A Spirited Affair
In this day and age, investors and fund managers alike are constantly on the lookout for new and innovative investment opportunities. But what about something that’s been around for a quite some time, just never in the limelight? This week’s “A Fund Affair” takes the spiritual path that leads to Islamic Funds.
According to figures presented at the 2007 Islamic Funds Asia conference held in March, the Islamic wealth management industry administers assets worth in excess of $750 billion. And the potential of this oftentimes unnoticed and untapped market of investors is growing. With an estimated Muslim population of 1.5 billion worldwide, the Islamic wealth management industry is expected to expand by 10% to 15% in 2007, offering investment options for Muslims as well as the socially responsible investor. This is the full body.
Islamic Funds are guided by the principles of Islamic law, also known as Sharia law. Investors pool their monies to earn profits that are permissible under Sharia law. These profits, also known as halal profits, exclude specific economic activities such as industries associated with pork, tobacco, alcohol, gaming, abortion, defense and pornography. Conventional banking, insurance and most forms of entertainment stocks are also a no-no.
However, the biggest problem for devout Muslims and the financial institutions that aim to serve them is the principle of riba. Riba means that you can neither receive nor pay interest, because Islam defines interest as a form of usury.
General Principles Guiding Islamic Funds
|· Interest bearing assets are forbidden, as is the concept of interest in Islamic loans/deposits in Islamic banking.|
|· Funds are not allowed to guarantee returns and managers are only held to account if foul play is discovered. Investors will also share the losses of the fund collectively, with no guarantee for their funds.|
|· Profits are shared in a pro-rated nature of what is actually earned by the fund and the earnings are shared in proportion terms with unit holders.|
The screening process for companies that are Sharia-compliant is a rigorous one. If a Fund adheres strictly to Sharia law, companies that carry substantial debt – like Ford Motors or France Telecom for example – are also to be avoided. Altogether, Sharia laws rule out almost half the stocks available on the market
But though Sharia law does severely restrict the sectors that funds can be invested in, most healthcare and technology stocks do pass the screening process. So there are mainstream companies that are open to Islamic Funds. Dr. Angelo Venardos, executive director, Heritage Fiduciary Services, notes, despite the limits of the investments, “the funds can still achieve the right returns, but a lot more screening work has to go into the fund.”
So why invest in an Islamic fund?
For Muslims wanting to grow their wealth, Islamic Funds are probably one of the very few options open to them. But for the non-Muslim interested in ethical investments, Islamic Funds provide a very good alternative option to conventional products available on the market.
Mayban Dana Yakin Growth Fund
|Fund Size||125 Million Malaysian Ringgit|
|Management Fee||1.5% per annum|
|Custodian Fee||0.8% per annum|
|NAV/unit price||0.547 Malaysian Ringgit|
It is clear that there are some very unique and challenging hurdles that Islamic Funds must navigate through. But Nadjihah Mohd Dzaiddin, Head of Equity at Mayban Investment Management is unfazed. “Investing according to Islamic principles is like following a disciplined nutrition regime, we know what we can and cannot do.” Dzaiddin says.
Dzaiddin says that the Mayban Dana Yakin Growth Fund does not invest in any interest gaining assets, including certificates of deposit. Dzaiddin adds that, “This can be a great challenge for Islamic funds in emerging markets where banking stocks are usually viewed as proxy for growth.” Still, Dana Yakin has been declaring an average of 9% per annum income yield since inception.
Ironically enough, the bulk of investors in Dana Yakin are non-Muslim. Dzaiddin believes that these investors are looking to avoid the volatile gaming and financial sectors altogether.
The most lucrative assets for Dana Yakin have been construction and plantation stocks. The fund has stayed out of small caps, which Dzaiddin classifies as anything below one billion Malaysian ringgit (US$292 million) in size. She notes, “We invest almost entirely in large-to-mid-cap stocks.” The top ten holdings of the fund are all concentrated in blue chip companies within Malaysia.
Dana Yakin Top Ten Holdings
|1||Telekom (M) Bhd|
|2||Tenaga Nasional Bhd|
|4||Star Publications Bhd|
|5||Sime Darby Holdings Bhd|
Although the weighting of the fund is 41.86% in trade and services, Dzaiddin feels that the two most important areas for the fund are the construction and plantations sectors, both of which have been key drivers for the fund.