Sharia investing has by no means been immune from recent volatility, but the high-quality nature of the sector has helped to deliver good levels of protection for investors. Moreover, the defensive characteristics shown last year have cemented Sharia investing as a small but growing part of the market which continues to be as dependable in a bear market as it does in a bull market.
Why? Sharia investing over the bull market of the last few years has kept pace with, and often exceeded, the performance of many of the world’s best non-Sharia “growth” funds.
Sharia investing delivering 12% outperformance on Fundsmith in just 11 months is significant
Predominantly what makes a good Sharia compliant investment has focused on good companies with well-run balance sheets, diverse boards, robust earnings margins and, importantly, very attractive future growth projections.
It’s no surprise then that many of the stocks which have made their way into Sharia funds have also found their way into high-quality ESG and mainstream growth funds, which have been one of the best places to be invested over the last five years.
Fast forward to 2022 and most investors will know that the hallmark of the bear market has been investors selling those same growth companies on fears raising interest rates and a recession would obliterate the attractive future growth prospects – and, in the main, this has been exactly what has happened.
Take the likes of Fundsmith’s celebrated global equity fund, which was down 23.4% in dollar terms in 2022, against iShares World Islamic ETF, which was down 11.8% in dollar terms.
Sharia investing delivering 12% outperformance on Fundsmith in just 11 months is a significant point to note.
Considering this outperformance is against one of – if not the – most well-known and widely held global funds just shows how effective the Sharia market has become in outperforming its mainstream growth competitors in down markets.
Broadly speaking, the same observation holds true when looking at the whole market, with the iShares MSCI World Islamic Index outperforming the FTSE All World Index by almost 6% last year.
Sharia’s status as a safe haven for investors could very well be the silver lining of this market. Something to get excited about when this market gets back into rally mode
Right now, the only industry to boast outperformance in both up and down markets largely remains the hedge fund industry, which struggled in 2022. For those hedge funds which have not outperformed, clients can still expect to pay 2% upfront and 20% per year in fees, which makes their strategies unaffordable, unsuitable and unattainable for many average investors, not to mention the absence of any Sharia based investment rules.
The Sharia market remains underdeveloped and underfunded, and the challenge remains to widen the range of funds available for Sharia investors. However, Sharia’s status as a true safe haven for investors could very well be the silver lining of this market, a defining point in the history of this fascinating sector, and something to get excited about when this market gets back into rally mode.