27four Investment Managers
9th April 2009
New Retirement Thinking
New Retirement Thinking
9 April 2009
By GUILIETTA TALEVI
Giulietta Talevi speaks to Fatima Vawda from 27Four Investment Managers about Shari’ah investing and
the growing number of options for Muslim investors
Giulietta Talevi: Welcome to New Retirement Thinking. Our discussion is on socially responsible
investment options and Shari’ah investment funds with Fatima Vawda managing director of
27Four Investment Managers. Fatima, let’s start off with the basics – what is a Shari’ah
Fatima Vawda: The word Shari’ah is derived from Islamic law – Shari’ah compliant investments are
according to an Islamic set of guidelines that dictate how money should be invested and managed…
Giulietta Talevi: For example?
Fatima Vawda: Broadly speaking and very simplified interest is forbidden in Islam – so for example any
institution where their business is borrowing or lending for example is eliminated from an equity
Giulietta Talevi: So basically the banks?
Fatima Vawda: Yes, also money market funds. Fixed income funds, bonds, money market etcetera is
immediately eliminated. If you deal with equity type investments there’s a two step criteria that involves
firstly screening – that’s screening where companies are involved in forbidden business activities such as
alcohol, tobacco, arms and ammunition, pornography, gambling etcetera are eliminated – so the universe
is filtered in terms of those stocks that qualify. The second screening is quantitative -that basically deals
with leveraging and the amount of gearing that a company has on its balance sheet, and several financial
ratios are then applied to those companies before the ultimate universe is determined.
Giulietta Talevi: What kind of gearing would be unacceptable to a Shari’ah type investment?
Fatima Vawda: Excessive gearing is unacceptable because again we are entering into the aspect of
interest – where there’s interest earned or interest incurred – so those elements of it makes it forbidden.
What also happens is that on a periodic basis when companies declare their financial statements
earnings are purified of any non-permissible income – so when a company declares a dividend it’s purified
at source and any interest income is extrapolated out of those earnings. That non-permissible income is
then given to charitable organisations or public benefit-type organisations. The entire oversight of this is
by a Shari’ah board. The role of the Shari’ah board is essentially to ensure Islamic compliance and also to
ensure that the legal structures, documentation, the investment guidelines etcetera satisfies the law of
Giulietta Talevi: Do Shari’ah funds classify as socially responsible (SRI) funds?
Fatima Vawda: Shari’ah funds can be classified as SRI. Basically SRI is classified in three ways – we
have shareholder activism and engagement where you can’t influence companies if you don’t participate,
then there are community infrastructure investment funds and then there’s positive and negative
screening. In this case Shari’ah would definitely fall within that screening bucket – that ethical investment
bucket – hence Shari’ah funds can be classified as SRI.
Giulietta Talevi: I’d imagine there’s a lot of admin involved in dealing with a Shari’ah-type
investment option – how popular are they when you’re talking about a large company that offers a
fund to its members? Presumably not everyone is going to go for a Shari’ah fund, and presumably
there’s a lot of administration work involved?
Fatima Vawda: There are a lot of issues with regards to Shari’ah. It is a very niche and specialist market –
when Shari’ah first started out in South Africa they were mainly regarded as savings vehicles through unit
trust and collective investment scheme vehicles. As the South African pensions market moved away from
defined benefit (DB) to defined contribution (DC) funds – where members essentially take the
responsibility for the funds they invest in – we started seeing more appetite coming from employees and
members of retirement funds to say they wanted investment options that satisfy their ethical beliefs. What
happens then is you often find boards of trustees looking at implementing Shari’ah investment options for
their members – but in a company with say 1,000 employees only 3 or 4 members want a Shari’ah
investment choice so it’s a very specialised market, and if a member does want that they needs to
communicate that to their board of trustees who will then speak to the asset consultant or service
Giulietta Talevi: Once you’ve done that is it fairly easy to offer those employees Shari’ah
Fatima Vawda: It is. The market is still small – which brings me back to the question that a lot of the initial
Shari’ah funds that were launched into the South African market were purely savings investment vehicles,
and that means they were 100% equity. What we have seen in the last couple of years is that more
balanced funds are now being offered, and more multi-manager solutions. As a member of a retirement
fund you can’t invest 100% of your assets in a pure equity fund because of Regulation 28 of the Pension
Funds Act that prescribes limits on the asset classes. Also, it doesn’t make sense for someone to be
100% invested in equity because they’re going to get no diversification benefits. They have to add the
non-correlation benefits of other asset classes. Also, once they’ve applied the screening processes to the
JSE for example they are left with a total of 70 stocks so that universe is quite limited, and once you
remove the stocks that are financial for example you land up taking a bet towards resources and
Giulietta Talevi: So basically you’re saying those counters that the fund is invested in can be very
highly geared to a particular sector or business cycle so there’s lots of swings and ups and
downs in that fund’s performance?
Fatima Vawda: Yes, if that’s a pure equity investment. We saw that with the performance last year –
Shari’ah funds did incredibly well in 2008 and the reason behind that was because banking and financial
stocks globally during the crisis fell apart because of the high levels of gearing and high levels of liquidity,
etcetera, where Shari’ah compliant investments didn’t invest in the banking stocks.
Giulietta Talevi: So presumably they invested in resources and they must have done well in the
first part of the year – now they must be doing very badly indeed. How do investors then protect
themselves if they’re invested in a Shari’ah fund through those ups and downs in the market?
Fatima Vawda: There are more balanced types of funds that are now available. What we are saying now
is don’t put 100% of your investments into equities – there is an Islamic bond market that’s been
introduced in South Africa, and Islamic bonds are available globally particularly in the Middle East and
Malaysia for example where there’s a primary and secondary market for Islamic bonds. In South Africa
you can buy an Islamic bond through a financial intermediary like an investment bank. What an investor
could do and what the balanced funds do is that they invest a portion of the portfolio into equities and a
portion of the portfolio into Islamic bonds – and now a portion of the portfolio into Shari’ah compliant
offshore funds. There’s a lot more Shari’ah compliant offshore funds that are now being marketed in the
South African market that allow you to obtain that asset class diversification that you couldn’t obtain
Giulietta Talevi: Are you seeing products developing in this area of the market and are the options
becoming greater to retirement fund members?
Fatima Vawda: Absolutely. I do think we are beginning to see more traction and more demand – the
boards of trustees have become more representative, members have become more vocal and they’re
asking for more requirements – so we do see a lot of appetite coming through. I do think that the market is
still small – you’ve got to understand there are two million Muslims in South Africa or 400,000 households
– so the demand is there, but you can’t compare it to the broad market. I think that the growth area is in
the rest of the continent because it’s heavily populated in terms of Muslim populations