wealtharticles-when_investing_is_governed_by

When Investing Is Governed By Ethics

Not all investors are content with just preserving or accumulating wealth. In recent years, some have shown great interest in growing their wealth responsibly. Fuelling this trend is the introduction of funds based on the theme of "ethical and socially responsible investing". Belonging to this category are syariah-compliant funds.

What are syariah-compliant funds?
Islamic finance operates in accordance with the religious beliefs and cultural mores of Muslim societies. Syariah-compliant funds encompass some of the principles of syariah that govern the following:

Riba. The payment or receipt of interest is usury and, therefore investments in entities involved in lending or borrowing, such as banks, are prohibited. Debt is also frowned upon, making highly geared companies unacceptable.

Haram. Investments in alcohol, pork, pornography or the gambling industry, or in entities engaged in illicit, immoral or dubious trade, are forbidden.

Maisir. Syariah imposes an absolute prohibition on gambling, and in some circumstances, this may extend to futures and options. However, syariah scholars are reviewing this aspect, to determine whether the traditional prohibition is still justified when it comes to futures and options.

Permitted areas for such funds may include real estate, private equity and infrastructure

Who is the product for?
Islamic funds may be suitable for both Muslim and non-Muslim investors who want to invest only in products that comply with Islamic investment principles. Those who believe strongly in socially responsible investing will also find these funds attractive because they do not invest in sectors such as gambling.

Syariah funds also appeal to investors who give high priority to ethical investing, and to those who are strong advocates of not using leverage as a means of growth for firms.

What are the pros of investing in syariah-compliant funds?
Islamic banking guidelines have been shown to reduce risks because of the more conservative mandates. Islamic investing is "very much sheltered" from the sub-prime mortgage crisis. Islamic equity funds do not invest in most financial stocks simply because they are non-syariah-approved securities.

However, syariah-compliant funds in Singapore have not performed much better than non-syariah funds, simpy because there are just 10 of them. "many of the funds in Malaysia that are syariah-compliant have actually managed to display resilience during this crisis because the market there for islamic products is much more developed right now.

There are advantage to investing in these sort of funds. For instance, islamic funds were little affected by the scandals that afflicted companies such as Enron and Worldcom. As highly leveraged balance sheets of these companies prevented syariah funds from buying their stocks.

What are the disadvantages?
As the universe of stocks that syariah-compliant funds are permitted to buying into is smaller, there may be less diversification. In addition, since they do not invest in banks and financials, these funds may not be able to benefit when these sectors stage a recovery.

Another issue of concern, is the need for regulatory and corporate governance practices and mechanisms to keep pace with the rapid development of this market. This is because the regulatory frameworks in most countries are still evolving and at the infancy stage for islamic products.

How much of these funds should a portfolio contain?
Asset allocation in a portfolio depends on the kind of risks an investor is prepared to take. Syariah-compliant funds are comprehensive in terms of asset classes, which range from fixed income (sukuk bonds) and equity to alternative instruments such as hedge funds and private equity.

These funds became popular...
There has been a tremendous growth in Islamic banking in general and in syariah-compliant funds in the past 5 years because of rising affluence in the Middle East and strong economic growth in Asia.

The 4 main growth driver are:
Strong economic growth in Asia. This has led to an unprecedented accumulation of wealth among members of the large Muslim population in Asia. Likewise, in the Middle East, the steep rise in oil wealth has fuelled demand for syariah instruments.

Mounting interest and pride among Muslims in their own culture and customs.

The profitability of Islamic banking channels, products and services. Investors are discovering that islamic banking can be lucrative as conventional banking, if not more so.

Interest in thematic investing. This type of investing have become a novelty for investors hoping to be the first to catch the upside. Popular themes include "alternative energy", "green funds", "bio-fuels" and "ethical and socially responsible investing", under which category syariah-compliant funds fall.

The Singapore government has also made revisions to its tax structure over the past few years to encourage the growth of syariah-compliant financial poducts.

How big is the Islamic banking market?
Over the past decade, the islamic banking and finance market has shown spectacular growth. It has been one of the fastest-growing markets in the world. There are now more than 300 institutions worldwide offering syariah-complaint banking, with an asset base of US$250 billion to US$500 billion.

By, Lorna Tan, The Sunday Times, 20th August 2008.