JEDDAH, 6 February 2006 — Investment funds in general and Islamic funds in particular, have performed very well last year. There are two major factors that explain this. First, and most obvious, is the high price of oil on world markets over the past few years which is expected to remain high throughout this year. Second, increased investment in the Gulf Cooperation Council (GCC), both from the public and private sectors, has led to new investment opportunities in the region. One of the best ways for investors to access new investment opportunities, whether equity based or real estate, is through investment funds.
There remains little information as to how Islamic equity funds have been performing relative to other investments. To find a comprehensive source for fund information, Arab News turned to the independent firm Failaka.com, a Kuwaiti-American company, which has been monitoring the growth and development of Islamic funds since 1996.
Following are excerpts from an interview with Failaka’s president and founder, Tariq Al-Rafai.
Q: What is an Islamic equity fund and how did the market develop?
A. An equity fund is simply an investment vehicle that allows investors to take advantage of investing in a diversified group of stocks which manages risk and exposure to one or a few stocks. It also offers the opportunity to participate in the long-term performance of the stock market. There are many ways to structure a fund which are entirely driven by what investors demand.
Islamic funds, however, add two other elements to these well-known stock market funds. They add a screening process to remove stocks of companies deemed to be inappropriate for Muslim investors. They also perform cleansing of a company’s profits, a technique used to remove any income derived from non-Shariah complaint sources, such as interest a company would earn on its bank accounts. Today, there are over 120 Islamic equity funds managed by some of the world’s top fund management companies, such as Citibank, Deutsche Bank, HSBC, Merrill Lynch and UBS.
Prior to the growth of equity funds, Muslim investors had little investment alternatives in which to place their money. Much of what was available to them during the 1980s and early 1990s consisted of short-term savings deposits, Murabaha accounts, and a limited number of local real estate funds. It is interesting to note that the earliest equity funds did not come from the Middle East, but rather from Southeast Asia, the US and even South Africa. Muslim investors in these countries, for the most part, did not have any halal investment solutions and, thus, developed equity funds as a first solution.
The most successful Islamic equity funds have been those offered by National Commercial Bank (NCB) and Al-Rajhi Banking & Investment Corp., both based in Saudi Arabia. These two banks, along with most Malaysian funds, have large retail networks in their respective countries, which have proven to be very rewarding.
Q: How big is this market?
A. It has grown from just $800 million in total assets for all Islamic equity funds, in 1996 to over $6.3 billion in 2005. That’s an annual growth rate of over 60 percent during the same period. The biggest boost to fund managers and the industry at-large came when Dow Jones and FTSE launched their Islamic indices in 1999. By 2000, the industry reached its first peak. There were over 100 funds available on the market offering an increasingly wide range of investment styles and objectives.
Q. How do you compare Islamic funds with other conventional funds?
A. Both have performed well recently. As you know, Islamic funds cannot invest in certain industries due to Shariah guidelines, such as investing in conventional banks and insurance companies. These two industries have performed very well over the past few years. As such, Islamic fund performance in international markets has not been as good as conventional funds. However, going back to the late 1990s, Islamic funds performed better since they tend to invest more in technology and healthcare.
Over the long term, however, Islamic funds will tend to perform better that conventional funds since they avoid investing in heavily leveraged (high debt) companies.
Q. Stock markets are booming in the Gulf due to ample liquidity and high oil prices. Don’t you think investors will shift money into stock markets rather than Islamic funds?
A. Yes, unfortunately, investors should focus on long-term gains and not short term. It’s good to have some of your money chasing the stock of the day, but the bulk of your wealth should be invested in well-diversified investments, part of which should be equity funds. Equity funds historically have been the best long-term investment.
Q. Islamic funds are not properly marketed. What steps should be taken to showcase Islamic funds to the general public?
A. No, I think Islamic funds are poorly marketed, in general, however, there are a few banks that are doing a great job at marketing. For example, in Saudi Arabia, National Commercial Bank has done the best job at marketing Islamic funds. However, industry-wide, there needs to be much more. Financial institutions need to focus on educating people to the benefits of long-term investing and explain to them what funds are. It is shocking to hear that many people do not understand what a fund is and what it’s risks are. Many believe that investing in funds is just as risky as investing in stocks directly.... But see that stocks go up more (in their view). This is not the case. Investing in equity funds is the safest way to invest in the stick market. You have professionals investing your money in a diversified group of companies vs. you trying to pick the best stocks. I guess there is some excitement in picking your own stocks and watching them everyday, but this should be more of a hobby than a retirement plan or a long-term wealth building tool.
