Azzad: Halal investing guidelines show Shari’ah-screened indexes outperform conventional indexes

By Toni Weeks

San Luis Obispo, Calif., Sept. 16 – Azzad Asset Management said it released a white paper on Tuesday detailing the impact of Halal investing guidelines on investment performance.

The white paper examines historical data over the last two decades and offers evidence that Shari’ah-screened indexes can outperform their broad-based conventional counterparts over the long term.

The paper shows that the most significant difference between conventional and Shari’ah-screened indexes, which favor industries such as information technology and health care, is the almost complete lack of financials due to the Islamic prohibition on interest. In conventional indexes, both globally and in the United States, the top asset class in conventional indexes is financial services.

Based on Azzad’s research, the Islamic indexes significantly outperformed conventional indexes in the time period before the “Dot-Com Bubble” burst, when technology and health care significantly outperformed financials. After the bubble, when financial services were the hardest-hit sector, the Islamic indexes again outperformed. In 2012, however, financial services significantly outperformed the other industries, resulting in the underperformance of the Islamic indexes.

The authors observed that Islamic indexes outperformed especially when considering long-term performance (both the 10-year and 1996-2014 periods), concluding that the result was due mostly to the long-term, lagging performance of Islamically prohibited industries, specifically financial services, combined with the long-term outperformance of permissible and overweight industries like technology, health care and oil and gas.

Azzad’s findings correlate with other research indicating that socially responsible investing strategies can deliver competitive, risk-adjusted returns. One example of that research is a 2012 study by Deutsche Bank, which found that incorporating environmental, social and governance data in investment analysis outperforms conventional strategies.

“We are often asked how Islamic investment criteria might affect portfolio performance,” Azzad investment adviser and co-author Omar Ezz said in a press release. “This research sheds some light on that subject. We think stakeholders and interested parties alike will appreciate our findings.”

Falls Church, Va.-based Azzad Asset Management is the investment adviser to the Azzad Funds and sponsor of the Azzad Ethical Wrap Program.

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