New Shariah Index Follows Letter Of Law

Standard & Poor's introduced a Shariah-compliant TSX index on Wednesday, looking to tap into the rapidly growing Islamic investor community in Canada and abroad.

The S&P/TSX 60 Shariah Index recategorizes equities on the S&P/TSX 60 and excludes all those that do not comply with Islamic law, which is based on the Qur'an. These include companies involved with alcohol, entertainment, pork- related products, tobacco and financial services. As well, companies with certain ratios of cash, leverage, and involvement in non-compliant business activities do not qualify.

Banks are excluded because investors are not allowed to profit from interest, which is considered an unequal distribution of risk.

Alka Banerjee, vice-president of global equities at Standard and Poor's, said there has been plenty of interest from asset managers already for the new index.

"It's still very young, maybe walking but not yet running," she said. "We'll find out over time what feedback is but we've gotten solid queries."

There are 25 companies on the new index with a combined market capitalization of $328.7 billion, or roughly 73 per cent of total Canadian equity market cap.

Commodities dominate the index, which is very closely tied to its parent. Top 10 holdings include EnCana Corp., Potash Corp. of Saskatchewan and Suncor Energy. BlackBerry maker Research in Motion is also represented.

Other excluded sectors are telecommunications, industrials and utilities.

The companies on the index are evaluated once a month by outside agency Rating Intelligence Partners, and then passed on to a panel of four Shariah scholars with financial backgrounds, all based in the Middle East.

The index maker uses the same logistics for its entire Shariah family, leading to economies of scale and the ability to create indices for any market, Banerjee said.

Standard and Poor's has 10 other Shariah indices covering 52 markets and 11, 000 securities around the world. There are specific indices for Japan, Europe and Asia. It also has 13 global benchmark and sector-specific Shariah indices.

The S&P 500 Shariah Index, measuring the U.S. equity market, was the company's first foray into such instruments and debuted with two others in December, 2006.

"Shariah indices have been around for a long time, but interest has only picked up in the last three or four years," Banerjee said. "We were very surprised at the strong response so we speeded up service."

While Standard and Poor's' other Shariah indices are already available, the retail market here remains "fragmented" and the company derives most of its sharia interest from the Middle East and South East Asia.

"The question is whether the demand for Canadian equities is in Canada or from outside Canada," Banerjee said.

Standard and Poor's also faces stiff competition from other index makers, such as Dow Jones and FTSE Group, which announced its own new Shariah index on the Stock Exchange of Thailand on Tuesday.

"Dow Jones was first . . . All major index providers have Shariah offerings but we have the deepest," she said.

Shariah indices are one of the newest categories of socially responsible investments. These are usually funds or portfolios built on companies that match up with an investor's social, ethical and political beliefs.

Banerjee does not consider the index a straight SRI because it is directed at investors of a specific religion.

While a common complaint of SRIs is that they may limit growth potential, both the S&P 500 and Europe 350 Shariah indices have actually outperformed their secular counterparts over a five-year period from 2003 to 2008.

"We're not necessarily looking at outperformance. It's a strategy for better governance and religious beliefs."

This profit is likely because Shariah investors have avoided steep losses from financials, but even if the situation were reversed the Muslim faith prepares them for that risk. And that is the greater purpose of the index.

"A Shariah investor can be comforted to know what they're buying is compliant today and ongoing," she said.

From Canwest News Service