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 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, more than 44 per cent 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 per cent of Australians now expect their savings and superannuation to be invested responsibly and ethically.
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, including the growing number of Muslim Australians looking to invest in accordance with Islamic investing principles, there is a number of super funds available.
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 one is investing into an activity or asset 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.
Crescent Wealth, which is Australia's only APRA-regulated Islamic super fund, holds no exposure to banks and insurance companies and does not invest into traditional fixed income markets due to the charging or receipt of interest – or ‘riba’ – being prohibited.
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, Crescent Wealth does not invest in any companies that sell or profit from the sale of alcohol, gambling, tobacco, weapon manufacturing, pornography and pork products.
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 Crescent Wealth screens out companies with more than 33.33 per cent 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.
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 per cent compliance with what is most important for them – their faith.
Jason Hazell, chief investment officer, Crescent Wealth
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