Page 146 - Profile's Unit Trusts and Collective Investments 2021 issue 2

CHAPTER 8

What are Shari’ah Compliant Funds?
Shari’ah compliant funds observe the laws of “Islamic Finance” by applying strict
ethical rules to their investment activities. For example, Shari’ah funds may not invest in
companies which make money from gambling, alcohol, pornography, pork products or
military equipment. Earning interest, or riba, which is considered an unjust unearned gain, is
forbidden under Shari’ah, and a fund which inadvertently earned interest would be required to
donate this to charity. Running a Shari’ah compliant fund is fairly onerous: all investments have to
be carefully screened and audited by a Shari’ah supervisory board made up of recognised
authorities. The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)
was created in 1990 to set compliance standards for entities that wish to operate in accordance
with Shari’ah.

Large Cap Funds
These are funds that seek long-term growth through investment in the shares of companies
with very large market capitalisations. At least 80% of assets must be invested in large cap shares
and 100% of share purchases must be in this investable universe at time of purchase. For the
SA–Equity–Large Cap sector, large cap companies are those that fall within the top 40 JSE listed
shares by market capitalisation (or, to quote from the ASISA standard, shares which have a market
capitalisation greater than or equal to the company with the lowest market capitalisation in the
FTSE/JSE Top 40 index). Currently, most of the SA large Cap sector funds are index funds – they
have investments in all the top 40 shares, according to the relative weightings of the shares, so that
the fund in effect replicates the composition of the JSE Top 40 index. These are passive funds. An
actively managed large cap fund seeks to outperform its benchmark. The ASISA benchmark for
funds in the SA-Equity-Large Cap sector is the FTSE/JSE Top 40 index (J200T), sometimes
referred to as the Alsi40.
The ASISA standard makes provision for other large cap sectors (such as Global–Equity–Large
Cap or Worldwide–Equity–Large Cap) but there are currently insufficient funds to warrant such
categories. A large cap fund that is not in the SA–Equity–Large Cap sector would have to invest in
shares of an appropriate foreign index published by a recognised exchange. For example, the
Regional–Equity–General sector currently contains a fund that tracks the Dow Jones Euro Stoxx 50
index. This is effectively, therefore, a large cap fund which invests in 50 of the largest, blue-chip
European companies operating within eurozone nations (excluding the UK).

Mid & Small Cap Funds
Funds is this sector (previously called Smaller Companies) invest in established mid cap
companies as well as in emerging companies that are in the initial phase of business growth. New
investment by the funds are restricted to shares that fall outside of the top 40 JSE shares (or, to
quote the ASISA standard, in shares which have a market capitalisation smaller than the company
with the lowest market capitalisation in the FTSE/JSE Top 40 index, or an appropriate foreign
index published by an exchange). At least 80% of the fund must be invested in this universe at all
times. Due to both the nature and focus of these funds, they may be more volatile than funds that
are diversified across the broader market.
New investment by funds in this category is restricted to small and mid cap shares, but if a fund
holds a share that increases in value to the point that it becomes a constituent of the Alsi40, the
fund manager is not obliged to sell the share (provided that it does not constitute more than 20%
of the fund’s assets).
In JSE terms, mid cap shares are not particularly small – the FTSE/JSE Top 40 and the FTSE/JSE
Mid Cap index (together approximately the top 100 shares out of just over 300) account for over
95% of the total market cap of the JSE, with the other 200 shares making up less than 5%.
Theoretically, a Mid & Small Cap fund could invest entirely in mid cap shares (without contravening
the fund’s mandate), which would mean companies with market caps averaging around R25bn.

144 Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts