Islamic Funds.

1. ISLAMIC FUNDS (2) By: Camille Paldi
CEO of FAAIF

2. SHARI’AH INVESTING IS FOR
ANYONE
In Malaysia, the CIMB Islamic Commodities Structured Funds 1 and 2
garnered 57 percent non-Muslim investors during its initial offer
period.
In the USA, Saturna Asset Management, a Shari’ah investment
management company based in Bellingham, Washington, disclosed
most of its assets under management for its Amana Global Equity
Fund are from non-Muslim investors.

3. MANAGEMENT FEES
An analysis of the 26 Islamic Funds on the UCITS platform in both
Dublin and Luxembourg shows that management fees chargeable to
these funds range from 150 basis points to 225 basis points, just like
those of conventional funds available on the UCITS platform.
Comparable charges for conventional and Islamic funds.

4. ISLAMIC PRODUCTS ARE NOT
COMPLICATED
Equity screening is done in two stages, business and financial
screening.
1. Business screening ensures that the investments in goods and
services that are prohibited by Shari’ah are excluded.
2. Financial screening further excludes stocks with high debt, high
receivables, and idle cash reserves.
This ensures stability of investments with a moral dimension.

5. ISLAMIC PRODUCTS ARE NOT
COMPLICATED
Screening ensures that the investments are stable and prohibit
excessive risk taking.
Screening also ensures avoidance of high borrowing and exploitation
of contracts.

6. ISLAMIC INVESTMENT UNIVERSE
If one were to construct a global Islamic equity portfolio from
components of the Dow Jones Islamic World Index, one can select
from a broad universe of 2413 components with an impressive
market capitalization value of USD18.35 trillion.
The Dow Jones Islamic Market Asia/Pacific Index has 1,146
components and a substantial market capitalization of USD4.37
trillion.
Similarly, the amount of sukuk outstanding during the first half of
2012 has grown impressively to USD210.8 billion.
Dow Jones Islamic World
Index
2413 Components USD18.35 Trillion Market
Capitalization
Dow Jones Islamic Market
Asia/Pacific Index
1146 Components USD4.37 Trillion Market
Capitalization

7. ISLAMIC INVESTMENT UNIVERSE
Islamic Funds demonstrate a higher return.
December 2008 – 2012
Dow Jones Islamic Market World Index versus the conventional Dow
Jones World Index
The cumulative total return of the Islamic Index demonstrated an
outperformance of 9.91% over the conventional index.

8. ISLAMIC INVESTMENT IS IN HIGH
DEMAND
There is a higher demand today for investment solutions that are
structured with certainty, fairness, ethics, and without speculation.

9. RESPONSIBLE INVESTMENT
The Islamic investment process comes with the structured capability
to manage risk as the screening provides an embedded risk
management overlay at the portfolio level.
This screening, via the application of three financial ratios based on
debt, receivables, and cash, results in a more financially sound pool
of constituents to select from.

10. ISLAMIC INVESTMENT IS ALREADY
WIDELY USED IN THE WEST
Most American, European, Japanese, and Australian pension houses
have provided specific allocation for SRI portfolios and ethical
investment.
It goes beyond a traditional ethical investment approach because an
additional layer of risk management exists on top of the SRI/ethical
screening.
Result = High quality assets with strong fundamentals and low debt-
to-equity ratios.

11. CONVENTIONAL V ISLAMIC FUNDS
(2012)
Conventional Funds 19 Trillion 70,000 Funds
Islamic Funds` 65 Billion 750 Fund
Conventional Index 3589 Constitutents USD12.1 Trillion
Market Capitalization
Islamic Funds 1,146 Constituents USD4.37 Trillion
Market Capitalization

12. SHARI’AH AND CONVENTIONAL
INDICES
In the top 10 constituents of both the conventional and Islamic index,
there are three common constituents:
BHP Billiton, Samsung Electronics, and Taiwan Semiconductor.
Other familiar names that make up the top 10 list of the Shari’ah index are:
Canon Inc., Petro China Co. Ltd., H Shares, and China Mobile Ltd.
The Shari’ah Index is more spread out and exhibits diversification of risk
from the standpoint of country and sector allocation.

13. SHARI’AH AND CONVENTIONAL
INDICES
The total number of Shari’ah compliant constituents is 1,065,
with market capitalization at USD4.0 Trillion,
which is about 40.25 percent of the conventional market
capitalization.

14. ISLAMIC INVESTMENT UNIVERSE
Although Islamic investing is based on a more limited investment
universe, that universe has sufficient breadth and depth to construct
a portfolio of good quality stocks with sufficient liquidity.
As of 2012, the Dow Jones Islamic Market World Index (DJIM World)
has a universe of 2,413 stocks, which is 35.5 percent of the Dow
Jones Global Index of 6,850.
However, its market capitalization of USD18.35 million constitutes
41.5 percent of the Dow Jones Global Index’s total market
capitalization of USD44.12 Trillion.
Dow Jones Islamic Market
World Index (DJIM World)
2413 Stocks USD18.35 million market
capitalization
Dow Jones Global Index 6850 Stocks USD44.12 trillion market
capitalization

15. GLOBAL MARKET INDEX
August 2006 – December 2012
The Dow Jones Islamic Market World Index versus the Dow Jones
Global Index,
The Islamic Index had a cumulative price return of 3.83 percent
compared to -6.08 of the Conventional Index percent over this period.
It has been observed from past years that Dow Jones Islamic and
conventional markets move in a similar volatility pattern, proving
better risk-adjusted returns fro the Dow Jones Islamic Market World
Index.
Islamic Index – Dow
Jones
3.83 %
Global Index – Dow Jones -6.08%

16. EUROPE MARKET
The Dow Jones Islamic Market Europe Index returned a higher
cumulative performance of -8.26 percent compared with -21.80
percent by the Dow Jones Europe Index (E1DOW) in this period.
Dow Jones Islamic Market
Europe Index
-8.26%
Dow Jones Europe Index -21.80%

17. JAPAN MARKET
In Japan, in the same time period, the Dow Jones Islamic Market Japan
Index also outperformed the Dow Jones Japan Index (JPDOW) by
6.77% over this period.

18. INVESTING IN ISLAMIC FUNDS
Similar to the conventional investment process, the investment
manager can optimize a portfolio by:
1. anticipating market trends and
2. constructing a portfolio from the available investment universe to
deliver certain performance characteristics, which could be based
on stock picks, sector weightings, or both.
This is then applied across different investment capabilities such as
global, Asia-Pacific ex-Japan, and ASEAN.

19. WEIGHTINGS
Higher weightings in the basic materials, energy, health care,
telecommunications, technology, and industrial sectors are expected
to contribute to the strength of the Shari’ah investing approach,
as opposed to a conventional investment portfolio, which typically
has higher weightings in the financial sector.

20. THE EUROPEAN SUKUK WORLD
The UK is well-positioned to become the international hub for Islamic
capital markets, worth USD 271.0 million Sukuk outstanding (2012).
Ireland and France are close behind, with both governments passing a
law enabling the issuance of Sukuks in 2009.
Luxembourg has issued sukuk.
Malta has passed a budget for Islamic finance in 2014/2015.
Spain is considering Islamic finance.

21. THE AMERICAN SUKUK WORLD
The States of New York and Illinois have both passed legislation
enabling sukuk transactions.
Goldman-Sachs issued a USD$500 Million Sukuk.
East Cameron Gas and General Electric have issued Sukuk.

22. THE SUKUK WORLD
Ernst and Young predicts the sukuk market will reach USD$917 Billion
in 2019.

23. THE SUKUK WORLD
Investment exposure to sukuk can offer diversification benefits.
Sukuk prices generally hold up well because they are often treated as
a buy and hold investment.
This gives an additional layer of insulation against volatility relative to
conventional fixed incomes.
An easy way to access the Sukuk asset class is through a fund that
invests in diversified portfolio of global investment grade Sukuks
such as the Al Hilal Global Sukuk Fund.

24. THE SUKUK WORLD
Launched in 2012, the Al Hilal Global Sukuk Fund has delivered a
performance of 4.3 percent in only six months since its March, 2012
debut.
The fund invests in a diversified portfolio of Shari’ah-compliant
Sukuk issued by sovereign, quasi-sovereign, and corporations and
aims to generate regular income as well as capital appreciation.

25. THE SUKUK WORLD
There is evidence that diversifying a portion of one’s overall
investment portfolio to Sukuk investments away from traditional fixed
income will show an improvement in the Sharpe ratio without
diminishing investment returns.
The Dow Jones Sukuk Index (DJSI) produced superior returns over the
conventional index over 2 years as of September 2012.

26. THE SUKUK WORLD
Sukuk investing is unique in that it enlarges the existing conventional
fixed-income investment universe to grant conservative investors
attractive opportunities in a completely separate class of fixed-
income assets.
Sukuk issued by financial institutions constitute the second-largest
sector in the DJSI (about 30%).
This enables conventional fixed-income investors to diversify the
quality of their overall portfolio’s exposure to the financial sector as
they can gain experience to Islamic Banks.

27. SHARI’AH COMPLIANT UCITS
FUNDS
Most Shari’ah compliant funds cater to the domestic market, where
the funds are meant for investors in that country. These funds are
generally small and issued only in the home currency, and foreign
investors can view that as an impediment.
They would prefer the fund base currency to be an internationally
accepted currency i.e. the dollar or the euro.
Small fund sizes result in investor concentration risk and can be
illiquid.
The Shari’ah investment track record is too short to grant confidence.

28. SHARI’AH COMPLIANT UCITS
FUNDS
Fund performance figures are generally not calculated according to
global investment performance standards (GIPS).
As a domestic fund, it may not have internationally acceptable
Shari’ah interpretations.

29. UCITS FUNDS
The UCITS fund structure was initially designed as a European
regulatory “passport” in order to sell funds across the European
Union, and its acceptability has now expanded to other regions
around the world, including Latin America and Asia.
These types of funds are available in regulated offshore fund
platforms like Ireland (Dublin) and Luxembourg.

30. UCITS FUNDS
The UCITS structure is flexible enough that it can be offered in
multiple asset classes and multiple currencies to a broader investor
base.
As such, it can more easily build scale internationally.
Such platforms are popular in the conventional space and offer a
good platform from which to launch Shari’ah compliant funds.
Due to the common European standard, UCITS funds are regarded
globally as very well regulated funds that have robust risk
management procedures and a strong emphasis on investor
protection.

31. IRELAND
Under the Finance Bill Act of 2010, which took effect January 1, 2010,
the Irish Ministry of Finance introduced some significant amendments
to facilitate Islamic finance transactions in Ireland, especially Sukuk.
In 2011, the Securities Commission Malaysia and Central Bank of
Ireland signed an MOU to provide an arrangement for the two
regulators to exchange information and cooperate in the area of
regulation and supervision of authorized entities offering collective
investment schemes.
The Securities Commission Malaysia signed a similar agreement with
Luxembourg in 2012.

32. UCITS FUNDS
CIMB-Principal Islamic Asset Management established a UCITS funds
platform in Ireland in December 2011.
CIMB Principal Islamic has launched three Shari’ah UCITS funds –
Islamic Global Emerging Markets Fund, Islamic Asia Pacific ex-Japan
Fund, and Islamic ASEAN Equity Fund for international distribution.
CIMB Principal Islamic is offering its Shari’ah compliant funds in seven
jurisdictions:
Malaysia
UK, Switzerland, and Germany (Europe).
Saudi Arabia, UAE, Bahrain (Middle East).

33. UCITS FUNDS
Saudi Arabia currently has the largest Islamic fund assets under
management (AUM) in the world at USD 19.9 Billion.
A total of 26 Islamic UCITS in Luxembourg and Ireland were first
made available to international investors on global fund platforms
like Ireland and Luxembourg in 2000.
However, the majority of the funds were launched from 2008
onwards.

34. UCITS FUNDS
Shari’ah Compliant UCITS funds that currently exist on these
platforms were established by conventional global asset managers
from non-Islamic countries:
the US, Germany, the UK, France, Australia, and Switzerland.

35. SHARI’AH COMPLIANT EQUITIES
AND SUKUK
The widest selection is in global equity UCITS funds (sukuk).
In regards to global Sukuk, there is only one fund available in
Luxembourg, however, it is not UCITS-compliant.

36. UCITS FUNDS
Although Shari’ah compliant UCITS are referred to as Islamic, they
were mostly established by conventional asset managers.
Shari’ah compliant UCITS funds investors will be reassured by a
regulatory framework that is clear, straightforward, and easily
understood.

37. UCITS FUNDS
Shari’ah compliant UCITS are globally offered, but currently the
market is very small and totals 26 funds in Ireland and Luxembourg.
UCITS Fund structures are similar to a European passport that enables
to sell funds order across the European Union.

38. THE END