How Sharia investing filters for quality and resilience

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SIMON BROWN: We are chatting with Maahir Jakoet, he’s portfolio manager at the Old Mutual Global Islamic Equity Fund. Maahir, appreciate the time today. I want to drill into the fund that you run in particular there at Old Mutual.

But before we do, let’s just step back a bit and have an understanding around Sharia investing, and in particular what it is.

In essence, what you’re doing in the process is you’re doing a scan which will filter out certain types of businesses, which is truthfully what anyone does, your filter is just Sharia-compliant.

MAAHIR JAKOET: Absolutely, that’s exactly what we’re doing. So you can call it a rules-based framework, which is very different to a scoring system like ESG [environmental, social and governance].

We often get asked about how ESG the fund is, or isn’t this just similar to ESG?

The reality is that ESG is more scoring and we, of course, are more rules-based.

Those rules, Simon, there’s actually a qualitative screen and a quantitative screen.

If I asked you – I’m sure you have Muslim friends or you know people who are Muslim – and if I asked you, so if we went and invested in a business as partners, what do you think I would stay away from at the core without calculating anything or looking at financials? What would I stay away from?

SIMON BROWN: It’s going to be, I would imagine, highly indebted companies. It’s going to be no alcohol, no tobacco, no gambling. Truthfully, I take your point. I would also say that these are – in many cases, I don’t invest in tobacco, alcohol, gambling either.

MAAHIR JAKOET: Absolutely, spot on – alcohol, tobacco, gambling, weapons manufacturing and so on.

Then it’s interesting that you say highly indebted companies. I guess that there you were thinking about that because the interest component is non-permissible.

That’s actually a very different rule because there is a rule in the quantitative screen that we cannot buy companies that exceed 33% debt-to-market capitalisation or asset value. So whichever one passes there.

But the important thing there, Simon, is what does that do to an investable universe?

So take all of the global shares that you can think of, and suddenly you just do a screen on the 33% debt. It actually de-levers the universe.

So you sit with a quality subset and when you sit with that quality subset, it does something.

And we say how does this then perform if we do that? It’s very easy to do this exercise.

You just say there are benchmark providers and the same rebalancing time, same methodology, same Sharia board, and you say, here’s the conventional fund and here’s the Sharia fund. Now we’ve applied all of those screenings and let’s stress test this.

As we stress test we say, okay, we’re going to go into a period of crisis.

Say, what happened in 2008, which one performed better? What happened in Covid, which one performed better? The 2022 rate shock, which one performed better? The Middle East crisis in 2026, which one performed better?

So that’s one aspect, and of course I mention these things because the fund has held up better.

But even though we’re not talking about the fund, we’re just talking about these two benchmarks, one conventional and the one Sharia. Well, in the numbers, it’s clear, we see that in the data. Okay, but what about recovery? And you also see that, of course, it uses certain reasons, that it recovers also a lot better.

Now, there are reasons for that because when you start taking all of the banks out and insurers and these heavily leveraged businesses, of course, in a liquidity crash or a crisis, it’s going to do better.

But then also when you do that, it upweights other sectors. Fortunately enough, on the global side, it’s going to upweight more of the bigger market caps, which are the tech companies, and that’s had a phenomenal run for the last decade as well.

SIMON BROWN: That’s actually fascinating. The whole time you’re talking, I’m thinking to myself, essentially what we’re doing is a high-quality filter – no disrespect – it’s a quality filter, let’s get rid of over-indebted companies.

Then I was going to follow up and say, and do we see any distinction when we move global? And we absolutely do because suddenly those tech companies are falling into it because they tick all of those boxes absolutely perfectly – the quality box, the exclusions in terms of tobacco, alcohol, gambling, weapons and the like.

So you are, in many points, I imagine, and you said for the last, maybe decade, you almost had not a tech fund but a tech-heavy fund.

MAAHIR JAKOET: A tech-heavy fund, absolutely. So in absolute terms, not relative, we would have more tech than anyone else.

But I think the differentiator also for this fund is that when you’re covering as many stocks as you do in global, I think using a systematic process helps.

You’re still an active manager, but I think using a systematic process helps because you don’t require the bums in seats as you would do for a fundamental investor, and I think that makes a big difference, and risk management.

So when you systematically want to put this portfolio together of quality companies – of course, at the right price, you don’t want to overpay, so think about that as an underappreciated quality – when you’re putting it together, it’s about also putting those safety bands in about the size of per-share or the size of the country or the size of the sector.

So when you put those limits in and you control for risk, you can get a good outcome, which is exactly what this fund has done, not on a one-trick pony basis.

It’s outperformed handsomely against conventional funds, conventional benchmarks, Sharia funds and Sharia benchmarks.

So yeah, our 10-year track record speaks volumes.

SIMON BROWN: It goes to what you said upfront as well, is that I’m doing it with less [stress] – as an investor in the journey, to me, the stress is watching those prices go up and down. I know long term we all know that, but we also know that it stresses [us], and you remove some of that volatility from the equation.

So you give me the return without that scary part, which is the volatility.

MAAHIR JAKOET: Absolutely, I think that’s extremely important and there are different ways to do that.

I don’t want to sound too technical, but we’ve got one constraint there where we constrain the percentage contribution to active total risk. If that breaches, especially when tech runs, you are profit taking and you bring all of that back.

So yeah, risk management is a thing. I think it’s extremely important in portfolio construction.

Our chief investment officer, Siboniso Nxumalo, always tells me, just always focus on the process because alpha comes and goes.

That’s so important because you can do that with risk management, and it’s the consistency that investors really want.

SIMON BROWN: Always focus on the process, I like it, 100%. Alpha will come and go, but if you do the process, it will come back at some point and that’s the important part. We’ll leave it there. Maahir Jakoet, portfolio manager, Old Mutual Global Islamic Equity Fund. Appreciate the time.

Brought to you by Old Mutual Investment Group.

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