Diversification plus ESG: more reasons to add Shari’ah funds to your portfolio

By: Gontse Tsatsi, Head of Retail Clients at Old Mutual Investment Group

One of the prevalent misconceptions about Shari’ah compliant funds is that they are exclusively tailored for members of the Muslim community. However, this couldn’t be further from the truth. In fact, investing in any of the four Shari’ah unit trust funds offered by Old Mutual Investment Group can yield two significant benefits for investors, irrespective of their religious background: first, portfolio diversification, and second, the opportunity to make a positive impact on environmental, social and governance outcomes.

Shari’ah investing principles have historically been interpreted by scholars to determine the minimum standards that an investment must satisfy to meet the requirements of Islamic Law. Islamic Law is centred on the preservation and protection of life, natural resources, and the environment, among other principles. The Shari’ah investment approach actively incorporates ESG principles and the United Nations’ Sustainable Development Goals such as responsible consumption and production, climate action, clean water and sanitation among others.

The growing popularity of Shari’ah investing is proof that focusing on shared values rather than differences leads to resilient and sustainable outcomes for all market participants. Global Islamic finance is growing ahead of core markets, offering investors a broader choice of funds than before, making it easier to create a diversified portfolio with ESG overlap/influences.

According to the State of the Islamic Global Economy Report 2022/3, nations outside the traditional Islamic Finance hubs such as Australia, Canada, Mexico and Russia, among others, are exploring the sector’s benefits to cater for their Muslim citizens. In addition, there is an increase in integrating Islamic finance principles within the broader financial ecosystem to strengthen finance in general.

Old Mutual Investment Group’s range of Shari’ah unit trusts  comprises four funds, including the Old Mutual Albaraka Income Fund (Regulation 28 compliant), Old Mutual Albaraka Balanced Fund (Regulation 28 compliant), Old Mutual Albaraka Equity Fund, and the Old Mutual Global Islamic Equity Feeder Fund. Each of these funds provides exposure to specific investment opportunities or themes, with three of the four funds managing over R1.6 billion in assets. The fourth fund, launched late in 2022, is still in the asset accumulation stage.

Investors with a long-term horizon focused on growth can choose between global or South Africa-focused equity funds, which invest in a wide range of local and offshore listed companies. The Global Islamic Equity Feeder Fund benefited from both local and global equities over the quarter, being fully invested as of 30 September 2023. Having quality at the core of the investment philosophy should help investors weather a potential slowdown in developed markets.

All four Shari’ah funds, including the equity funds, strictly adhere to Shari’ah law and do not invest in companies involved in alcohol, gambling, non-Halal foodstuffs, or interest-bearing instruments. Old Mutual ensures compliance across its Shari’ah range through a Shari’ah Supervisory Board, responsible for ensuring that the funds adhere to the standards of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).

On the other end of the risk spectrum, investors with a low-to-moderate risk tolerance can consider the Old Mutual Albaraka Income Fund. This fund offers capital stability through local and international equities, liquid assets, and non-equity securities such as sukuks or Islamic bonds, while limiting equity exposure to 10% and property exposure to 25%.

Our income fund aims to offer investors an ethical investment vehicle providing income and relative capital stability over time, offering an attractive yield with a duration of approximately two years, and all our funds share the common goal of protecting capital while delivering returns per the stated fund mandates.

According to the State of the Islamic Global Economy Report 2022/3, from a structural perspective, Islamic finance is merging with global sustainability initiatives eco-projects. Indeed, the shared values between ESG and Shari’ah provide investors with a wider variety of ethical investments, and more opportunities for diversification, which could partly explain the growth in Islamic finance and Shari’ah investments worldwide.         

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