Interview Series

WSF Reliance Global Shariah Growth Fund

Investment Manager: Reliance Asset Management (Malaysia) Sdn. Bhd.

(December 2011)

Investors can often be unfamiliar with the term Shariah funds.  How would you describe to an investor the difference between Shariah and conventional funds?

Shariah funds choose not to invest in certain stocks that would be deemed inappropriate for Muslim investors. From the point of view of an equity investor, there are two key dimensions to Shariah-compliance. The first is ethical, in that certain business activities such as producing or selling alcohol and tobacco are considered off-limits. The second dimension is financial, and will include, for example, the exclusion of companies that operate with very high levels of debt relative to their market capitalization.


Figures show that the Shariah fund industry and Islamic finance in general has grown very rapidly in the last decade. Why do you think this has happened?

As a relatively new segment of the asset management industry, recent growth rates clearly reflect development from a low base. However, we expect industry momentum will continue to build, as investor awareness continues to improve, and a broader spectrum of the investment community begins to appreciate the benefits of investing in Shariah-compliant equities.


Is there growing interest in Shariah-compliant investments among non-Muslim investors and if so what are the main reasons behind this?

It is hard to prove this specifically so we would point to the continued growth of the ethical and sustainable investment funds sector, of which the Investment Management Association reports ethical funds experiencing net retail sales of GBP94mn in the second quarter of this year, the highest since 2007. In addition, the growing concern relating to the sustainability of the conventional banking industry seems fairly apparent. Shariah funds cater for investors who are searching for a compelling combination of an ethically sound and financially more conservative way to invest, whether they are Muslim or not.


Shariah-compliance puts conditions on investing which some people say restrict the potential of an investment product. What would you say to this argument?

We don’t believe this to be true. Although the universe of investable companies is reduced by the application of Shariah criteria, our own research suggests that the overall risk-return profile of Shariah-compliant indices is comparable to that of conventional indices. Clearly over shorter time horizons differences will emerge, such as the outperformance of technology-biased Shariah indices during the dot-com boom, and their subsequent underperformance as the bubble burst. Over the long-term however, these variations tend to cancel out.

Has the performance of Shariah-compliant investments differed significantly to conventional investments in recent years and if so, why?

Shariah indices have outperformed their conventional counterparts by a significant margin in recent years. A negligible exposure to financial stocks has certainly helped, but equally important in our view, is the relatively low gearing levels of Shariah-compliant stocks. It should come as no surprise that, given the uncertain economic climate, investors have favoured companies with strong balance sheets.


How have Shariah funds been affected by recent global economic and market developments, such as policies on quantitative easing and the Eurozone debt crisis, as opposed to their conventional counterparts?

The main performance difference that we observe between conventional and Shariah-compliant funds through this period of upheaval is that of the lower volatility of Shariah-compliant funds. Banks and insurance companies are interest rate and collateral sensitive so are prone to significant price changes whether due to lower bond rates (via quantitative easing) or asset write downs (as a potential consequence of the debt crisis). This increases the volatility of conventional funds which tend to have large holdings in the financial sectors, as opposed to Shariah-compliant funds that cannot hold conventional banks and insurers.


Is the performance of Shariah funds in any way inherently less or more vulnerable than conventional funds to the kind of large volatility seen recently   on almost all markets?

Shariah-compliant funds have been shielded to some extent from one of the most volatile segments of the equity market, as investor concern has focused on the financial sector. Nonetheless, correlations between individual stocks and sectors, indeed across all asset classes, are extremely high at present, as macro concerns continue to dominate price movements.


Regarding the Fund itself, how has it performed recently compared to its peers and are there any particular stocks or areas where the Fund is performing well?

Our investment process, called Cognition, has been designed to target stock selection as a source of excess return. Rather than over or under weighting geographic regions, or economic sectors, Cognition seeks to identify the appropriate blend of investment styles and select stocks that are best suited to the current market environment. To this end, we are particularly pleased to note that the Fund has added value almost exclusively through picking the right stocks.


What advantages are there to the Fund having a global, as opposed to a specific regional or country, investment scope?

Rather than restricting ourselves to a single region or market, a global approach enables us to maximize the number of investment opportunities. This makes use of one of the key advantages of our quantitative approach as compared with traditional ‘fundamental’ fund managers, since we are able to rapidly analyze and respond to new information for all companies in the investment universe at the same time.


Apart from the need to make sure investments are Shariah-compliant, is your stock selection process for the Fund different in any way compared to the process you would use if you were picking stocks for a conventional global investment fund?

Our investment process could equally be applied to a conventional investment universe. Although some of the factors we use to analyse the universe are perhaps better suited to Shariah stocks, such as the Piotroski measure of financial strength, the process framework itself is essentially a full market model. Indeed, when conducting our style analysis to look for trends in the market, we do so at the broad (conventional) market level.


In your opinion, what are the prospects for the Shariah funds industry in the short to medium term?

The Shariah funds industry is still in its infancy, and at this low base percentage growth will be high. Short-term growth will come from the expansion of simple products which bridge the gap between the conventional and Islamic asset management industries rather than from complex products. In the medium term the industry will need to create effective structures for the mass retail market which will bring wider options and expand its depth.


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