If this is a belief that you hold and if it’s something that you value, I think it’s very important to know what it entails and how to build it. And of course, what to watch for if you actually have it.
Traditionally, Shariah compliant portfolios do not invest in any companies that either make money off speculating in financial services making interest off of financial services or even gambling generally. That’s one major thing. Most financial companies are automatically excluded due to this. A lot of the commodity trading companies are excluded. A lot of the casino companies are excluded, and anything that is making money off of money is excluded.
Second of all, certain food companies – alcohol related companies, pork product related companies – those are also excluded. Tobacco companies also excluded.
If we keep going down the list, we find that the production of weapons of mass destruction, certain sectors of the entertainment industry are also prohibited. These are all investments that are prohibited in the Shariah compliant portfolios.
The big one is most definitely anything that is paying interest.
In a Shariah compliant portfolio you cannot own a bond or anything that pays interest. Aside from investing in companies that maintain exposure to the interest world or to alcohol, pork, gambling, or derivatives of financial services, you absolutely cannot invest in traditional fixed income products. Therefore, GICs and bonds are definitely excluded from Shariah compliant portfolios.
Now, Shariah compliant portfolios are not easy to build. They’re complicated, and quite often misunderstood. Generally, what we’ll start with is the Shariah compliant index, meaning we will run a screening tool through our top stocks.
We’ll take a look at cashflow, how the companies are performing, what the momentum is, what their value is relative to the price, and we will effectively pick a short list of companies that we think would make sense in the Shariah compliant index.
Now, let’s talk about the pitfalls and what to watch for. I’ve seen it so many times people come into my office and they tell me I have a Sharia compliant portfolio, when in fact they don’t. The dead giveaway is if you own mutual funds.
Traditional mutual funds are not Shariah compliant. In fact, there are very few mutual funds on Earth, especially in Canada and the US, that exist that are Shariah compliant. There are a few global funds. I know there’s a company out of the UK, Imam, that uses mutual funds.
The global amount funds, there are some that exist. It’s a very small number that are fully Shariah compliant. But if you own a traditional mutual fund through either a company that sells mutual funds, a Canadian company that sells mutual funds, or a bank owned firm that sells mutual funds, that is a generic unit of a mutual fund.
Unfortunately, you’re not Shariah compliant because in that fund, if you go online and you take a look at the top holdings, there will be companies in the alcohol, tobacco, and financial services.
In fact, you probably own investments that pay interest, which is a big no-no in the Shariah compliant industry. If you own traditional mutual funds, you’re not compliant.
Another thing you could do is you could pull up the financial statements of that mutual fund and look if it’s ever paid any interest. That would tell you right off the bat if you’re Sharia compliant or not. But effectively, none of the traditional mutual funds are Sharia compliant.
The key, as we recall, is individual securities away from the banned sectors which we mentioned earlier. And no fixed income, no traditional fixed income, no bonds, no GICs, nothing that pays interest on cash or on a financial instrument.
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