dow jones aiding islamic investing

7/31/2019 Dow Jones aiding Islamic Investing

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l i s t e n i n g p o s t

Qatar today j u n e 2 0 1 234

ince the launch o the Dow Jones Islamic

Market (DJIM) World Index in 1999, the

DJIM amily has expanded to provide a

wide variety o benchmarks tracking Shar-ia-compliant securities – including indexes

or 69 countries, across both developed

and emerging markets. The amily also in-

cludes regional, industry sector and market

capitalisation indexes. By screening invest-

ments or compliance with Sharia law, the

indexes help to reduce research costs and

compliance concerns that Muslim inves-

tors would otherwise ace in constructing

Islamic investment portolios.

Qatar Today caught up with the Director

o Islamic Market Indexes or Dow Jones,

Tariq Al-Riai, and gathered his thoughtson a range o issues regarding Sharia-

compliant investments and how produc-

tive the DJIM World Index is against more

‘unrestricted’ indexes.

“In many cases it perorms better,” ar-

gued Al-Riai. “We’ve gone back in history

and we’ve noticed that in developed mar-

kets, such as Europe and the US, Islamic

indexes perorm better. There are a ew

cases where they didn’t – one was when the

dotcom bubble burst, or instance. Islamic

indexes tend to be high technology and

healthcare, and these were hit badly dur-

ing the dotcom bubble, so prices ell harderthan the regular indexes. But during the

recent nancial crisis the Islamic indexes

held on better because there aren’t any -

nancial or insurance companies included.

The highs and lows are similar but the

severity is dierent.”

Foundation of the indexes

Dow Jones ounded the indexes in 1999,

seeing a rising awareness o Islamic nance

and Islamic investments – asset manag-

ers wanted to have a world-renowned

islamic market indexes are designed to strip out stocks which don’t comply with sharia principles

so where can one find fiscal value in such an acutely regulated environment? can it compete

against its conventional counte rparts?

GROWINGPOPULARITYFOR ISLAMICINDEXES

S

b y R o R y C o




j u n e 2 0 1 2 Qatar today 35

benchmark. Beore 1999, i you had an Is-

lamic und you didn’t have a measure or a

gauge to compare it against, which made it

dicult to estimate how your portolio was

perorming. There were o course the con-

ventional indexes, but they used dierent

rules and regulations.“From 1999, Islamic investing really took

o,” said Al-Riai. “Our main index – the

DJIM World Index – represents the world’s

markets and it’s weighted according to how

many companies are in each market and

how big the markets are. There’s a miscon-

ception about Islamic indexes. It’s invest-

ing in companies which are permissible or

Muslims to invest in. For example, Evian

produce bottled water; they’re an American

company without any discernible ties to Is-

lam. However investing in them is permis-

sible.”Some o the high prole companies which

make up its Islamic Market World Index in-

clude Apple, Microsot, IBM and Google in

the Technology sector; Exxon Mobil and

Chevron in Oil and Gas; and Johnson &

Johnson and Pser in Healthcare.

Screening

The selection universe or the DJIM index-

es includes the components o 69 country-

level benchmark indexes. To determine

their eligibility or the DJIM indexes, the

stocks are screened to ensure that each

meets the standards set out by the Sha-ria regulatory board. A company must meet

Sharia requirements or acceptable prod-

ucts, business activities, and interest and

income expenses.

Ater eliminating companies that prot

rom unacceptable business activities, the

DJIM Index Sharia board evaluates those

that remain using several nancial ratios,

which are established to exclude companies

that have unacceptable levels o debt or earn

impure interest income. Liquidity is an ad-

ditional criterion or inclusion, and the in-

dexes include only actively traded stocks

that are easily accessible to investors.

“The DJIM World Index has about 2,600

companies – this number fuctuates every

quarter when we add or remove compa-nies,” said Al-Riai. “There are three rea-

sons why we might drop a company rom an

index. The simplest one is i it is acquired or

it merges – this has nothing to do with Sha-

ria principles, it’s just no longer traded on

the market.

“Then there is Sharia screening. We

look at the world markets – which have

thousands o companies and we apply two

screens to determine Shariah compliance.

The rst one is industry screening. There

are obvious industries which we cannot in-

vest in – alcohol, tobacco, gaming, conven-

tional banking and insurance companies

are not permissible. Then we put nancial

ratio screens on the resulting universe to

minimise companies which have a high lev-

el o debt, because this means that they are

paying a lot o interest, which is not accept-able. The resulting universe includes the

companies which make up the index.

“So or instance, a company might go to

the market to raise a conventional bond.

This is no good because they broke through

the leverage ratio so we remove it at the next

review. Another reason would be i a chick-

en producer decided to buy a pork producer

– they have a line o business now that’s no

longer permissible so we must drop them

also,” he explained.

Tool for fund managersSo who are these Islamic indexes aimed at?

The average man on the street who wants to

earn a quick buck whilst adhering to Sharia

principles, or a und manager at an invest-

ment bank? The indexes collate data and

get averages, but how do they help to make

strategic investment decisions?

“Our investor is not the average man on

the street,” explained Al-Riai. “It’s the und

manager that manages the und or the bank

that launches a product to attract a und. So

why would they choose us as a customer? I

you’re a und manager you need to be able

to gauge yoursel to see how well you aredoing against others, and how is this done?

These investment managers work with a

benchmark – they’ll choose an index and

say: ‘We’re going to launch a GCC equity

und, so we need a GCC index. We also want

it to be Islamic.’ That won’t only be their

benchmark, but they’ll also be able to see

what stocks are permissible.

“We also work with und managers in

creating exchange-traded unds (ETF)

or exchange-traded products, which are

essentially unds which behave in their

“there’s a misconception about islamic indexes.

an islamic index is one which is permissible for

muslims to invest in. it doesn’t mean that one

must only invest in Qatar islamic bank or dubaiislamic bank. it’s investing in companies which

are permissible to invest in.”

Tariq al-rifai

Director of islamic market

inDexes

Dow Jones




Qatar today j u n e 2 0 1 236

characteristics as a stock – you buy it and

sell it on the stock market like a stock – but

it’s actually investing in a basket o stocks

based on an index. That’s a bit more techni-cal, but they need an index to do this struc-

ture,” he explained.

Trends in the market

In a practical sense, where are we seeing

the indexes help investors make decisions?

Are we seeing any discernible trends in the

marketplace? On the back o the results

which the indexes throw up, where are as-

set managers and investment banks placing

their chips?

“Right now we’re looking at three trends

in the market,” said Al-Riai. “First o we’reseeing a lot o growth and interest – espe-

cially since the nancial crisis – in xed-in-

come products such as bonds or the money

market. It gives you ongoing income while

limiting the downside potential. Volatile

stocks and real estate are where inves-

tors have got hurt the most, but bonds are

popular now, they’re almost like a deposit

and every month you get a tidy return. In

2006 we launched the rst ever Sukuk In-

dex – sukuk are Islamic bond equivalents.

That has been going well, but the major

issue is that the sukuk market is still rela-

tively small compared to the demand that’sthere – it’s not widely traded, so there are

liquidity issues.

“Secondly, investors are looking or

something which gives them an income,

gives them some comort and minimises the

downside. Seeing this, we launched the Dow

Jones Select Dividend Index, which mea-

sures the stock perormance o the world’s

top dividend-paying companies – maybe

3-4% returns. For investors, and particu-

larly Islamic investors, this kind o return

gives them the solution they’re looking or –

which is something that’s liquid, something

they can trade in and out whenever they

want and at the same time it’s generating an

income or them.“Thirdly, we see that there is a lot o in-

terest in commodities – oil, precious metals,

grains and things like that. But commodi-

ties, such as oil and natural gas, are traded

on utures pricing, which is not Sharia com-

pliant. As such, Islamic investors have shied

away rom this sector. However, there is

another way these investors can gain expo-

sure to commodities. This is what we did at

Dow Jones Indexes. We took the companies

that are in our Dow Jones Islamic Market

World Index and selected the ones that are

commodity producers (such as Exxon Mo-bil, Total, BHP Billiton, Newmont Mining,

etc.) and we made an index o these compa-

nies (i.e. an index o commodity-producing

companies – not direct commodities). This

is the solution we came up with to solve one

o the dilemmas in the Islamic nance in-

dustry. Another solution would be to devel-

op Sharia-compliant pricing or commodi-

ties directly, but this is out o our scope so

we will leave it up to others,” he said.

The DJIM Global Equity Commodity

Index intends to measure the stock peror-

mance o companies engaged in the explo-

ration or production o scarce and renew-able commodities, as well as companies

that provide related services. Only compa-

nies that pass rules-based screens or Sha-

ria compliance are included in the index.

The commodity sectors represented are

agriculture, energy, metals, precious metals

and water.

Easy accessibility

Liquidity is an additional criterion or in-

clusion in the DJIM indexes, and they in-

clude only actively traded stocks that are

easily accessible to investors. The selection

universe expressly excludes the very small-

est and most thinly traded stocks. So does

this rule out the likes o China, where somestocks may be dicult to access?

“We have indexes or China,” said Al Ri-

ai. “In act in Asia we launched a Greater

China Index, which is China, Hong Kong

and Taiwan. It basically oers exposure to

that market. What we launched recently or

GCC-based asset managers is the ‘CHIME

Index’ – or China, India and the Middle

East. We made this index or those asset

managers who want to invest in compa-

nies in these countries, and we launched a

und with a Qatari company to do Islamic

CHIME. From our perspective we have noproblem getting pricing in China, or other-

wise we wouldn’t have done an index.”

Regulations

A ve-member independent Shariah su-

pervisory board advises Dow Jones Indexes

on the methodology o the DJIM Indexes.

With Sharia being largely based on inter-

pretation, how dicult is it to gain a con-

sensus on contentious matters which may

be understood dierently depending on the

country you are in?

“In 1999 there wasn’t any consensus,”

said Al Riai. We’re a global index provider– we wanted to make sure we had a meth-

odology that we could use to screen what’s

universally accepted. So i you look at our

board members, it’s pretty diverse. We have

an American, a Syrian, a Bahraini, a Saudi

and a Malaysian, so I think we have a good

representation o the schools o thought.

Obviously the standards that we developed

are widely used today, but when you look to

invest in the stock market – the concepts,

the methodology and the screening – they

are all airly universal right now”

sectorallocation

countryallocation

%

%

technology

us

12

54

oil & gas

uk

17

7

healthcare

Japan

16

5

industrials

canada

14

5

basicmaterials

switzerland

13

3

consumergoods

australia

9

3

others

others

9

21

dJim world index

(as at 30/5/2012)

dow jones aiding islamic investing

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