27four Investment Managers
7th August 2014
The landscape for faith-based investing
When we discuss South Africa’s strengths as a country, one thing that often comes up is our diversity. While this undeniably is a big challenge, it is also an incredible opportunity.
This is not just rainbow-nation sentiment. There really is a lot of value in combining different strengths and learning from different ideas.
This is as true in the world of investing as it is anywhere else. The development of investment solutions that comply with the requirements of Islamic law is one such case.
Fatima Vawda, the managing director at 27Four Investment Management says that the local industry has seen significant growth in faith-based investing. There are now seven different asset managers that offer Shari’ah compliant solutions.
What is interesting is that the principles of Shari’ah law make these products appealing to investors who may not be Muslim, but are still interested in making ethical choices with regards to where they put their money.
This is because Shari’ah compliant funds will not invest in companies that produce alcoholic beverages, tobacco products, military equipment or pornography. Companies that profit from gambling or adult entertainment services are also excluded.
Further requirements of Shari’ah law prevent these funds from investing in conventional banks and insurance companies that charge interest. Any companies that deal with non-ḥalāl food products such as pork are also excluded.
Who rules on compliance?
Where things do get somewhat tricky, however, is that there is not one central body that issues certification on whether funds are Shari’ah compliant or not. Because Islamic scholars have different interpretations of the law depending on their school of thought, there is not always agreement on what constitutes an Islamic investment.
So individual companies listed on the JSE do not get certificates to declare their business activities Shari’ah compliant. The decision on their appropriateness is left to investors and asset managers do their own screening.
“Shari’ah investments are not sanctioned by a body,” Vawda explains. “Each financial institution that offers Shari’ah compliant investments needs to have a Shari’ah Supervisory Board that ensures compliance with the principles.
“The board is made up of Islamic scholars, and plays the role of an auditor to make sure that investments are managed in accordance with the Shari’ah.”
This means that while one fund may be allowed to invest in a particular company, another fund might not due to a difference of opinions between their supervisory boards.
There is also a Shari’ah index maintained by the JSE, which is screened by an independent company.
The options for South African investors
Anyone looking for local Shari’ah compliant investment products has three main options: equity funds, balanced funds, and commodity exchange-traded funds (ETFs). There is also one manager that offers a global property fund. So it has become possible to build a pretty well-diversified portfolio using only these solutions.
Shari’ah equity funds will only invest in those companies that operate businesses within Islamic law. This can be something of a limitation as it does narrow down the options on the JSE quite significantly, and most of them tend to be very resource-heavy.
However, other industries in which they can invest include healthcare, telecommunications, ICT, and certain food producers and retailers. Some local funds also make use of their offshore allowance to invest in the wider selection of stocks that can be found on international markets, and there are a few global funds available to local investors as well.