R30bn flows into unit trusts, ETFs in first quarter

Index and the FTSE/JSE Shariah Top 40 Index.

Over the past several years, the government has amended financial legislation to better accommodate shariah-compliant banking and investment products and services, Jakhura says.

Collective investments can now include non-equity shariah-compliant instruments, and tax laws have changed so that those investing in shariah-compliant products can enjoy the same tax concessions as those with conventional products.

Jakhura says that in 2014 National Treasury broke new ground by issuing a $500-million Islamic bond, known as a sukuk.

FINANCIAL PRINCIPLES

Islamic economic principles, Jakhura says, are consistent with the concept of “shared prosperity”, whereby society benefits as a whole. He says it is increasingly recognised, not only by Islamic institutions, but also by global institutions such as the World Bank and the World Economic Forum, that the adherence to certain principles inherently leads to sustainable economic development and a more equitable distribution of wealth. In 2009, following the global credit crisis, the Vatican suggested that “the principles of Islamic finance may represent a possible cure for ailing markets”.

Islam recognises the forces of supply and demand, the profit motive and the right to private ownership, which are essential for innovation and prosperity, Jakhura says. But it differs from Western capitalism in that capital cannot dictate its own rewards – there is a sharing of risk between the supplier and the user of capital, instead of a transfer of risk. And no rights are absolute – they are subject to higher moral considerations.

Islamic commercial law, or Mu’aamalaat, which forms part of shariah, espouses the virtues of “the honest businessman” and requires transparency and fairness in business dealings, Jakhura says.

The fundamental principles of Islamic finance are:

• “Riba” is prohibited. Riba literally means excess or increase, but commonly refers to interest on a loan. In fact, Jakhura says, the concept of a loan, as it is understood in Western finance, is foreign to Islamic finance.

• There is a shared responsibility for profit and loss between borrower and lender. A good example of this in conventional finance is buying shares in a company. Shareholders enjoy a share of the company’s profits if it does well, and bear a share of its losses if it does badly.

• Investing in companies that provide goods or services considered contrary to Islamic values is prohibited. These include interest-governed financial institutions; the entertainment industry, including hotels, casinos, and nightclubs; and companies manufacturing, selling or offering alcohol, pork, gambling, pornography, prostitution, weapons or tobacco.

• Transparency is demanded of all parties in a financial transaction. Shariah forbids deception by, for example, exaggerating a product’s worth or concealing a defect.

• Transactions must be backed by tangible assets, and the trading of debt is prohibited. This rules out speculative investing and trading in derivatives.

• All financial institutions offering shariah-compliant banking and investment products must have in place a shariah supervisory board – made up of Islamic clerics and scholars who have the respect of the Muslim community – which monitors compliance.

martin.hesse@inl.co.za The local collective investment scheme industry attracted healthy net inflows of R30.4 billion in the first quarter of this year, pushing year-on-year net inflows to the end of March to R157.1bn, the highest for this period in three years, according to industry statistics released this week by the Association for Savings & Investment SA (Asisa).

The statistics show that investors in unit trusts and exchange traded funds (ETFs) continued to favour South African multi-asset funds, which attracted R56bn of the yearon-year inflows.

Multi-asset portfolios are popular with investors and financial advisers, because they offer diversification within a single portfolio managed by an experienced manager, with the aim of smoothing out the highs and lows of the markets.

Sunette Mulder, the senior policy adviser at Asisa, says a surprisingly high proportion of the annual net inflows to the end of the first quarter went into South African money market funds (R45bn) and interest-bearing funds (R23bn).

“The high inflows into the interest-bearing sector were somewhat unusual. This is the first time in three years that these portfolios have seen positive inflows,” Mulder says.

A large portion of this money (R19.5bn of the R23bn) went into interest-bearing short-term funds.

TOP PERFORMER

The South African interest-bearing short-term sector was the bestperforming sector in the year to the end of March, delivering an average return of 8.4%, followed by money market funds, with 7.5%.

Mulder points out, however, that over five, 10 and 20 years, the South African multi-asset high equity sector has consistently outperformed other major sectors. These portfolios, on average, outperformed South African equity general portfolios or delivered the same returns, while offering investors the added benefit of a more diversified risk profile.

Over five years, they returned 10.2% a year on average (South African equity general: 10.1%); over 10 years, the two sectors each returned 8.2% a year; and over 20 years South African multi-asset high-equity funds returned 13.2% a year (South African equity general: 12.7%). Average inflation for the 20-year period was 5.8%.

The collective investment industry managed assets of R2.07 trillion at the end of the first quarter. South African multi-asset portfolios held 51% of these assets, South African interest-bearing portfolios 25%, South African equity portfolios 20%, and South African real estate 4%.

Mulder says that 31% of the inflows in the 12 months to the end of March came directly from investors. This does not mean, however, that these investors acted without advice. A number of direct investors pay for advice and then choose funds. – Staff Reporter