Ethical Investment gif
Kamso continues, “There are currently 233 stocks in the FTSE Bursa Malaysia EMAS Shariah index. The Index com- prises constituents of the FTSE Bursa Malaysia EMAS index that are Shariah- compliant according to the Securities Commission’s SAC screening method- ology and FTSE’s screens of free float, liquidity and investability. This is a wide and deep enough investment universe with which to build a diversified portfolio of about 30 to 50 companies”.
Real Estate
As popular and well-known as this as- set class is, performance figures are not available for many of the 43 sharia’a- compliant real estate funds for which the IFIS currently has data. This means that comparisons between the actual funds are nigh-on impossible to make, let alone comparisons with other Islamic asset classes and with conventional real estate funds (eds. Boerner et al, 2010). There is however, general information available about the past few years. “Ac- cording to Ernst & Young’s Investment Funds & Investment Report 2009, the average returns form Islamic real estate funds fell from 8% in 2007 to -11% in 2008 and rising to +3% in 2009. Given, conventional real estate funds today av- erage an annual return of between 9% and 13% (Lynn, 2010), it is clear that their sharia’a-compliant counterparts still have much work to do in terms of performance levels. However, for the Is- lamic investor real estate remains a core asset class because of longevity and di- verse geographical opportunities.
Diversification is the Key
Why all this talk about diversification in the first place? It is a well known fact that well-diversified portfolios perform better than those too narrow in focus. There is no therefore no reason why a sharia’a-compliant portfolio cannot offer up pleasing returns, so long as it is well diversified. The professionals certainly acknowledge-and take advantage of-the benefits of diversification. In recognition of these benefits, sharia’a-compliant investment fund company Al-Tawfeek was, as early as 2001, diversifying not only the sectors it invested participants’ funds in, but also the financing struc- tures and geographical locations of the investment projects. The chart below, taken from Al-Tawfeek’s presentation at an Islamic finance symposium (Khan, 2001), shows that the Saudi–based company was using no less than seven modes of financing by 28th February 2001:
Lease 27.27%
Others 2.30%
Local Stock Portfolio 10.46%
Performers vs. Non-Performers
Int’l Stock Portfolio 9.68%
Commadities 9.76%
Equity Participation 40.53%
As with conventional investment, not all sharia’a-compliant asset classes will be performing well at any one time. In order to optimise the potential for satisfactory returns, therefore, it is necessary for the Islamic investor to identify which areas are currently the best performers and which ones should be avoided for the time being.
Sukuk
The next chart demonstrates the diversified nature of the sectors Al-Tawfeek invests in:
Services 4.19%
Industrial 20.69%
Real Estate 15.23%
Financial 11.61%
Others 27.58%
Trade 10.75%
Individuals 1.69%
Petrol 8.25%
The final chart shows the different geographical locations of the investment projects:
Others 14.99%
Singapore 4.70%
UK 3.77%
Turkey 18.79%
Despite various investor concerns re- sulting in the sukuk market contract- ing following its amazing performance in 2007, the Islamic paper is now back on the radar of many sharia’a investors (Boerner at al). In terms of a diversified portfolio, a fixed-income product can be most useful. Many financial institutions have already established sukuk funds and those who have not been able to, due to the issues of the past few years, are at least including sukuk structures in some of other funds; Richard Williams, Finance Director of UK-based Bank of London and The Middle East (BLME), tells Global Islamic Finance Magazine that the bank’s Income Fund structure contains sukuk and murabaha. “You have to innovate to create a product that will meet the demands of clients”.
It would seem that investors currently believe that the most effective way of getting value out of sukuk funds is to adopt the “flight to quality” method and prioritise investment in triple-A rated is- suers.
Islamic Funds
Islamic investors are increasingly de- manding sharia’a-compliant funds, with most funds targeting regional
investments in mainly GGC/MENA, in- ternational, emerging and Asia Pacific markets (Boerner et al). As the average year-end performance is quite close to its index benchmarks, the successful in- vestor will form an opinion on the fund’s management and its commitment to outperforming, as opposed to tracking the index performance.
Bahrain 13.05%
Malaysia 3.88%
USA 6.26%
Saudi Arabia 34.56%
With the theme of diversification in mind, a sizeable percentage of the prolifera- tion of new sharia’a funds claim to be targeted at the expert investor aiming to diversify his portfolio to a profitable end. One such fund is the Shamil Solid Re- turn Fund, a multi-asset investment fund from the Shamil Bank of Bahrain (Boern- er et al). It may also be worth looking into funds that actually set out
2010 June GlobalIslamic Finance 61
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