Investing with a social conscience
There are a number of unit trusts designed for investors who wish to invest in socially responsible companies. While these funds offer an outlet for individual investors with a social conscience, they are of limited use to Muslim investors who wish to invest in line with their religious and cultural beliefs.
To broaden the investment options available to Muslim investors, STANLIB unveiled the Shari'ah Equity Fund to a group of brokers at their offices in Melrose Arch on 27 June 2007. The fund, which will be available from 1 July 2007, "offers an equity solution that strictly complies with the Shari'ah law governing Islamic investment."
Talking at the launch, Ashraf Mohamed, STANLIB Shari'ah Equity Fund portfolio manager said that the South African investment environment was up to speed with international Shari'ah requirements. In this regard, the Association of Collective Investments (ACI) has opted to follow international Shari'ah regulations and has signed on as a member of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).
South African Shari'ah funds are required to appoint a Shariah Advisory and Supervisory Board comprising at least three members. These individuals must be well versed in the "principles of Shari'ah." STANLIB has appointed Dr Mohammad Hashim Kamali, Sheik Seraj Hendricks and Faizal Ahmad Manjoo to vet transactions and ensure that the fund complies with "international Shari'ah best practices."
Striving to beat the JSE All Share Index
Mohamed said that "the long term objective [of the Shari'ah Equity Fund] is to grow capital, reducing downside risk which essentially means low volatility."
Because South Africa is unlikely to have a local equivalent of the American Dow Jones Shari'ah Index any time soon, the STANLIB Shari'ah Equity Fund will be benchmarked against the JSE/FTSE All Share Index.
Mohamed mentioned that the fund would probably make full use of its mandated 15% offshore component. In this regard, the Dow Jones Shari'ah Index would be used to assist in choosing which international equities to include in the portfolio.
A short-list of acceptable investment alternatives
Mohamed described the stock selection process which is used to pick shares for the Shari'ah Equity Fund. First, companies involved in the alcohol, tobacco, gambling, conventional banking, conventional insurance, entertainment and media industries have to be excluded. This step reduces the investment universe from around 210 JSE listed shares to 70 shares.
Once the first stage is complete, Mohamed applies a number of financial ratios and rules to whittle down the remaining 70 possibilities. These rules include:
Rule 1 the company's debt to 12 months trading market cap should not exceed 30%
Rule 2 the company's accounts receivable to 12 months trading market cap should not exceed 30%
Rule 3 the ratio of liquid assets to total assets should not exceed 70%
Rule 4 no more than 5% of income should derive from non-Shari'ah sources
These rules are applied "to guard against investing in companies where there is excessive debt or excessive interest income," and reduce the short-list to 45 shares. Mohamed then structures the Shari'ah Equity Fund portfolio by selecting between 20 and 25 of these short-listed shares.
Every six months the portfolio has to be reviewed to ensure that all the shares included still meet the above requirements. Should circumstances change, and a particular share no longer comply, the Shari'ah Equity Fund manager is allowed three months to dispose of the shareholding.
The top ten in the starting portfolio
Mohamed used an example to demonstrate how the selection process worked. In comparing PPC to Murray & Roberts, he illustrated how Murray & Roberts could not be included in the fund due to excessive accounts receivable.
Mohamed listed the most likely 'top-ten' shares to be included in the fund when it launches. These were Mittal, Anglo Platinum, MTN, BHP Billiton, Sasol, PPC, Group 5, Aspen, Reunert and Northam Platinum.
Going forward Mohamed expects STANLIB to launch a Shari'ah Income Fund and Shari'ah Balanced Fund in September this year. These launches are subject to final Financial Services Board approval.
Editor's thoughts:
Over five years, Shari'ah funds in South Africa have outperformed the MSCI World Index by 175%. This statistic proves that socially responsible investments can provide market beating returns. Do you believe in the principals behind socially responsible investing, or do you prefer to put making money first? Send your comments to [email protected]
