Investing In Islamic Funds: A Practitioner's Perspective

CHAPTER 8

Using Performance Characteristics to Build Wealth

Empirical Evidence, Proven and Tested

Learn a lesson, O ye who have eyes!

(Al Hashr: 2)9

INTRODUCTION

Some critics argue that in the years from 2006 to 2011, Islamic indices benefited from the lack of exposure to the financial sector, which has been in distress.1 As the economy recovers, financial stocks typically outperform, as they are representative of the recovering economy. Therefore, critics believe that Islamic indices will underperform conventional indices. Having gone through a full market cycle and examined the impact of different sectors on both conventional and Islamic index performances, it turns out that this is not the case. Whether it’s a bull market or bear market, as long as the recovery is driven by economic fundamentals, Shariah investing will still exhibit resilient performance. This chapter will detail the performance characteristics of Shariah investing through both bull and bear markets starting from the peak of 2005, before the U.S. mortgage crisis.

During this period there were many significant market shocks that provided an opportunity for Islamic indices to exhibit their claimed resilience. In theory, this resilience is based on the risk robustness of the equity screening process, which forms a key part of the investment process. Indeed, the screening process is the main difference between the Shariah and conventional investment process.

The actual Islamic indices’ performance characteristics ...