Moderator Rushdi Siddiqui said the various types of screening processes see no way for a viable index that could be the basis of products. He asked Charlene Low how FTSE addresses the issue. According to Low, the general perception is that a Shariah index traditionally is more volatile and has turnover.

“However, when we looked at the whole Shariah screen and the financial screen, we saw less volatility and turnover. Our clients said they were looking for performance and in the last six months, we saw very good performances from Shariah indices compared to their conventional counterparts,” she said.

Rushdi then asked Angeline Choo whether her clients have suggested something more stable such as venturing outside of Standard & Poor’s indices. She said that for S&P, most of the Shariah indices are the subset of the conventional indices. For example, S&P 500 has 500 companies and once these companies were screened, the Shariah companies are 270, so 55% of the companies are Shariah compliant in the data set.

Datin Maznah Mahbob suggested ways of developing a more stable index so that companies would not be removed or eliminated from the index and therefore from a portfolio. Maznah said from her perspective, index providers sometimes do market capitalization rate, asset rate, free flow rate. The most stable and predictable, from a fund manager’s point of view, is the asset rate, which is actually the balance sheet and subject to the open market movements on the capital market.

Rushdi then asked Dr Aznan Hasan to explain the various screening methodologies and which is more Shariah compliant. Aznan responded that it is difficult to say which of the methodologies is more Shariah compliant and classified them into two categories — the Malaysian and the international standards. There are no financial ratio screenings under the Malaysian method while under the international category, there is also sin screening apart from the financial ratios screening. The choice should be based on what is suitable for one’s situation in one’s particular region.

Low added that in Malaysia, FTSE has two indices, namely FTSE Bursa Malaysia EMAS Shariah Index and FTSE Bursa Malaysia Hijrah Shariah Index. The former uses Securities Commission Malaysia (SC) guidelines, and there are about 820 stocks deemed Shariah compliant by the commission. For the requirement of international investors, the FTSE Bursa Malaysia Hijrah Shariah Index has one screening approved by SC and in addition does the Yasaar screening.

Rushdi asked Low about the performance of FTSE’s international Islamic index and the domestic Islamic index. She said the FTSE Bursa Malaysia Hijrah Shariah Index is a better performer although the units are of a lower volume.

Rushdi said the FTSE and Dow Jones indices do not work well in Muslim countries as these countries are raised and sustained by debts and hence, failed the debt screening. The Islamic indices also have 99% exposure to the Organization for Economic Cooperation and Development (OECD) countries.

Rushdi then asked Aznan whether there is a need to look at another set of screening processes for Muslim countries until they become developed markets. Aznan agreed, saying that if the majority of the stock screening processes are applied in Muslim countries, many companies will have to be excluded.

Rushdi then sought the panel’s view on how to position the Islamic funds and Islamic indices in the conventional sphere in a subprime environment where Islamic indices and Islamic funds are outperforming the conventional counterpart because they have no exposure to the financial sector.

According to Low, FTSE has the FTSE Good Index Series which falls under the social ethical screening where FTSE looks into human rights and labor law. “There is also a need for Shariah screening (for this index) and when we look at Shariah screening, we look at the companies which are not with high debt or highly leveraged and also the company’s policy and corporate governance. There is no exclusion of having two funds which have Shariah screening and social-ethical aspects,” she said.

Low said for many conventional investors, Shariah screening can be seen as a good proxy for fundamental screening. “When you look at the common goals of investment, we are actually looking for the returns and the direction is to look at Shariah investing in a generating angle,” she added.