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Assessing the growth of Islamic equity funds

Assessing the growth of Islamic equity funds. Suhail Arain Investment Director Scottish Widows Investment Partnership. Islamic Finance : Overview. Islamic assets are about 1% of global banking assets

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Assessing the growth of Islamic equity funds

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  1. Assessing the growth of Islamic equity funds Suhail Arain Investment Director Scottish Widows Investment Partnership

  2. 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

  3. Islamic Finance : Current Market Size

  4. Islamic Funds

  5. Developments and Outlook

  6. 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

  7. 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

  8. Islamic Performance ISLAMIC VS NON ISLAMIC SECTOR PERFORMANCE 12/10/07 300 280 260 240 220 200 180 160 140 120 100 80 2003 2004 2005 2006 2007 VICE WEIGHTED INC FI N - PRICE INDEX NON VICE WEIGHTED - PRICE INDEX Source: Thomson Datastream

  9. Islamic Performance FTSE GLOBAL ISLAMIC INDEX VS MSCI GLOBAL INDEX 12/10/07 240 220 200 180 160 140 120 100 80 2003 2004 2005 2006 2007 FTSE ISLAMIC GLOBAL $ - PRICE INDEX MSCI WORLD U$ - PRICE INDEX Source: Thomson Datastream

  10. 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

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