Franklin Templeton Investing
The world of Islamic finance and investing represents an exciting world of opportunities for Muslims all over the world, and one we think should likely continue to grow. I recently had the pleasure of attending the Global International Islamic Finance Forum (GIFF) in Malaysia and had the opportunity to share our team's views as well as exchange information on the future of Islamic finance in emerging markets. More than a thousand participants from around the world attended this year's GIFF in Malaysia, which I think is testament to the growth of Islamic finance.
Many investors outside the Muslim world might not know much about Islamic finance, but recognition and interest in it has been growing globally. Bank of Malaysia Governor Datuk Muhammad bin Ibrahim spoke at the GIFF and reported that by 2020, total assets in global Islamic finance are expected to reach more than US $3 trillion.1 He also said that in at least 10 jurisdictions, Islamic banking today represents more than 20% of total banking assets, and in many countries, Islamic banking services are offered in tandem with traditional types of financial services and products.2
For those who are not familiar with Islamic finance, it encompasses both equity and credit-based investments (called sukuk) that are compliant with Islamic (Shariah) law. The goal is the same as with other types of investments: to produce a favorable return and/or generate income. The difference is that Islamic investments must adhere to various tenets, including the prohibition of the payment of interest (so-called "riba") as well as certain forbidden activities and products including alcohol, armaments and a number of foodstuffs and food-related activities. The interpretation of what is Shariah-compliant and what is not can be complex, requiring the active involvement of Islamic scholars (who may not always agree). This can add a layer of complexity for investors. If the main business of a company is not deemed compliant with Shariah law, a portfolio manager cannot purchase, hold or sell its shares. Of course, the desired goal or purpose of any investment is to make money for those who invest in it. So, I think it is worth a look at how these types of investments have performed versus emerging market equities more broadly and versus global equities in developed markets more broadly. You can see in the chart below how the MSCI Islamic Total Return Index has largely mirrored the performance of the MSCI Emerging Markets Total Return Index since 2002 with some slight variations, while generally outperforming the MSCI World Index.3 Of course, some countries' equity markets have performed better or worse than others. We would note that Islamic investment indexes in Indonesia, Turkey and Malaysia have seen some periods of volatility but have generally outperformed many other countries in this category since 2002.4
If you look at the sector weightings of the MSCI Emerging Markets Islamic Index versus the more general MSCI Emerging Markets Index, you will see significant differences. For example, financials is much smaller in the Islamic Index, while consumer discretionary and energy are much higher for the Islamic index. Country weightings also differ between the indexes.