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.
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.
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.
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.
Focus (for Islamic funds) has shifted to (among other assets) plantations with its recent growth and success,” Venardos of Heritage Fiduciary Services comments.
The current annual income yield target for Dana Yakin stands at roughly 7% - 8%. According to Lipper, Dana Yakin returns rank the fund 25th out of 36 on Lipper’s list of Malaysian Islamic funds
Given the framework in which Islamic Funds must operate in, these funds underperform their peers. Just one comparison – the Dow Jones Islamic Market index had a 14.5% yield for 2006 whereas the MSCI Emerging Markets index gained 29% in the same timeframe. The trading and administrative costs for such funds are also higher than larger conventional funds.
But there are upsides that may appeal to the niche investor or those who desire ethical investment. Bernardo Vizcaino, head of research and specialized funds at Eurekahedge notes that, “The screening criteria and prohibitions stipulated in Sharia law encourage sensible and safe investments, and idealistically seek to promote transparency and minimize ambiguous dealings. Indeed our initial analysis of these products has shown that these funds tend to protect capital in bear markets while performing as well as the overall market in bullish environments.”
Heritage Fiduciary’s Venardos adds that, “the Dow Jones Islamic Funds Index mirrors the Dow Jones Social Responsibility Index, both of which were very much in line during the 1997 correction.” Islamic funds he thinks have come to represent a safe haven for those pulling money out from volatility, especially in Asia.
But reality bites. “The best assets are still 'sex, drugs and rock ‘n’ roll', which they (investors) certainly miss out on," says Venardos.
Please send your questions and comments to us at firstname.lastname@example.org. We will answer as many of your emails as possible on "CNBC's Cash Flow" airing on Monday, April 30, 10 a.m. to 12 noon Hong Kong/Singapore time.