand for that type of fund in the marketplace. Every single one of these categories of funds would have been perfect to add to a U.S. stock heavy portfolio seven years ago. Today, after huge run-ups and inflows of money, these categories of funds will perform poorly in coming years – check out our MAXrating category ratings for these and similar funds. The poor ratings result from outperformance and money inflows.

While it is true that these types of funds are less correlated to U.S. stocks, that doesn’t mean buying a low correlation asset after it has run up is a smart move for your portfolio.

While we have nothing against relatively low fee funds offering access to undiscovered nooks and crannies of the global markets, an investor could have added these “four key sectors” to their portfolio with any number of regular old open end mutual funds years ago. The fact that they didn’t want to is why we didn’t see a slew of new funds in these categories in the early 2000s (though we did see quite a few new tech funds…).

For example, in our Powerfund Portfolios we owned Artisan International Small Company (ARTJX), Forward International Small Company (PISRX), American Century International Bond (BEGBX) and American Century Global Natural Resources (BGRIX) – the latter of which was actually cheaper to own than some of these newfangled and overpriced ETFs. We once owned a real estate fund (SSgA Tuckerman Active REIT) but never owned an international real estate fund (though they do exist, Alpine International Real Estate [EGLRX] started in 1989).

American Century Global Natural Resources was closed and liquidated while we owned it because nobody wanted to buy a global commodity fund. Now many of the largest ETFs and mutual funds invest in commodities. The same can be said for an old Vanguard Utility fund, which was killed right before a major move up in utilities.

We no longer own any of these funds in our Powerfund Portfolios and are selling our old fashioned foreign bond fund in December. This WSJ article and these new funds are the reasons we are comfortable giving up this diversity for the time being. As die-hard contrarian investors, we’ll be back when some of these funds are shut down.


Jaffe's Lumps of Coal

December 17, 2007

Sure Chuck Jaffe's Christmas-themed 'Lump of Coal Awards' might not be as clever or insightful as our own Thanksgiving focused Turkey Awards, but they're an entertaining pre-holiday week read nonetheless.

We especially like his 'Inability to Recognize a Bad Fund When They See It' award giving to the directors of the Franklin Real Estate Securities Fund:

Franklin Real Estate Securities is off more than 20% this year, but even when this fund has made money, it has badly lagged its peers. Directors acknowledged as much in the fund's annual report, noting that "the fund's total return for the one-year period, as well as for the previous three-, five- and 10-year periods on an annualized basis was in the lowest quintile" of its peer group. That's putting lipstick on a pig, because the fund actually ranks in the bottom 5% of its peer group for all of those time periods, according to Morningstar.

Adding eye-liner, a party dress and a suggestion that this pig will dance, the very same paragraph said that "the board found such performance to be acceptable."

Of course, the real travesty with a poor performing giant fund is not with their boards (how many fund boards really care about lagging performance anyway?) nor the semi-blind shareholders, but with the brokers who sold it. No load funds almost always shed assets when performance slips – even long time winners will lose shareholders after a few bad quarters. Until absolute returns tank hard, load funds can maintain a healthy, commission paying, asset base in near perpetuity.

That said, this fund has recently seen mass shareholder redemptions, which should cause a huge taxable distribution to the remaining shareholders when the fund goes ex-dividend tonight. Talk about dammed if you do, dammed if you don’t – either sell the fund and possibly owe a back end sales load (C,B class shares), or stick around and get hit by some other investor’s taxable gains in a year the fund is down by double digits.


Six Funds from Fortune - Five Thumbs Down From MAXfunds

December 12, 2007

Fortune Magazine lists 'six standout mutual funds', inexpensive no-loaders run by managers that have posted category-beating returns over the last decade:

We started by screening for funds that have outperformed their peers by the widest margins over the past ten years, using data from fund-tracking firm Morningstar. To make sure our choices would be easy to buy and affordable to own, we ruled out names that were closed to new investors and focused only on no-load offerings with minimum investment requirements of $25,000 or less. We also limited our picks to funds with expense ratios lower than the average for their category. Finally, we eliminated specialized funds, as well as those whose current managers were too new to be primarily responsible for the fund's performance record."

Here's the complete list:

While owning lower fee funds with good long term track records is better than some fund investing strategies, you’ll likely underperform the market in the next 1-3 years if you buy the funds on this list.

There are two factors working against investors in this low fee/long term success fund picking strategy: 1) funds with great performance over the long haul often attract huge amounts of money, which leads to performance problems. 2) funds with great track records often benefited from an investing style or category that was in favor in the past, but is less likely to continue going forward.

Fortune’s fund list has these problems. What has been hot relative to the S&P 500 over much of the last decade is small cap, foreign, value, and international stocks. If the same screen was done in 2000 you’d come up with a bunch of low fee Janus funds, with some tech and aggressive growth funds mixed in. These are, of course, the kind of funds that fell harder than the S&P 500 in the following few years.

I recommended CGM Focus (CGMFX) on a television broadcast a few years back, and think it is a decent, truly unique if risky fund that allows individual investors to have a reasonably priced hedge fund like product in their portfolio. However, the time to buy it is after it suffers a cold spell when other fund investors are running for the door. Unlike other funds on the Fortune list, CGM Focus benefits from bold calls made by manager Ken Heebner, not from a tailwind helping his fund’s particular strategy.

Manning & Napier World Opportunities (EXWAX) has been an Our Favorite Funds category favorite since 2002, and in our opinion is the only fund on the list that has a better than 50% shot of beating benchmarks over the next 1-3 years.

Oakmark Select's (OAKLX) Bill Nygren is one of the most overhyped managers around. He became an investing star a few years ago and has been posting mediocre performance ever since (though mainstream fund analysts still adore him). This is a guy who was completely blindsided by the mortgage mess - and he has a billion dollars worth of Washington Mutual (WM) dragging down his fund to prove it.

FBR Focus (FBRVX) is guilty as charged of cap creep (as the article notes). We generally don’t like funds that build a solid track record as a smaller cap fund, raise a ton of money, then start buying larger cap stocks.

We held Bridgeway Ultra-Small Company Market (BRSIX) (a microcap index fund) in our Powerfund Portfolios from 2002 to the end of 2004. We sold it a few years ago when the fund brought in too much money and mirco cap stocks were getting overpriced. This fund will likely be back on our recommended list when microcap stocks drop and this fund loses a few hundred million in assets.

Artisan funds are expensive but can be worth the money, but we prefer smaller new Artisan funds. Artisan International (ARTIX) is too big, but our bigger beef is more of a category criticism: there are too many international funds with over $10 billion in assets for this category of funds to do well in coming years. We owned Artisan International Small Cap (ARTJX) in our model portfolios from 2002 (when it was small and new) to 2006 and will probably buy it again in a few years after it falls and reopens to new investors.

Bottom line, keep an eye on the fund categories you are investing in – are they too in favor? Low fee performance chasing is only slightly smarter than ordinary performance chasing. Our own MAXfunds rating system looks at fees and past performance, but it also looks at measures of future trouble, like too much money flooding into a fund or fund category. Click on the above funds to see what our ratings and metrics have to say.


Ask MAX: Did My Fund Fall 41% In One Day?

December 7, 2007

Bobbie asks:

Can you please tell me what happened to the Fidelity Advisor Korea A (FAKAX) fund? It dropped 41% in one day. I have been holding this for many years and didn’t hear anything negative news that would have caused this."

On December 5th Fidelity Advisor Korea fund (FAKAX) paid out $3.06 worth of short term capital gains (taxed as income if you own the fund in a taxable account) and a whopping $13.03 of long term capital gains – a total of $16.09 or 42% of the fund price. These payouts are tax events – not actual drops like you see when fund investments fall.

Depending on what box you checked when you invested, you’ll either get a dividend check in the mail in the amount of 42% of your investment in the fund, or (more likely) the 42% dividend was reinvested for you into more shares of the fund. Either way you didn’t actually lose 42% of your money overnight. In fact the fund was actually up slightly on December 5th, adjusting for the distribution.

The bad news is if you own this fund in a taxable account (outside of an IRA or 401K), you’re on the hook for the taxes due on this amount come April 15th.

Distributions of this size are very rare and generally the result of a fund with a hot track record that either sees big outflows of money by shareholders or is one in which the manager decides to change the portfolio holdings significantly. Either situation means the fund has to realize capital gains on appreciated stock.

If shareholders leave the fund, the manager has to sell stock to raise cash. Selling stock in a hot fund generally means realizing capital gains - gains that have to be paid out to the remaining shareholders.

In the case of Fidelity Advisor Korea we suspect the manager sold many of the holdings in anticipation of merging the fund into Fidelity Advisor Emerging Asia (FEAAX). This merger has been planned since early this year, and the fund was closed to new investors in March. There was likely some shareholder redemptions from the fund, reducing the number of investors left to pay the distributions to.

For more on year-end fund distributions, click here.

Thanks for the question.


Want to ask MAX a question of your own? Send him an email by clicking here. Please include your name and where you live.

Tough Tax Year Ahead

December 3, 2007

SmartMoney reports that mutual fund investors are in for a tough April 15th. Taxes paid by mutual fund investors, muted for years by the big losses of the early 2000s, are back with a vengeance:

Fund industry experts are predicting a double whammy this year that we haven't seen since the tech bubble burst. Not only will investors be staring at flat or dismal returns, but they'll also be faced with paying taxes on big capital gains distributions from the well-performing funds they held before the recent turmoil began. Lipper senior research analyst Tom Roseen estimates that investors may pay 20% to 30% more to the federal government than the $24 billion they shelled out last year. That means the typical investor, depending on how much they've saved in certain funds and what type of an account that money is in, could face a tax bill of thousands of dollars. 'We could easily hit the highest tab investors have ever seen,' says Roseen."

By law, funds have to distribute any taxable gains from investing to shareholders each year.

Your fund has profits and losses much like your own portfolio does. Funds can have losses from bad investments, gains in the form of short term or long term capital gains, ordinary income, and now, low tax dividend income.

Each year the fund accountants figure out how much income there is of each type. The tax liability is then passed on to the shareholders in the form of a dividend (the tax rate for each depends on the shareholder), which is why none of this matters in a tax deferred account like an IRA or 401(k).

Most of these fund distributions are made in December and many fund companies give estimates of these distributions on their websites in late November and early December, which can help existing and potential investors avoid some taxable gains.


See also:

Capital Gains Questions?

Tougher Tax Times Ahead for Mutual Fund Investors

How Mutual Funds Work - Capital Gains

Six Mutual Fund Tax Tips

New Look and Features on MAXfunds Data Pages

November 30, 2007

We're happy to debut our improved mutual fund research pages today.

We've added over fifty new data points, most of which are accessible by clicking the 'Show Details' link you'll find at the bottom of the Expenses, Performance, MAXmetrics, Portfolio and Resources sections.

If you have any comments or if you spot a bug, please let us know by clicking here.

Can Money Market Funds Fail?

November 27, 2007

Got money? Then there's a good chance some of it's in money market funds. Investors now own over $3 trillion in these buck-per-share mutual funds that offer the liquidity of cash, the yield of Treasury bills, and the safety of …. well, that’s the part that's now in question.

Money market funds have only been around for about three decades, making them the young'ns of a mutual fund business that's existed in one form or another since before the Great Depression. Whenever we suffer a credit crisis of some sort, the same question comes up – are money market funds safe?

The number of articles written about the money fund industry's current troubles has been climbing in lockstep with the number of financial institutions taking multi-billion dollar write-offs related to mortgage “investments” (and we use the term loosely).

In last week’s Wall Street Journal, for example:

The risk to money-market funds is that a decline in the value of a single investment can cause them to "break the buck," or allow their net asset value to fall below the $1 level the funds are required to maintain.

FAF Advisors [a unit of U.S. Bancorp] is the latest in a string of about a half-dozen financial institutions that have taken steps to protect their money-market funds. The others include Bank of America Corp.'s Columbia Management Group, Credit Suisse Group's Credit Suisse Asset Management and Wachovia Corp.'s Evergreen Investments. No money-market fund has broken the buck in the recent turmoil.”

Like a top-40 radio station, the (mortgage) hits just keep on coming. This latest evolution of the mortgage disaster is now placing even the safest category of mutual funds in jeopardy. But just how risky are these funds?

Money market funds are certainly not risk-free investments. They're not FDIC insured or backed by the good faith and credit of the U.S. government (although their portfolio holdings may be). According to Vanguard’s website, “Although a money market mutual fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.”

Money market funds are, however, the safest type of mutual fund you can buy. Strict rules governing the portfolio's makeup mean losing significant chunks of your account (over 20%) would require a crisis of epic proportions, and perhaps even a bit of fraud.

Money market funds maintain stable fund prices by owning very short-term, high-quality debt securities. With little time to maturity and high ratings, it's very unlikely that portfolio holdings could fall in price enough to go below a dollar per share (breaking the buck). We'd have to see a default (or expectation of default) by the issuer for that to occur.

This is not to say that money market funds have never dropped in value. We just rarely get to see a 1% - 10% drop in fund price, because the firms behind the funds shore up the bad investments (as they are doing now) to make good. Nobody wants their good name sullied as the proprietor of a money market fund that slipped miserably into the abyss.

Before all is said and done with this latest mortgage nightmare, we’ll probably see more money market funds shored up, more even than the fifty or so we witnessed in the 1994 derivatives debacle – when rapidly rising rates sunk some derivatives bets (and bankrupted Orange County, CA in the process). As long as fund families can afford to support the funds, there's minimal real risk to investors.

So what’s a risk-averse fund investor to do?

If you don't want to assume any risk at all, buy bank products like CDs, savings accounts, or bank-issued, FDIC insured money market accounts. One good choice is HSBC’s online savings account, which yields about the same as a typical money market fund, only with FDIC insurance. Government T-bills are also risk-free, for all practical purposes.

Only slightly riskier than bank and government products are the money market funds run by giant fund companies like Fidelity, Vanguard, American Century, and American Funds. Unlike some banks, large fund companies won’t go bankrupt in the mortgage crisis (banks take on more risk than fund companies, so if bank investments go bad, those banks fail, but if fund investments go bad, it's the fund shareholders who take a bath.)

For more security, choose the safest money market funds (the ones that own mostly government-backed debt). You can identify these by reading the fund prospectus and also by the fact that their yields will be lower (for funds with similar expense ratios). In addition, higher-risk money market funds use words like “Prime” to denote corporate commercial paper (short-term corporate debt). Safer funds often include “U.S. Treasury or U.S. Government” in the fund name. Vanguard Treasury Money Market Fund now yields just 4.02%, compared to their marginally riskier Prime Money Market Fund's 4.29% yield. Be aware, however, that some banks sell ordinary mutual funds that are not FDIC insured, often with a sales load to boot.

The simple truth is this: any asset class can become risky if its investors begin selling their shares in a panic. Whenever there's a wave of panic selling, fund managers are forced to unload their holdings in order to meet liquidation requests, and without any buyers, any investment could fall to the floor. So far, investors have remained calm. In fact, they added $25 billion to money market funds just two weeks ago. No fund family could support a true meltdown. Fidelity’s largest money market fund has over $100 billion in assets. Try supporting that if the bottom falls out.

Seventh Annual MAXfunds Turkey Awards

November 22, 2007

It's Not an Honor Just to be Nominated.

Gobble gobble. It’s that time of year again: Time for MAXfunds to nominate funds for our seventh annual fund turkey awards. With over 25,000 funds (counting all share classes and ETFs) out there, there are plenty of Butterballs to go around this Thanksgiving.

The “A Tad Riskier Than We Said” Award
Winner: SSgA Yield Plus (SSYPX)

You’d have to be hiding under a rock to have missed all the mortgage loan problems haunting Wall Street in 2007. Somewhere in the middle of this year’s sub-prime mess (just after questionable lenders went belly up but just before mega banks started taking tens of billions in write downs while their stocks plummeted) – some mutual funds got hit.

The funds affected were short or ultra short term bond funds – sometime called “low duration” funds. After money market funds, these are supposed to be the safest type of fund an investor can own - the place to put money you really don't want to lose.

The pitch for ultra short term funds addresses bond investor’s two biggest fears: the fear creditors will default and the fear interest rates will rise, hurting existing bonds.

Traditionally low duration has meant that a fund owns bonds just a year or two away from maturity. However, low duration goals could also be achieved by buying pools of much longer term adjustable rate mortgage debt. An interest rate increase doesn’t really matter (in theory) if the rates on the loans can reset higher, as is the case with most home equity loans. If they are working like they should, when interest rates climb, these funds won’t get slammed, unlike longer duration bond funds which can fall 10% or more.

Of course, lending money out over many years based on equity in a home that was valued in the last few years of a housing bubble has its risks, but that’s where the high credit ratings come into play. Or so everyone thought.

SSgA Yield Plus (SSYPX) was a smallish sub $200 million in assets very low fee fund that did just that – load up in adjustable rate mortgage debt. To this day the fund literature touts “high credit quality” and “sophisticated credit analysis”. Apparently high credit quality and sophisticated analysis didn’t stop Yield Plus from falling 8.65% in the third quarter of this year.

Unfortunately Yield Plus is just the tip of the sub-prime iceberg at SSgA – State Street Global Advisors, one of the world’s largest asset management companies. Some of their larger institutional funds were down as much as a third in the mortgage mayhem.

SSgA was not alone here, dozens of similar funds took a beating this year, but this one was closest to our hearts (which SSgA broke…) as we used to have it in one of our MAXadvisor Powerfund Portfolios. SSgA Yield Plus is down to a paltry $66 million in assets. An 8.65% drop in a fund that investors are expecting to fall not at all does tend to send investors packing - us included.

The “Lets Buy The Same High Risk Junk In All Our Funds” Award
Winner: Regions Morgan Keegan

Remember when the tech crash took just about every Janus stock fund down with it? Trouble was, as we pointed out in 2000, most Janus funds all owned substantially similar stocks. By looking at the performance of several Regions Morgan Keegan bond funds (owned by Regions Financial (RF), it seems like there was more variety in their fund names than in their fund holdings. Though a few of their bond funds are not down by half or more, its clear the fund managers favored some (questionable) asset-backed debt in all of their portfolios. If consistency in fund management is a virtue, RMK is your family.

Here is their complete list of RMK taxable bond funds with YTD performance as of this week, courtesy of our friends at Morningstar:

RMK Select High Income (MKHIX): -54.45%
RMK Select Intermediate Bond (MKIBX): -42.73
RMK Select Fixed Income (RFIFX): -1.83%
RMK Select Limited Maturity Fixed Income (RLMGX): -4.70%
RMK Select Short Term Bond (MSBIX): -9.60

Closed end funds, market returns:

RMK Advantage Income Fund (RMA): -62.08%
RMK High Income Fund (RMH): -62.66%
RMK Multi-Sector High Income Fund (RHY): -61.07%
RMK Strategic Income Fund (RSF): -61.86%

The closed end funds use leverage, which RMK was careful not to cut back on even as mortgage backed securities yielded less and less over borrowing costs.

Maybe RMK just needed one fund, “RMK (not so) Select Bond”

For the record, most bond funds are up 5% or more this year.

Incidentally, we’re sniffing around this family for some distressed investing for 2008. Check out our 2008 Hotsheet for more.

The “What Tech Comeback?” Award
Winner: Seligman New Technologies Fund I
Honorable Mention: Van Wagoner Emerging Growth (VWEGX)

Now that the Nasdaq is the top major index and Google stock is kissing $700 a share, you’d think that some of the old dot com era funds would be having a good run. While there are some cases of comeback stories – like Jacob Internet (JAMFX) – there are also some unfortunate tales of funds that have fallen but can’t get up.

It’s almost cruel of us to pick among the remains of the (tech bubble) days, because several ill fated new economy funds that launched a few months, weeks, or even days from the peak in the Nasdaq in 2000 have been closed or merged out of existence. Still, attention must be paid.

According to the fund family's website, “Seligman has been in business for more than 140 years, at times playing a central role in the financial development of the country and its markets.” Apparently such an illustrious past didn’t keep them from falling for the tech bubble.

After a bold start in 1999, Seligman New Technologies Fund started a long slide from the $45 range to under $3 today, where it has remained for the last three years, even as most other tech funds have gained significantly from their lows.

The reason this fund hasn’t staged a comeback (like other tech funds) is that it over-dosed on illiquid venture capital investments in dot-com era businesses - many of which didn't make it out of 2001 alive. Seligman spent much of 2007 trying to find buyers for its “private placements” in new economy startups, the ones that could be sold that is. Multimillion dollar investments in companies like techies.com are worthless. The small amounts of cash raised in the sales is being distributed to shareholders and management as fees.

Honorable mention should go to Van Wagoner Emerging Growth (VWEGX), another bubble fund plagued by such private placements (direct equity investments by accredited investors and institutions not available to the general public). When this fund scored a 291% return in 1999, few probably thought that fund's performance over the subsequent seven years would be about the worst of any fund in existence.

Too bad. Let’s give the fund a pass on the 2000-2002 crash that (along with other Van Wagoner funds) destroyed billions of investor capital… the last four years have been so unbelievably bad you would think the Nasdaq was at 500.

Van Wagoner Emerging Growth stunk in 1997 and 1998 too. What was it about the 1999 market that lead to an near perfect inverse relationship between manager quality and performance? Like most Van Wagoner funds, this fund had a red light rating on our site in 2000.

Will The Government Bail Out Fannie and Freddie?

November 20, 2007

This morning cutesy-pie named “Freddie Mac” (FRE) scared investors with the news that the company’s third quarter loss was just a smidgen over $2 billion, and that they might cut their dividend for the first time ever - by as much as half. Freddie Mac is Federal Home Loan Mortgage Corporation, own of two giant government sponsored entities at the very center of the mortgage storm. Fannie Mae (FNM), or Federal National Mortgage Association, is the other.

Both stocks opened down sharply this morning – continuing a slide that started a few weeks ago but well after the mortgage market started melting earlier this year.

Investor’s confidence in the wonder twin’s power to avert trouble amidst the collapsing lesser giants like Washington Mutual (WM) and Co untrywide (CFC) could best be summed by CNBC’s David Faber on "Squawk on the Street” this morning at the opening bell:

…don't know if we have a bid/ask [for Freddie] but it’s looking below $26 dollars a share down over $11... It’s not like Freddie is going to get taken out here or anything in terms of any problems. The government will be there at some point."

Perhaps the government will “be there at some point” when things go awry, but does that mean the government will support the shareholders of Fannie and Freddie? Would there not be outrage by taxpayers (some renters surely) stuck paying hundreds of billions to support the mortgage market – a crisis of S&L bailout proportions – AND shareholders including Fannie and Freddie executives with millions worth of stock who drove the car off the cliff?

In the great real estate bubble, all roads eventually lead to Fannie and Freddie. This may be bad news for shareholders of many large cap value funds with big Fannie or Freddie stakes, notably two Weitz offerings: Weitz Value (WVALX), down 1.38% today, or Weitz Partners Value (WPVLX) down 1.18% on a day the S&P 500 was up slightly.

Islamic Funds Outperforming

November 19, 2007

Carolyn Cui at the Wall Street Journal reports that mutual funds that invest in accordance with Islamic doctrine have been among this year's top performers. This outperformance is in large part because Islam forbids charging interest; funds following these rules have avoided investing in banks and mortgage companies that have been hard hit by the sub-prime meltdown. In fact, of the nine broad sectors in the S&P 500, only two are negative this year: financials and consumer discretionary.

Most mutual funds that invest based on Islamic principles have largely weathered the recent credit turmoil. Two Islamic funds offered by Azzad Asset Management, smaller than the Amana and its $333.1 million of assets, also are beating the Standard & Poor's 500-stock index since the start of this year, after trailing the broad market for several years.

Dow Jones Islamic Fund is up 13.3% year to date, which ranks it in the top 4% of its category of large- market-capitalization stocks. The fund, managed by Allied Asset Advisors, tracks the Dow Jones Islamic Market Index, which is a product of Dow Jones & Co., publisher of The Wall Street Journal.

A sister Amana fund, Amana Growth Fund, isn't doing quite as well. The fund has $680 million of assets and invests in companies whose earnings are expected to rise faster than the broader market. It has returned 11.5% this year. While that beats the broader market, it still trails its growth-type peers by 1.4 percentage points."

The chart-topping performance of the two Amana funds has apparently attracted plenty of non-Muslim investors as well. As the article states, assets in the funds has ballooned to $1 billion in the past 18 months.