Institutions bound to invest money according to Islamic principles have more to consider than their bottom line. Many businesses are just not compatible with Islam, and it is important to know which stocks should be left out of an Islamic portfolio.
Index provider Dow Jones has catered for the Islamic investment market for three and a half years with its Islamic Market Indices. So popular are the benchmarks, that expansion is on the horizon for the index series, says Rushdi Siddiqui, director of the Islamic Index.
“Now that we have 34 Islamic indexes and nearly $1.5bn (E1.6bn) of assets managed against the family of indexes, we are seeing the beginning of more sector based and regional based investing, and customisation is probably not too far into the future,” he says.
“The Dow Jones Islamic Market indexes have given this niche market – equity investing – more credibility and legitimacy,” he says.
The family of indices track Shari’ah compliant stocks from around the world.
Some businesses are incompatible with Shari’ah Law. These include alcohol, pork-related products, conventional financial services such as banking and insurance and entertainment – hotels, casinos and gambling, cinema, pornography and music.
As well as this, Shari’ah scholars do not advise investing in tobacco manufacturers or defence and weapons businesses. So stocks of companies involved in any of these businesses are not considered suitable for Islamic investing.
The indices, says Siddiqui, are used by Islamic banks, Arab banks and western asset management firms with Islamic mandates, which are mostly for actively managed funds. A few, however, are for index funds and increasingly, the indices are used for structured products.
The series includes the broad DJ Islamic Market Index, the DJ Islamic Market US Index, the DJ Islamic Market Technology Index, the DJ Islamic Market Extra Liquid Index, the DJ Islamic Market Canadian Index, the DJ Islamic Market UK Index, the DJ Islamic Market Europe Index, and the DJ Islamic Market Asia/Pacific Index.
Dow Jones selects stocks for the Islamic indices with the help of a Shari’ah Board of Islamic scholars. The board includes experts such as Shaykh Abdul Sattar Abu Ghuddah, who is a senior Shari’ah Advisor to Albaraka Investment Co of Saudi Arabia and Shaykh Justice Muhammad Taqi Usmani, who has been a member of the Supreme Court of Pakistan since 1982.
The indices are constructed by creating a universe from which stocks can be selected. First, any industry group that represents an incompatible line of business has to be excluded. Companies in other industry groups may also be ruled out if they own prohibited business or earn money from them.
After this, remaining stocks are tested according to three filters designed to remove those with unacceptable debt ratios.
Siddiqui says those running the indices are proud of the hard work they have put into this niche market. “It’s the benchmark for Islamic equity investing,” he says. “And we look forward to sharing our experiences with those wanting a Christian, Catholic, Jewish, or other type of indexes.”