When you mention socially responsible investing, few people envision striking it rich. Whether you avoid investing in companies that do nasty things to the environment or manufacture armaments or encourage sinful activities like smoking, drinking and gambling, the effect is the same: You shrink your universe of available stocks. If returns suffer a little – and they probably will – so be it. That's the price you pay for putting principles above profits.
But that is why Islamic-based investing has been celebrated recently. Mutual funds that have selected stocks that are consistent with Islamic values – for example, avoiding alcohol producers, casinos, pork processors and conventional banks – have delivered better results than the broader market, rewarding investors with principles and profits. No wonder non-Islamic investors want in.
You can get a good sense of how well Islamic investments have performed by looking at any of the indexes tracking stocks that have been approved by the Shari'ah Supervisory Board.
The Dow Jones Islamic U.S. index, a collection of U.S. stocks, beat the benchmark S&P 500 by about 6 percentage points between Lehman Brothers Holdings Inc. going bankrupt in September, 2008, and the market hitting bottom in early March. And the Islamic index has beaten the S&P 500 by about 6.5 percentage points over the past five years.
That's no small feat, and the reason for this outperformance is simple: Islamic principles said no to Citigroup Inc. (down 93 per cent from its high), Lehman Brothers (kaput) and other financial stocks. Longer term, banks stocks as represented by the KBW bank index, have also been a drag, plunging 54 per cent over the past five years and 39 per cent over the past 10.
At the same time, Islamic funds have embraced energy stocks and other commodity producers, which have risen substantially.
Nicholas Kaiser, who handles the actively managed Amana Growth Fund and the Amana Income Fund – U.S. funds that are not available to Canadian investors – has seen assets under management triple since 2003, to a total of about $1.25-billion (U.S.). Mr. Kaiser believes that investments from non-Muslims have grown dramatically, likely representing about 20 per cent of the funds' assets in 2008.
Globally, Islamic wealth and fund management have an estimated $1-trillion in assets under management. Canadian investors have access to the Global Iman Fund, launched in March, 2009. In late May, Standard & Poor's launched the S&P/TSX 60 Shariah Index, which is heavily focused on commodity producers at the expense of the Big Five Banks. If the popularity of Islamic-themed investing continues, the launch of index-tracking exchange-traded funds on North American stock exchanges won't be far behind.
However, the cross-over popularity of Islamic investing raises a question: Do non-Islamic investors care about the underlying principles or are they merely chasing past returns, one of the great investing no-nos?
Avoiding financials was a great move over the past couple of years, but continuing to avoid them, if you don't really have to, could just as easily hamper performance.
In Canada, the Big Banks have rewarded investors over the longer term. Over the past 10 years, the S&P/TSX composite index has risen about 86 per cent – not bad, but not much next to the 250-per-cent return from Royal Bank of Canada, the 230-per-cent return from Bank of Nova Scotia and the 125-per-cent return from Bank of Montreal.
Shorter term, things are also looking up for financials since they cratered earlier this year. Since the S&P 500 hit a 12-year low in early March, the index has risen close to 41 per cent, with financial stocks leading the way with gains of more than 100 per cent. By comparison, the Dow Jones Islamic U.S. index has trailed with a 33-per-cent return.
“If that is the sector that outperforms, we will miss that,” Mr. Kaiser says. “That's one of the risks of holding the funds.”
