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Simon Brown: I'm talking to Mahir Jacoet. He is a portfolio manager at Old Mutual Investment Group. Mahiru-san, thank you very much for today. Stock Screening – We are talking here about a type of faith-based Shariah compliant investment. Screening stocks with some hard and soft exclusions is a big part of the investment process. What are those processes and what are their exclusions?
mahir jacoet:Thank you, Simon. yes. This is the starting point to reach the universe as a Shariah-compliant portfolio his manager. And once we have this world, it's time to apply our investment philosophy on top of it.
But I would paraphrase “hard” and “soft” – these words – rather say “qualitative” and “quantitative.” Because how it actually works is that the Sharia committee has a group of academics and it works together with the compliance department. It reflects the entire universe. Now I'm talking about local and global. Local for JSE, global for S&P.
Qualitative factors relate to the core activities of the business. For example, Vodacom is a core telecommunications business, while AB InBev (formerly SAB) is a business classified as consumer staples. However, they are essentially selling alcohol, which is not permissible under Islam.
Another sector excluded from our world is the banking sector. This is because they are also not allowed to charge and receive interest. So this is the first screen.
And then there's the quantitative screen. This is actually a mathematical calculation from the annual financial statements. These are ratio-based calculations. An example of a ratio is that disallowed income divided by earnings cannot exceed 5%. In other words, impermissible income is when a business is essentially fine, but it has interest-based investments on its balance sheet that exceed the income it generates.
Another example of a ratio is the total debt ratio. This is total debt divided by market capitalization or total assets, which cannot exceed 30%. There's obviously a reason for that, but that's how his second screen works on the quantitative side.
And eventually we get to space and apply our investment philosophy on top of that.
Simon Brown: Gotcha. Do you have any examples? I think – let’s take a hotel group for example. Most of their income will come from lodging, but they also probably run a bar and sell alcohol as well. But if those alcohol sales are only 1-2 percent of revenue, that's fine.
Mahir Jacoet: yes. And apart from this, there is another process called non-admissible income calculation, which actually strips it away every day so that when the investor starts investing, they can get a so-called “pure” investment. Masu. When they withdraw from their investments.
Simon Brown: Excluding interest-bearing assets obviously excludes a significant amount of assets, particularly interest-bearing assets. Because we have seen the situation in the banking sector, especially financial institutions, over the last few years. [current] Interest rate environment – If you had this type of exclusion, how would it have affected your performance?
Mahir Jacoet: That's a great question. I think it's important to understand how banks make money through something called net interest margin. Net interest margin is simply borrowing at a lower price and lending at a higher price. However, I believe other factors also come into play, such as loan demand and other economic conditions.
But my point here is that banks tend to do well in a cycle of rising interest rates until consumers and businesses feel the pinch. So up to a certain point there is clearly a positive increase. However, to answer your question in more detail, I believe that if interest rates are high, local investors can invest in Islamic bond products (called sukuk).
And when a sector is excluded, [there are] Other sectors that are uncorrelated to interest rates include healthcare, utilities, and energy. So even if a sector like finance is excluded, there is still room to move within the sector and make that decision.
Simon Brown: I understand your opinion. These are markets and there is always a place to make money. There is an argument that faith-based investing is, in some sense, inherently ESG (environmental, social, and governance). [focused]. Are there any differences or fairly significant intersections in terms of using broader social goals?
Mahir Jacoet: yes,. absolutely. So I think the ESG side has a big focus on fossil fuels and monitoring controversy, but the ESG side also excludes alcohol, adult entertainment, gambling, tobacco, and weapons. Now, that applies squarely as a crossover within a faith-based fund or an Islamic law-compliant fund.
So I think the difference there is probably the financial sector that you mentioned, entertainment, but also from the quantitative rules, overly leveraged companies on the Sharia side end up with very high quality. reach a high starting point. The base universe.
So those crossovers are alcohol, adult entertainment, gambling, tobacco, and weapons, with some nuances on either side. However, a faith-based or Islamic law-compliant portfolio is always expected to be highly ESG-aligned.
Simon Brown: Investors invest in search of returns, so I would like to return to the topic of returns. That's the center.
Let's talk about faith-based performance [investments]. There is the Old Mutual Global Islamic Equity Fund. What is the return status? Many people will say, “If you shrink the market, your profits will immediately decrease.” Now, you pointed out earlier that when it comes to banking, there are other banks that can do it perfectly well. Do the returns stack up?
Mahir Jacoet: It is certainly so. actually. Looking at 2023, MSCI World, the developed market index, was around 24.5%. And the national world index, MSCI ACWI, was slightly lower at 22.8%. Our portfolio outperformed him by 31%.
Similar good performance numbers were seen on the local side. However, the portfolio outperformed traditional benchmarks because of its particular global focus. So what does it mean?
That we can disprove the myth that people assume that in a smaller universe, because we are constrained and unable to sustain finance and other sectors, people will do worse. means. Because we've proven what we actually call it in this universe. Even with our hands tied behind our backs, we may have achieved results.
This debunks the conventional wisdom when it comes to faith-based investing and ESG investing.
I think talking about ESG distorts the story. I believe that if an investor is truly a long-term investor, his better ESG companies should do better. And you invest in those types of portfolios not because of short-term performance, but because it's the right thing to do.
But what this does is it gives traditional investors and multi-asset investors an opportunity to say, “Hey, this person's performance profile is different.” I have all the traditional ones. In fact, when combined, it will help diversify my overall portfolio: the teaching and stories that actually need to be put out into the world. ”
Simon Brown: That's a great point. This is about a kind of diversification in your portfolio. If you have 10 fund managers and they're all chasing the same world, they're not going to get the same returns, but the truth is there's no difference between them. here it is.
And you also mentioned space. Although it is a small universe, when viewed on a global scale, it is still a very large universe. We've taken a lot of capital out of it, but the world market is huge.
Mahir Jacoet: absolutely. To give you the exact numbers, the S&P Islamic Index is actually the largest Islamic index. So, as a starting point, we use that index, which has about 710 stocks. Ultimately, you should build a beautiful portfolio of about 80 stocks from a universe of about 387 stocks allowed.
Therefore you are completely right. I think it's a little difficult on the local side, but on the global side, you can build a very good portfolio from about 400 stocks that meets the needs of your customers.
Simon Brown: And, as you say, you can get alpha with different portfolios, different methodologies. That's ultimately what investors are looking for.
Let's change course a bit and take a broader look. It's been an action-packed year, with elections around the world and a debate over soft vs. hard landings in the United States. Interest rates are expected to start falling. What types of events and factors are expected to most impact the global universe portfolio?
Mahir Jacoet: I will try to answer this question at various times.
First of all, I think a lot of people are looking for a crystal ball answer, but the reality is we don't know. Therefore, the strategy is to build a shock-proof portfolio.
While quality is at the core of our philosophy, the business must have the ability to grow and be attractively priced. So if you look at his second element for being able to grow, you have to achieve growth. We also ask for that evaluation.
Therefore, we want to buy assets at price. And I think that's the strategy that we're going for with the Fed – will they raise rates, when will they raise rates, and by how much? These are the types of questions we always ask ourselves. There has never been a time in history when interest rates were this high and lasted this long without something breaking.
Well, this week too, labor statistics attracted a lot of attention. Nonfarm employment totaled 335,000, compared to an estimated 185,000. This is an explosive number.
But in summary, when you look at all of this data that we're looking at, it looks like the U.S. consumer is doing well.
That said, there is a good chance that a rate cut is actually going to have a soft landing further down the line.
I think another big factor in the market is China. CPI data released this week was mostly negative at 1% and 0.8%. This is the weakest level since the global financial crisis. So, like monetary stimulus, there is no quick and easy solution to China's housing market.
The government has some tools at its disposal, but the truth is I don't know how they plan to deal with this depressed consumer sentiment.
Therefore, we adopt the strategy of the barbell approach. So we bring value and growth to both dimensions, but we put quality at the core. We believe this will benefit our clients and investors in the long run.
Simon Brown: I think so. I like it 100%. If you go back four years and you say you don't know, [but] 4 years ago – So what have we seen since then?
The first pandemic in 100 years, the highest inflation rate in developed markets in 40 years, as you say, and incredibly high inflation rates for a long period of time. No one could have predicted one of these, let alone all three would happen.
As long as you have a quality business with growth potential, it will be able to weather the curveballs when they come. And the curve balls are bound to come. Perhaps the only certainty is uncertainty.
Mahir Jacoet: absolutely. What I always say is, if someone else is giving you a 20% positive rating and I'm giving you her 18% rating, the phone won't ring in the office, I can tell you that. I think. But if the market is down 20%, you need to make sure you are at least minus 10% to have an advantage over the market on the downturn. I think that's what the philosophy of equality really helps with, and that's our strategy.
Simon Brown: Yes, it's not about trying to predict the future. I'll leave it there. Mr. Mahir Jacoet, Portfolio Manager at Old Mutual, thank you for your time.
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