Shariah funds outperform the general market
Quality Sharia funds outperform the general market
Abdul Davids, head of research at Kagiso Asset Management
For Sharia-compliant investors, the additional rules and limitations placed on Sharia-compliant funds leads to the misperception that Sharia investing results in lower returns compared to conventional investing. We deliberately made a stand against this assertion by choosing the average general equity fund as our benchmark.
The last few years have been frustrating for stock pickers: relative fortunes have been encapsulated in simple binary factors (eg holding resources). For Sharia investors, the performance backdrop has been even more challenging than it has been for investors in the general market. This is because over the last seven years a disproportionate portion of the total return of the All Share index returns has been due to three large stocks: Naspers, British American Tobacco and SAB-Miller (prior to its delisting) – all three of which are non-Sharia-compliant.
This environment is changing: 2016 marked the beginning of profound change in the world’s economic course. It was an inflection point for governments, central bank power, policy stimulus and potentially also for economic growth and inflation, all with complex implications for financial markets. An important outcome for us is the re-emergence of diligent bottom-up stock picking as a rewarding exercise.
Indeed, over the last three years, the Kagiso Islamic Equity fund was the single best performing equity fund in the South African market – outperforming hundreds of conventional funds and maximising capital growth for Islamic and other socially conscious investors.
Source: Morningstar – based on lump sum, income re-invested, NAV-NAV
Derived from Arabic, the word Sharia means the ‘sacred law’ and refers to the teachings that guide both daily life and economic investments in Islam. To comply with Sharia law, a fund may not invest in industries related to alcohol, gambling, tobacco, weapons, pornography, and other so-called sin industries.
In addition, Sharia law prohibits both the payment and receipt of interest. Therefore, sharia-compliant funds may not invest in highly leveraged companies. This also rules out businesses within the traditional finance sector such as banking and insurance companies. As a result, the investment universe is meaningfully reduced for Sharia-compliant investors.
We believe our Sharia investment framework, built on the principles below, is strong.
- Transparency:We believe that the socially conscious investor’s need for full transparency outweighs any risk of commercial encroachment (we are fully transparent on holdings).
- Experience:Our Sharia product is driven off our single research process, benefiting fully from the stock-picking capabilities of our experienced team (our fund is not operated in a silo).
- Active engagement:Our Sharia advisers are directly involved in the setting up of our Sharia screening process and are an integral part of the final stock screening and monitoring process (we have very regular input on screening issues).
- Pro-activeness and buy in:We firmly believe in the underlying ethical principles of Islamic Finance. We believe that the aim is to provide moral investment exposure rather than a blind following of mechanical rules. To this end, a stock that may pass through the qualitative and financial screens can still be excluded on closer consultation with our Sharia advisers.
Sharia beats the benchmark
As a result of these additional rules, the investment universe is reduced substantially for Sharia-compliant investors. Sectors such as banking, beverages, media and entertainment are ‘no-go’ areas for investment. And all companies selected for investment need to have closely managed debt and cash balance levels to avoid the payment or receipt of excessive interest.
This has led to the widespread perception that Sharia investing results in lower returns compared to conventional investing – but this need not be the case. At Kagiso Asset Management, we have deliberately selected the average general equity fund as our benchmark as a stand against this incorrect perception. We have found that our stock picking capabilities (both in local and global stock selection), and the breadth advantage we enjoy over larger peers, more than outweigh any potential drag from a more limited universe, over the long term.
Managing our global exposure ourselves for many years has enabled us to uncover differentiated and attractive investments for our clients and has been a strong source of alpha over time. Additionally, with the majority of the local market’s earnings now generated from offshore, the experience gained from our global research has added invaluable perspective to our analysis of locally-listed stocks.
Contact the team at Ammanah for your specific local or offshore investment needs on 0861 786 393 or 011 837 7865