Assessing the growth of Islamic equity funds Suhail Arain Investment Director Scottish Widows...
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Transcript of Assessing the growth of Islamic equity funds Suhail Arain Investment Director Scottish Widows...
Assessing the growth of Islamic equity funds
Suhail Arain
Investment DirectorScottish Widows Investment Partnership
Islamic Finance : Overview
• Islamic assets are about 1% of global banking assets
• The current size of Islamic finance market is estimated to be US$480 bn with retail being the largest segment at US$380 bn
• Islamic capital markets is the most dynamic segment with 40% CAGR over the 2000 – 06 period
• Regional breakdown : Middle East 40%, South East Asia 28%, Europe 10% and North American 6%
• Forecast growth of Islamic finance market 11% CAGR over period 2007 – 2010
• The opportunity remains large with some surveys indication that 75% of banking customers in the Gulf prefer Islamic banks and would switch to this format if their products were at least on par with those of conventional banks
Islamic Finance : Current Market Size
Islamic Funds
Developments and Outlook
Risk/return relationship and the benefits of diversification
• What do investors give up in becoming Shariah investors?
• An Islamic investor tends to focus on quality (low gearing)
• Favoured sectors include : Energy, materials, industrials, healthcare and technology at the expense of FINANCIALS and utilities
• An investment managers’ perspective
SWIP Shariah Guidelines
• Investment Principles
• According to Islamic principles certain industries are unlawful and investments in these are forbidden
• They include:– Tobacco– The production or sale of pork products– The production or sale of intoxicating liquor– Non-Islamic structured banking, finance, investment or life insurance business, or any other interest-related
activity– Cinema, and all media that contain pornographic material such as broadcasting, videos and CDs etc– Arms manufacturing
• Companies invested in must also follow the following guidelines– Interest revenue shall not exceed -5% of total revenue– Non-Islamic structured borrowing must not exceed -30% of the total market value of the company’s stock– Cash plus accounts receivables plus interest bearing assets shall not exceed -30% of the company’s adjusted
total assets– Each company shall be comprised of -51% non-liquid assets
Islamic Performance
ISLAMIC VS NON ISLAMIC SECTOR PERFORMANCE 12/10/07
2003 2004 2005 2006 2007
80
100
120
140
160
180
200
220
240
260
280
300
VICE WEIGHTED INC FI N - PRICE INDEXNON VICE WEIGHTED - PRICE INDEX
Source: Thomson Datastream
Islamic Performance
FTSE GLOBAL ISLAMIC INDEX VS MSCI GLOBAL INDEX 12/10/07
2003 2004 2005 2006 2007
80
100
120
140
160
180
200
220
240
FTSE ISLAMIC GLOBAL $ - PRICE INDEX
MSCI WORLD U$ - PRICE INDEX
Source: Thomson Datastream
Examining the need for uniform Shariah guidelines
• Islamic finance has come of age but is still developing
• Is Shariah compliance a binary event or something more complex?
• May need to standardise products but not principles
• Transparency is of the uptmost importance
• Who decides?– Customers/investors– Investment advisors
• In the end a fatwa is just an opinion given in the best of faith
• Unfortunately no decisive answer investors should invest in those assets that are most appealing/relevant for them