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Thursday, 23 August 2007

S&P Hops On the Sharia Indexing Bandwagon

There's been a push lately among index providers to roll out new Shariah-compliant indexes, as they look to capitalize on growing wealth in the Gulf region. S&P recently introduced three: two covering the global property market and one covering the Pan-Arab region. Alka Banerjee, vice president of global index management, says that S&P took a different approach to the construction of its Shariah indexes than some index providers. Instead of screening their universe of stocks and creating new indexes, Banerjee says that S&P is building its Shariah family by creating indexes that are essentially subsets of its already established indexes, such as the S&P 500. "We started with existing indexes that are accepted in the market," Banerjee says. As a result, the indexes track fairly closely with the original indexes and investors have an added point of reference. "We will eventually cover all of our universe," she adds. The move echoes the socially responsible investing [SRI] universe, where many indexes start with familiar benchmarks and screen out offending companies. S&P said that customer demand led it to create Shariah versions of its property indexes. The S&P/Citigroup Global Property Shariah Index is derived from the S&P/Citigroup Global Property Index, which covers publicly traded property companies in 53 countries. The S&P/Citigroup World Property Shariah Index is derived from the S&P/Citigroup World Property Index, which covers only developed markets. Banerjee says the broad S&P/Citigroup Global Property Index includes roughly 500 components, while the Shariah version includes only about 130 components. The significant loss of components is due mainly to the fact that property companies are often highly leveraged, and as a result many did not meet the financial ratio requirements for the Shariah indexes, Banerjee explains. The global index holds securities from 26 countries and has a total adjusted market cap of about $231 billion. The developed markets index holds securities from 16 different markets and has a adjusted total market capitalization is around $191 billion. The United States, Australia, Hong Kong and Japan are among the top five countries for both indexes. S&P created its S&P Pan-Arab Shariah Index using its emerging markets indexes. The index covers roughly 130 companies from 11 different countries including Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia and United Arab Emirates. Saudi Arabia represents nearly half of the index at a weighting of 48.24%, followed by Kuwait at 20.07%. The biggest sector is financials at 35.92% of the index, followed by materials at 26.67% and telecom services at 19.24%. (Most energy companies in the Gulf region are state-owned, and therefore, the energy weights in these indexes are small; however, the total economies in this region are tied closely to the energy sector, so the influence is significant). In addition to this new Shariah index, S&P also offers the S&P GCC Index Series, covering the six Arab states in the Gulf Cooperation Council [GCC]. All of the member countries are included in the Pan-Arab index; they are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates. The S&P Shariah indexes exclude companies that operate businesses involving alcohol, tobacco, gambling, pork, pornography, and advertising and media. Companies involved in certain types of financial businesses are also excluded, as are those that engage in the trading of gold and silver as cash on a deferred basis. Potential components must also meet certain financial ratio requirements regarding such issues as debt and accounts receivable. The S&P Shariah family currently includes 16 indexes, and Banerjee says that more are in development. All of the major index providers now have Shariah indexes, although S&P is the first to launch Shariah-compliant property indexes. Dow Jones Indexes was the first to market with its Dow Jones Islamic Market Indexes, launched in February 1999, and now has a family of 70 indexes. FTSE calculates several regional indexes on its own and has partnered with exchanges in Singapore, Dubai and Malaysia to launch additional Shariah-based index series. Most recently it launched the FTSE Shariah Japan 100. MSCI launched its own family near the end of July this year; the new series covers 50 countries and 50 regions. - (SA, 23 Aug 07)
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