I've often written about how socially responsible investors increasingly put their money where their beliefs are. One particular area that has seen a lot of activity lately is in funds designed to conform to Islamic principles. New funds and exchange-traded funds are popping up, such as the Dow Jones Islamic Market International Index Fund (JVS), while existing investments have seen their assets under management grow substantially.

At first glance, you might assume that these funds might solely invest in areas where Islam is the dominant religion, such as the Middle East. In reality, though, most such funds simply screen companies for those that comply with Islamic Shariah law.

That does rule out companies in several industries, including (but not limited to):

  • Alcohol makers like Diageo (NYSE:DEO) and Fortune Brands (NYSE:FO)
  • Tobacco producers such as Altria (NYSE:MO) and Philip Morris International (NYSE:PM)
  • Institutions that support gambling, like MGM Mirage (NYSE:MGM)
  • Companies involved in pork production

There are other restrictions as well, including rules against pornography. Even financial companies and others that maintain high levels of leverage might be excluded, although different funds interpret the restriction on charging interest in various ways.

Good performance
As it happens, some Shariah-based funds have performed extremely well in recent years, helped by the fact that many of the industries those funds exclude have done particularly poorly during the recent bear market. For instance, the Amana Trust Growth (AMAGX) fund outperformed the S&P by seven percentage points in 2008 and has an extremely high five-year average annual return of more than 9%, owning stocks like Apple (NASDAQ:AAPL) and Amazon.com (NASDAQ:AMZN). The Amana Trust Income (AMANX) fund, meanwhile, has put in even better performance and ranks near the very top of the large-cap value fund category over the past five- and 10-year periods.

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Keep in mind, though, that just as with any other method of picking stocks, some funds that follow Islamic principles won't do as well as others. So don't just gravitate to the first fund you find that invests according to your beliefs. Instead, do the same analysis you would for any mutual fund, and pick the best one that meets your personal requirements.

Do you think companies should spend their money on socially responsible causes? Read Selena's take on the issue, and then feel free to weigh in using the comment box below.

Longtime Fool contributor Selena Maranjian owns shares of Apple. Apple, Amazon.com, and Fortune Brands are Motley Fool Stock Advisor picks. Diageo is a Motley Fool Income Investor selection. Philip Morris International is a Motley Fool Global Gains recommendation. Try any of our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.