by Pritu Makan
Listing on the JSE in October
The Satrix MSCI World Islamic Feeder ETF provides investors with exposure to the MSCI World Islamic Index in rand terms and gives Islamic investors direct exposure to a range of companies that are allowable for investment in terms of Shari'ah investment principles.
The MSCI World Islamic Index is a market-capitalisation-weighted index, tracking the performance of eligible large and mid-capitalisation stocks across 23 developed markets. The transparent and robust stock screening methodology is endorsed by MSCI's Shari'ah Advisory committee.
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Business activity screening means no investment in companies that are directly active in or derive more than 5% of their revenues from prohibitive activities including adult entertainment, alcohol, cinema, conventional financial services, defence/weapons, hotels, gambling/casinos, music, pork-related products and/or tobacco.
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Financial ratio screening will prohibit investment in companies deriving significant income from interest or companies that have excessive leverage. Three financial ratios are used to screen such companies: total debt over total assets, the sum of a company's cash and interest-bearing securities over total assets, and the sum of a company's accounts receivables and cash over total assets. None of these financial ratios may exceed 33.33% and 30% for new inclusions to the indices.
The MSCI World Islamic Index reflects the total return of an Islamic portfolio where re-invested dividends have been "purified" (i.e. if a company derives part of its total income from interest income and/or from prohibited activities, then this proportion must be deducted from the dividends paid out to shareholders and given to charity). This is conducted by applying a "dividend adjustment factor" to all reinvested dividends. Satrix will ensure the purification of dividends received within the fund where such dividends have accrued any prohibited income. Pure and impure dividend amounts reported to investors are based on MSCI's calculation to ensure consistency with the benchmark.
Performance
The performance since 2014 has slightly lagged the MSCI World Index but the index performance has still been strong in both US dollar and rand terms.
Features and benefits
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This ETF is the first globally focused Shariah compliant ETF listed on the JSE and gives investors the ability to gain global equity exposure to developed markets in a Shariah compliant manner.
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More specifically, investors gain exposure to the performance of the large and mid-cap stocks of the 23 largest developed market countries that are relevant for Islamic investors.
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The ETF complies with Shariah investment principles by applying screens to exclude securities based on two types of criteria (business activity and financial ratios) to ensure adherence to Islamic law.
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In addition to the offshore diversification benefits, the underlying constituents are mostly large-cap, defensive counters with limited liquidity constraints.
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The ETF has a relatively low TER compared to other global ETFs.
Risks
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Global market cap indices usually have a high exposure to the US (~66%), which is currently not regarded as particularly cheap. The S&P 500 is currently trading on a forward PE of ~24 times.
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High concentration risk - the top ten constituents make up ~37% of the index.
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Investing in the equity market remains high risk - offshore investments are no different.
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Growth prospects may be lower given that the index is mainly made up of mature companies.
FNB Stockbroking and Portfolio Management view
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This is a low-cost option that will provide investors with exposure to a broad spectrum of offshore equities that are in line with Shari'ah principles. This ETF will also be suitable for impact investors and ESG investors with a particular aversion to "sin stocks".
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By participating in this IPO, the client will have the benefit of investing in this ETF at the listing price and pay zero brokerage and trading fees, and no buy-sell (bid-offer) spread applies.
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The ETF will be listed on the JSE, making trading easy if you have an existing stockbroking account. For the alternatives currently available, including buying a unit trust, an additional platform will have to be used.
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This ETF offers a good base to start investing when following a "core and satellite" approach to offshore investing. This means that the bulk of assets can be in an ETF such as this one, complemented by specific opportunities in other ETFs or single stocks.
How to apply
FNB Stockbroking and Portfolio Management (SPM) - Go to shares.fnb.co.za and after logging in navigate to My Portfolio > Corporate Actions to apply.
FNB Share Investing (SI) - Send an email to shareinvesting@fnb.co.za. Please indicate your account number and the rand amount you would like to invest. Please be advised this is only available as a Share Invest product.
Please ensure funds are available. If your account is not funded the application will be cancelled.
