Building a portfolio around faith

The world of investing was changing rapidly before the impact of COVID-19 distorted global and Australian markets. Increasingly, Australian investors and their global counterparts have been demanding their retirement savings be invested according to their values and beliefs.

For many Australians this has meant investing their super in environmental, social and governance (ESG) driven responsible investment funds, or ethical options within super funds that invest in ways that seek to reduce the impact of climate change or environmental damage.

According to the Responsible Investment Association Australasia (RIAA), more than 44% of totally professionally-managed funds in Australia have been placed with responsible investment managers and this is expected to increase significantly.

Research commissioned by RIAA earlier this year shows 86% of Australians now expect their savings and superannuation to be invested responsibly and ethically.  

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Fortunately, the superannuation system – the use of which is mandatory for all workers – offers Australians an array of options to invest for their future. For faith-based investors, there is a number of super funds available. 

Crescent Wealth is the only Australian Prudential Regulation Authority (APRA) regulated Islamic super fund and a pioneer of Islamic investing in Australia since 2013. 

For financial advisers, the implication of this trend is that clients will seek education and explanation of the myriad options available to accommodate their beliefs and values.

For some advisers, questions about Islamic investing will be their first. 

Put simply, Islamic investing is the practice of investing in alignment with Islamic finance principles and values. 

From an investment governance perspective, there are a few core principles which must be followed in order for a fund to be considered Shariah-compliant, and these principles are set and maintained by the Dubai-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).

1.Avoiding the payment and receipt of interest

The prohibition of interest arises from the Islamic view that money should be used only as a medium of exchange, a store of value and a unit of measurement. Money itself possesses no intrinsic value. You cannot use money to make more money, there must be an underlying asset or production of some sort to produce an increase in wealth. 

Thus, when it comes to investments and wealth being ‘halal’ – the Islamic word for permitted – the yardstick of judgement is what results in the increase of one’s wealth. Is the target invested into an activity or asset one that Islam allows? If not, the resulting increase in wealth is deemed ‘haram’, or forbidden. 

The charging or receipt of interest – or ‘riba’ – is therefore prohibited. Any return on money invested should be linked to the profits of an enterprise.

We hold no exposure to banks and insurance companies and do not invest into traditional fixed income markets due to the charging or receipt of interest – or ‘riba’ – being prohibited.

According to the Association of Superannuation Funds of Australia (ASFA) as at March 2020, more than 40% of conventional super funds are invested in interest or riba through cash, and both Australian and international fixed income.

To offset this, we hold higher levels of Islamic cash and Sukuk bonds in our portfolios. Sukuk bonds are Islamic-compliant bonds which are designed to provide the fund with the same protection afforded by standard fixed income instruments. 

2. Investing ethically and morally

Consistent with socially responsible investing, Islamic investment principles specifically screen out socially detrimental activities. Islamic investing is consistent with positive social values and good governance and expressly prohibits investment in non-permissible activities. 

In line with this, we do not invest in any companies that sell or profit from the sale of alcohol, gambling, tobacco, weapon manufacturing, pornography and pork products. Our focus is to invest in assets which benefit the community, including healthcare, property and infrastructure, natural resources and innovative industries. 

3. Avoiding uncertainty

The existence of uncertainty in a contract is prohibited. Everyone participating in a financial transaction must be adequately informed and all fundamental terms such as price or quantity must be clearly determined at the outset.

4. Avoiding speculation

Investments that rely on chance or speculation, rather than the efforts of the investor to produce a return are also prohibited. Normal commercial risk-taking and related speculation is otherwise permitted.

Additionally, under Islamic investment principles, we screen out companies with more than 33.3% leverage, because of the risk of investing into highly indebted companies. 

As a result of complying with these principles, investment strategies of Islamic investment funds are inherently conservative, have high cash holdings and are designed to withstand the market volatility that comes with high levels of equity holdings, investment in non-sustainable industries and debt. Our fund has a bias towards conservative businesses and tangible assets that have clear community benefits. 

For clients, investing in accordance with Islamic investment principles means a narrower choice of investment options and more conservative and stable investment returns, but it does deliver 100% compliance with what is most important to them – their faith.

Beyond this, we aim to do good for all Australians, not just Muslim ones. Though it serves the specific requirements of Muslim Australians saving for their retirement, the fund is open to anyone who wishes to join, regardless of their faith.

As community leader Sheikh Alaa Elzokm said in a recent member webinar, the fund works to benefit all people. 

“Islam cares about achieving the benefit. Everything that is beneficial for the people, all the human beings in general,” he said.

“Islam does not distinguish between a Muslim or non-Muslim for achieving the benefit.”

By investing in assets which are designed to make the world a better place, we meet this important Islamic principal by making a positive impact on all Australians, particularly by screening out asset classes such as alcohol, tobacco, pornography and the production of weapons of mass destruction. 

Many Australians may not be aware, but Islamic finance is rapidly growing around the world. Over the last 10 years Islamic finance has grown at a rate of around 10% every 12 months, with Thomson Reuters predicting the sector to reach USD$3.8 trillion ($5.21 trillion) in value by 2022. 

Further to this, Islamic finance is becoming increasingly important in our part of the world, the Asia Pacific region. Particularly as Muslim populations expand in Southeast Asian countries such as Indonesia and Malaysia. Currently, the region is estimated to account for almost 25% of the international Islamic finance market, as Sukuk issuance has boomed in nations such as Malaysia over recent years.

This growth coincides with the increased desire of investors to invest in financial products which are in line with their beliefs. In light of these trends, we have grown to serve more than 9,000 Australians since our launch in 2013, managing around $270 million in retirement savings. 

We believe that faith-based investing will continue to grow among Islamic communities, and we will continue to work to ensure Crescent Wealth serves this increasingly important community need.  

Jason Hazell is chief investment officer at Crescent Wealth.