Barron's June 16, 2008 featured an article, Keeping
the Faith, about how funds adhering to Islamic (Shariah) investment principles
have avoided the greatest effects of the current credit crisis.
We found the same tendency to be true in a study we performed for Business
Islamica Magazine of Dubai, U.A.E in 2007. (download
PDF version of article here).
Interest, whether paying or earning it, is to be avoided in Shariah compliant
investing. The result is that banks and insurance companies, for example (fund
proxies: KBE, KIE, and XLF) are not found in Islamic funds.
There are other prohibited investments, but the overwhelming economic impact
of Shariah investing is the avoidance of financial companies and leveraged
companies.
The story is not all positive however. As logic would suggest, and as our
study demonstrated, Shariah compliant funds outperform the general market (whether
US, Europe, or Japan) in times when financials do badly, and underperform the
general market when financials do well.
In any event, Shariah compliant funds are proliferating globally and their
assets under management are growing very rapidly, due in part to the increased
petro-dollar flows to regions where Shariah compliant investing is attractive.
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