Mutual Fund houses launching specific schemes catering to philosophies propagated by a particular community is an interesting concept that is slowly gaining momentum in the Indian mutual fund industry. Here, I am referring to the Shariah compliant funds that have been introduced in the recent years. Before getting into more details, let me first give you an idea of what exactly is Shariah compliance.
Shariah, is the moral code and religious law of Islam. Shariah compliance means that companies will be screened on the basis of the businesses that they undertake and also their financial ratios. Activities prohibited under the Shariah law include drinking alcohol, consuming tobacco, gambling, eating pork, interest lending business which includes traditional banks and hotels etc. On the other hand, financial ratios refer to leverage, cash compliance and share of revenue, which is derived from non-compliant activities.
In the mutual fund space, we currently have 3 Shariah compliant funds, one of which is a passively managed fund, while the other two funds are actively managed. Benchmark Mutual Fund (recently acquired by Goldman Sachs group) was the first to launch a Shariah based ETF called the Shariah BeES (now renamed as GS S&P Shariah BeES) in March 2009. This was followed by Taurus Mutual Fund, which launched an actively managed Shariah Compliant fund 'Taurus Ethical fund' in the same year. After this, there was a repositioning of a 15 year old equity diversified fund from the Tata stable called Tata Select Equity Fund, which has been renamed asTata Ethical Fund in September 2011.
An insight into the AUM of these funds shows that the ETF's corpus has actually witnessed a downward trend. The AUM of Shariah BeES from Goldman Sachs decreased from ~ INR 1.25 crore in March 2009 to INR 87 Lakhs in March 2012. However, for Taurus fund house, the corpus has increased from a meager INR 2.48 crore in April 2009 to ~ INR 26.71 crore in March 2012. Separately, for Tata Ethical Fund, the AUM has grown by ~ 7.44 % from INR 103.61 crore to INR 111.31 crore during the period of September 2011 to March 2012. If we look at the total AUM of all equity diversified funds, we find that the actively managed Shariah funds constitute only 0.11% of this total AUM. This is a clear indication of the fact that the investors for whom this product is actually designed are not really aware about this offering; and in this regard, the fund houses need to make a serious effort to reach out to the respective community and create awareness about this product.
As far as the portfolio allocation is concerned, both Taurus and Tata funds are currently bullish on sectors like Auto Ancillary, Information Technology, Pharmaceuticals, Electric Equipment and Oil Exploration. As compared to other diversified equity funds, which have on an average of 10% of the portfolio concentrated in the banking space and which is considered to be the backbone of the economy, the concentration of the same in Shariah compliant funds is nil. Now, if we take a look at the performance of Shariah compliant funds, we can only consider Taurus Ethical fund. The fund from Tata AMC became an ethical fund only last September, hence we need to give it some more time before we can speak about its performance.
An analysis on the performance of Taurus Ethical Fund over the last 3 years shows that this fund has generated a return in the range of 28% as against 15%, delivered by its benchmark index, i.e.S&P CNX 500 Shariah Index and also the broader major indices like SENSEX and Nifty.
The outperformance of the fund means that although the fund has a mandate to restrain from investing in certain sectors like banks and in companies deriving revenues from the sale of cigarettes and liquor, it has been able to maintain consistency in its performance. Although the performance of Taurus Ethical Fund over a 3 year time horizon seems to be in sync with some of the better performing large and multicap funds, the only concern to us is that the corpus of this fund has not grown the way it should have.
To conclude, we are of the view that although the Shariah funds have been launched with the aim of targeting a particular community, yet the fund houses have not been very successful in their endeavour. We believe that investors who want to take an exposure to a socially responsible fund can consider investing into this category. These funds take a lot of defensive calls that can be seen from their exposure into the pharma space. Separately, the funds seem to be bullish on the infrastructure segment. Both the pharma and the infrastructure space have good future potential, which means that investing into these funds should yield positive results to investors in the long term.
The author is a Research Head at Fundsupermart.com India. You can write back to her atfeedback@fundsupermart.com
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