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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
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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
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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)