There’s a new addition to South Africa’s range of Shariah-compliant collective investment schemes – the Satrix MSCI World Islamic Feeder exchange traded fund (ETF) listed on the JSE this week. It brings to 31 the number of retail unit trusts and ETFs (29 and two, respectively) from South African asset managers that invest according to Islamic principles.
The ETF tracks the MSCI World Islamic Index, which measures the performance of large- and mid-cap Shariah-compliant companies across 23 developed-market countries. Of the 1 410 companies in the broader MSCI World Index, the MSCI World Islamic Index represents 362 of them.
Yusuf Wadee, head of exchange traded products at Satrix, said: "We are proud to launch South Africa’s first Shariah-compliant ETF with offshore exposure, providing investors with a unique opportunity to access a globally diversified equity portfolio while adhering to Islamic investment principles."
He says the new ETF is aimed at investors with a long-term investment horizon wanting offshore equity exposure but with the transparency and cost-effectiveness of an index-tracking ETF.
The fund will compete with several actively managed Shariah-compliant global equity funds, including funds managed by Camissa, Element, Oasis and Old Mutual.
Its “sister” fund is the Satrix Shari’ah Top 40 ETF, launched 15 years ago in April 2009, which tracks the local FTSE/JSE Shari’ah Top 40 Index.
Screening
The MSCI World Islamic Index is backed by a transparent, robust screening methodology endorsed by MSCI’s Shariah advisory committee. The methodology screens out companies that are not Shariah-compliant, taking into account the following factors:
• Business activity: Companies engaged in prohibited activities such as adult entertainment, alcohol, arms, interest-based financial services, defence/weapons, gambling, pork-related products, and tobacco are excluded.
• Financial ratios: Companies with significant interest income or excessive debt are excluded.
In line with Shariah principles, any income derived from interest or prohibited activities – typically a low percentage of total income – is deducted from dividends and donated to a charity.
Constituents
Comparing the constituents of the Satrix’s global and local Shariah-compliant ETFs, one is immediately struck by the differences in sector representation, with the local ETF heavily weighted towards mining companies (resources stocks).
The top five constituents (as at September 2024) of each of the two indices are as follows:
• JSE/FTSE Shari’ah Top 40 Index: Gold Fields 13.18%, Anglo American 11.89%, MTN 9.22%, Anglogold Ashanti 7.98%, BHP Group 5.59%. Over half (58%) of assets in the local ETF are in resources stocks, which means the fund is vulnerable to the cyclical fluctuations of the mining sector.
• MSCI World Islamic Index: Microsoft 17.53%, Tesla 4.33%, Exxon Mobil 3.03%, Procter & Gamble 2.36%; Johnson & Johnson 2.25%.
Looking in more detail at the composition of the global fund, according to MSCI, we see that companies from the US constitute two-thirds of the index (66.62%), Japan 5.52%, France 5.31%, Britain 3.91%, Canada 3.39%, and other countries 15.26%. The biggest sector represented is information technology (34.73%) with fairly even representation across the healthcare, industrials, energy, resources and consumer goods sectors.
Of the high 17.53% exposure to Microsoft, Wadee explains that this is because of the company’s high market capitalisation and because there is no limiting, or “capping”, holdings to a certain percentage of assets.
“The MSCI World Islamic index is an uncapped index. Thus, a stock like Microsoft, due to its large market capitalisation, will carry a high uncapped weight in the index. This is high due to the strong run we’ve observed in the tech space, stemming from strong earnings and performance by big tech coupled with big leaps made in AI, which has directly benefited companies like Microsoft. Other big tech-based companies, namely other members of the “magnificent 7” (which by virtue of their inclusion would have served to downweight Microsoft), however do not comply with the Shariah screening, hence their omission. Tesla is the only other member of this group (the others being Apple, Alphabet, Amazon, Meta and Nvidia) included in the index,” Wadee says.
The Microsoft holding is within the limits prescribed by the Collective Investment Schemes Control Act (Cisca). Wadee says: “In terms of limits, Cisca regulations limit index fund individual stock exposures to 20% in the case of headline indices and 35% in the case of sub-sector indices. In terms of both metrics this index is within prescribed limits.”
Costs
Index-tracking funds generally have lower costs than actively managed funds, and this is well illustrated by the differences in costs between the Satrix MSCI World Islamic Feeder ETF and the other Shariah-compliant global equity funds on the market. The Satrix fund’s annual total expense ratio (TER) is quoted at 0.55% on the fund’s minimum disclosure document, whereas the TERs of the actively managed funds range from 1.6% to 2.1%, or at least three times higher.
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