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Assessing the growth of Islamic equity funds
Suhail Arain
Investment DirectorScottish Widows Investment Partnership
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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
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Islamic Finance : Current Market Size
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Islamic Funds
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Developments and Outlook
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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
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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
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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
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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
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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