For example, between the time when Lehman Brothers went bankrupt in 2008 and the market hit bottom in March of 2009, the MSCI World Islamic Index, a benchmark index made of global companies that adhere to Islamic financial principles, outperformed the MSCI World Index by approximately 600 basis points.
Similar outperformance by the category was in evidence during the market correction of 2011, and the category bears close watching during the current environment when many investors are dealing with elevated concerns about risk and volatility.
On the equities side, there is an emerging category of Sharia-compliant mutual funds, ETFs, unit trusts and balanced funds that prohibit earning interest on loans and focus on principles of risk and profit sharing in accordance with Islamic law.
With regard to income investing, there is also a unique category of investments called sukuks, which are Islamic financial certificates that are similar to bonds and which can be laddered into a diversified portfolio. These products give holders part ownership of the underlying asset, so instead of receiving fixed-interest payments directly from issuers like traditional bonds, they receive a share of the earnings generated. The global sukuk market is currently estimated at $500 billion, according to zawya.com, making it a mature, global investment category that can act as an important diversifier to a broader global fixed-income portfolio.
What’s Ahead?
With the twin trends of ESG investment growth and the re-emergence of market volatility, 2020 is shaping up as a year of significant change for investors and advisors. Approaches that help mitigate certain downside risks and provide access to potentially uncorrelated returns and income opportunities, while also helping meet the needs of the ever more socially conscious investor, are likely to find much broader applicability. Sharia-compliant investing is a category poised for strong growth and one that is likely to become a powerful tool for advisors of all sizes and approaches.
Naushad Virji is CEO of SP Funds, a provider of socially responsible, ethical, non-levered exchange-traded funds.