Mis­sion-based so­cial and eth­i­cal in­vest­ing

Finweek English Edition - - Fund Focus - By Leon Kok

The Shari’ah-com­pli­ant Old Mu­tual Al­baraka Bal­anced Fund is one of a few funds that is both suited for Mus­lim in­vestors and meet en­vi­ron­men­tal, so­cial and gov­er­nance cri­te­ria. It is also an op­tion for those seek­ing less vo­latil­ity than in pure eq­uity in­vest­ments.

the South African fi­nan­cial ser­vices in­dus­try boasts sev­eral Shari’ah-com­pli­ant funds, and the Old Mu­tual Al­baraka Bal­anced Fund* is cer­tainly among the largest of Shari’ah bal­anced funds. The port­fo­lio is strictly man­aged in ac­cor­dance with Shari’ah (Is­lamic law) and con­se­quently does not in­vest in the shares of com­pa­nies whose core busi­ness in­volves deal­ing in al­co­hol, gam­bling, non-ha­laal food­stuffs or in­ter­est-bear­ing in­stru­ments.

Al­though man­aged ac­cord­ing to Is­lamic prin­ci­ples, those prin­ci­ples have ap­pealed to a broader in­vestor base, with ap­prox­i­mately 20% of the in­vestors be­ing non-Mus­lim. Bal­anced funds tend to not be as ag­gres­sive as pure eq­uity funds since a bal­anced fund com­prises var­i­ous as­set classes (bonds, Is­lamic bonds (sukuk), shares etc.), which di­ver­si­fies sources of re­turn and may re­duce vo­latil­ity.

In­vestors seek­ing mod­er­ate to high longterm cap­i­tal growth with gen­er­ally less vo­latil­ity than in pure eq­uity in­vest­ments would also do well to con­sider this fund. In terms of the fund’s com­po­si­tion, it aims to be less risky by de­sign com­pared to its Shari’ah bench­mark. How­ever, in­vestors need to be able to with­stand short-term mar­ket fluc­tu­a­tions.

Ac­cord­ing to Old Mu­tual In­vest­ment Group in­vest­ment an­a­lyst Maahir Jakoet: “It’s an at­trac­tive in­vest­ment for in­vestors who are cau­tious about risk and seek­ing smoother longterm re­turns.”

The fund’s strat­egy is to achieve greater re­turns and less vo­latil­ity com­pared to the mar­ket over medium- to long-term in­vest­ment pe­ri­ods. Hav­ing ex­po­sure to in­ter­na­tional as­sets en­ables it to achieve greater di­ver­si­fi­ca­tion and con­se­quently re­duc­tion in vo­latil­ity.

Any in­come that is deemed non-per­mis­si­ble is ac­crued and de­ducted on a daily ba­sis and is paid to a char­i­ta­ble trust elected by the Shari’ah Su­per­vi­sory Board. This trust is com­pletely in­de­pen­dent and nei­ther Old Mu­tual nor Al­baraka have any say in the al­lo­ca­tion of funds and the re­cip­i­ents thereof.

The Old Mu­tual Al­baraka Balaa stand­alone re­tire­ment in­vest­ment. The fund has re­turned an im­pres­sive an­nu­alised 9% for the five years end­ing June 2017 – out­per­form­ing the Is­lamic Bal­anced Funds’ av­er­age over this time pe­riod.** It has also out­per­formed the con­ven­tional (non-Shari’ah com­pli­ant) Bal­anced Fund peer group av­er­age over the two- and three-year pe­riod. The per­for­mance ob­jec­tive is to out­per­form the bench­mark over rolling three-year pe­ri­ods.

The Old Mu­tual Al­baraka Bal­anced Fund may in­vest in lo­cal equities, global equities and non-eq­uity as­sets such as sukuk, says Jakoet. It may also in­vest in the port­fo­lios of other unit trusts, both lo­cally and those reg­is­tered in coun­tries with ac­cept­able reg­u­la­tory en­vi­ron­ments. The fund has an off­shore limit of 25%.

A break­down of the fund’s re­cent com­po­si­tion as at 30 June shows do­mes­tic equities (38.9%), Is­lamic liq­uid as­sets (37.4%), in­ter­na­tional equities (20.4%), and in­ter­na­tional non-equities (3.3%).

In to­tal, 20.4% of the global eq­uity com­po­nent is in­vested di­rectly into Shari’ah-com­pli­ant global equities. The global eq­uity com­po­nent con­sti­tutes be­tween 80 and 120 stocks and is man­aged by the same in­vest­ment team as the Old Mu­tual Al­baraka Bal­anced Fund. A prom­i­nent fea­ture of this global com­po­nent is that it is en­vi­ron­men­tal, so­cial and gov­er­nance (ESG) cog­nisant, pro­fil­ing one of the few bal­anced funds that is not only Shari’ah com­pli­ant but also has a sig­nif­i­cant ESG bias, plac­ing a high pre­mium on eval­u­at­ing cor­po­rate be­hav­iour and de­ter­min­ing fu­ture per­for­mances of com­pa­nies.

Three im­por­tant fac­tors driv­ing per­for­mance do­mes­ti­cally, says Jakoet, are em­pha­sis on risk man­age­ment (speak­ing to low vo­latil­ity stocks); val­u­a­tion (what’s cheap and what’s ex­pen­sive); and seek­ing out mo­men­tum stocks that the mar­ket likes and that con­tinue to do well. They call this a man­aged vo­latil­ity strat­egy, which is the en­gine driv­ing their Shari’ah and cer­tain non-Shari’ah solutions.

Top eq­uity hold­ings cur­rently include Vo­da­com, BHP, Mondi, Richemont, Cash­build, Kumba Iron Ore, SibanyeStill­wa­ter, Clicks Group and Datatec.

“We are bench­mark cog­nisant, but be­cause we look at value, mo­men­tum and vo­latil­ity, we don’t look at val­u­a­tion mul­ti­ples in iso­la­tion. So, if a stock shows great value, it may well be in the fund. We look at the port­fo­lio holis­ti­cally when tilt­ing toward value, mo­men­tum and low vo­latil­ity,” says Jakoet.

The in­vest­ment team es­tab­lished the process of de­duct­ing non-per­mis­si­ble in­come on a daily ba­sis. The fund adopts lead­ing gov­er­nance and com­pli­ance prac­tices on mul­ti­ple lev­els, boast­ing a proven long-term in­vest­ment track record. The in­vest­ment team’s strat­egy aims to man­age the fund in such a way that it has a mod­er­ate risk pro­file and sim­i­larly is less risky (in terms of vo­latil­ity) than its bench­mark. The port­fo­lio man­age­ment team re­spon­si­ble for the fund’s strat­egy con­sists of Saliegh Salaam as lead port­fo­lio man­ager, as­sisted by Grant Wat­son and War­ren McLeod. The team’s mem­bers have worked to­gether for over a decade, and their com­bined ex­pe­ri­ence, in­sights and fo­cus has re­sulted in Old Mu­tual hav­ing a highly pro­fi­cient in­vest­ment team re­spon­si­ble for man­ag­ing their range of Shari’ah-com­pli­ant funds. ■ In­vest­ment an­a­lyst at Old Mu­tual In­vest­ment Group

*Dis­claimer: Old Mu­tual Cus­tomised Solutions (Pty) Ltd is a li­censed FSP. The above fund is a reg­is­tered col­lec­tive in­vest­ment scheme ad­min­is­tered by Old Mu­tual Unit Trust Man­agers (RF) (Pty) Ltd. The rel­e­vant fund’s Min­i­mum Dis­clo­sure Doc­u­ment is avail­able on www.omut.co.za. **Morn­ingstar re­turns – June 2017

Maahir Jakoet

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