Ghost Stories #103: How Shari'ah-compliant investing can outperform (with Maahir Jakoet)

So let's start then with what makes a Sharia mandate different.

I think we must absolutely just cover off the basics here, because there are specific rules that you have to follow, right? So what does that practically mean, and what are you not allowed to own in the fund?

I think that's a great place to start.

Often people wanna look at the ESG angle, but it's actually very different.

There are definitely overlaps.

Sharia really is rules-based instead of being scored based, where there are some inconsistencies.

There are two vital steps that investors need to understand, and the one is the core business activity screen.

Core is what you're making your revenue from, broadly speaking.

So we cannot own companies where the bulk of the revenue comes from alcohol, tobacco, gambling, conventional financial services such as banks and insurers, weapons manufacturing, adult entertainment, et cetera.

So that really covers that list.

Just to note, banks are a big one, because if you look at the MSCI World Index and you look at financials, whether it's in that index or a different index, it's roughly between 18 to 22%.

So at a starting point, when you're removing financials, it up weights something else.

Keep that in mind.

And then there's the second test, which is actually a mathematical test.

It's a quantitative financial ratio screening test.

And there are four, but the important one is the debt ratio, and that is 33% debt to asset value or market capitalization.

Now, if you think about that again, besides the conventional banks, when you take that out, you de-lever your universe by that rule, and that's really the big one.

There are other rules, but that is definitely the most important one.

Yeah, fascinating.

And you've talked there about core business, so I just wanna maybe confirm something there, and bulk of revenue.

So for example, if a company's making, I don't know, 5% of its money from something that is impermissible, that would technically be okay from a screening perspective, provided it also meets the quantitative debt screen, right? So just to be clear, it's quite a practical test.

It's where do you make most of your money, right?

Yes.

So well picked up.

That's what we call non-permissible income, and that essentially would have to be removed, and that's a ratio perhaps that I didn't mention in the quantitative screen as well.