But why? We asked Ashley Lester, Head of Systematic Investments at Schroders and Lead Manager of the Islamic Global Equity Fund
In less than a year since its launch, Schroders’ Islamic Global Equity Fund is already outperforming the Dow Jones Islamic Market World Index, one of the most prominent Shariah-compliant global equity benchmarks. With a history of more than two centuries and with £700.4 billion of assets under management, Schroders is now offering its clients access to a global investment universe comprising more than 2,600 stocks that have been screened to ensure adherence with Shariah law.
In addition to using a Shariah-compliant benchmark, the British multinational asset management company has retained Malaysia-headquartered Amanie Advisors to advise on the Shariah compliance of the fund.
Here, Ashley Lester, Head of Systematic Investments at Schroders and Lead Manager of the Islamic Global Equity Fund, tells us about their investment strategy for this fund, what makes it different from other Islamic equity funds, and how it benefits from ESG-related features.
Schroders has been operating for more than 200 years. Why did you decide to launch an Islamic equity fund in December 2020?
We launched this fund along with our distribution partner because we felt that the Muslim population is growing rapidly, it’s growing wealthier, and yet the investment options available for Muslim investors remain limited. We’re really excited about launching this fund because we see it as an opportunity to serve an important part of the community that is underserved, both in the UK and abroad.
Schroders has been around for a long time, and we’ve very been active in parts of the world where Shariah investing is important, including parts of Southeast Asia. It was natural for us to pay some attention to how well-served this part of the market was. Our observation was that Shariah-compliant Islamic investors were seriously underserved in terms of the range of product offerings and investment options out there for them. We were fortunate to have a distribution partner who made the same observations.
How has the fund performed so far and how has the appetite been from investors?
We’re really delighted with both. There’s been quite a lot of appetite from investors. As of the end of June 2021, the assets under management of the fund are nearly £150 million. We’ve had inflows into the fund well into the tens of millions of pounds. So the fund is doing well in terms of assets under management and performance. It has outperformed its benchmark year-to-date by 2.8% and since inception it has outperformed it by 3.1% as of June 30, 2021.
Schroders also managed a global Shariah equity fund in Indonesia that was launched in 2016. How is that fund related to the new Islamic equity fund?
The Indonesia fund is entirely separate. Our role there was a bit different. For some years, we were advising our Indonesian team who were the portfolio managers on a global Shariah-compliant portfolio. Our role was advisory, and I think it was important in that it made myself and the team much more aware of issues around Shariah investing. More recently, the advisory relationship with that team has moved on to our global team. But the experience of working alongside them and advising them on Shariah-compliant global investments for several years was very valuable for us in establishing this fund.
What makes this Islamic equity fund different from other global Shariah-compliant funds?
We think that the market here is quite small in terms of the types of funds that are available. There are quite a lot of passive funds, but many investors wish to seek options that can do better than the market and obviously we seek to provide them in active space. Many of the funds out there are also quite small in terms of assets under management and they can often focus on quite a specific style of investment, either value or growth, in sort of a single style box.
I think what’s unusual about our fund is our scale – we’re bringing the full investment resources of Schroders in general and our Schroders’ Systematic Investments in particular, to bear on the problems of making this the best fund that it can possibly be. Schroders’ Systematic Investments’ style is multi-factor, which means we seek to invest across a variety of diversified investment styles in an attempt to provide the smoothest ride of excess returns that we possibly, reasonably can. We think this is differentiating – bringing a well-resourced team to bear on this problem and seeking to deliver value-adding excess returns in a well-diversified style.
What does ‘multi-factor’ investing refer to in this context?
Investors generally, whether they’re discretionary or quantitative, often describe their investment process in terms of different styles of investments – styles that you can see in various trade publications that might describe investors as having a growth or value style.
Within the world of quantitative investors, which is the world I’m part of, those styles are generally called factors. There are four or five basic factor ideas that drive most of the quantitative funds which investors see in the market. Those factors involve sources of long-run return that are reasonably well understood by the broad quantitative investment community. Some examples are the value factor, the idea of buying stocks that appear cheap on some measure. There’s the momentum factor, the idea of buying stocks that would have done well recently, and there are other less well-known factors, such as the profitability factor, governance factors, and the low-volatility factor. These are all rules that quantitative investors use to decide which stocks to buy or not to buy.
It’s possible to buy a quantitative investment that specialises in just one of those styles, but we at Schroders Systematic Investments believe strongly that this is sub-optimal because by combining at the stock level all of the different sources of insight that you can have about the likely drivers of excess returns, one is more likely over time to select stocks which will outperform across a wider variety of market environments. A key part of our process is how to bring together the different factors in such a way that gives just the right amount of diversification and exposure across each of the different factors.
Which business sectors does the equity fund target and what are some examples of the investment opportunities that are available?
A characteristic part of sophisticated quantitative investment styles is that we don’t specifically seek to target sectors most of the time. We can have specific measures which say at the moment, we’ll focus more on technology or industrials, but in general, the great majority of the returns we see from our investment process are pure stock selection.
What we try to do is compare similar companies and buy more of the companies which seem better according to our rules. We might compare North American technology companies to each other for instance, and invest more heavily in those that have the best measures of value and momentum and the others factors I mentioned. But overall, compared to the benchmark, we’re seeking to have a pretty balanced set of exposures across industries. And that’s actually quite important because the Shariah-compliant set of industries is quite different from the global set of industries. If we were very focused on particular industries across our other portfolios but those industries were some of the ones which were excluded from or were in very limited form in the Shariah-compliant benchmark, then that would be a problem for our process.
Schroders said that the fund seeks to outperform the Dow Jones Islamic Market World Index over the next three to five years. How do you intend to do that?
Our process is to look for lasting rules of what types of stocks tend to outperform in the long run and then invest across a set of those rules. One of the reasons to do this multi-factor process is that any given investment style or factor definitely goes through cyclical swings. There are periods when value stocks underperform. A recent example of that was the period 2018 to the end of 2020, which was a tough time for most value investors.
The idea of multi-factor investing is that at times when one factor is underperforming, another factor–or possibly more than one factor–might be outperforming, so the idea of diversification is how one seeks to get the smoothest ride. But all of the factors which we’re investing in, solid statistical and financial evidence shows that they generate return in the long run. So rather than trying to time-in to what type of stocks we think are likely to do best in the six months, our process is about looking for the types of stocks that do best in the long run and then getting a diversification effect across these stocks.
Many Islamic investors today are looking for sustainable Shariah-compliant funds that integrate Environmental, Social and Governance factors. How are you converging these two principles within Schroders Islamic Global Equity Fund?
Broadly speaking, there are two underlying driving forces behind ESG investment. One is a desire for our investments to align with our principles, perhaps with the idea of making the world a better place, or simply aligning our principles with our investments. That approach to ESG investment is often called impact-driven investing, and it’s very important in ESG investing to measure the impact on the world of the stocks in which you’re investing.
On this side of things, Shariah investing was there before ESG investing was there. Because much of the idea of Shariah investing is to align end investors’ principles with their investments. Not surprisingly, when we compare measures of impact between our Shariah-compliant fund for instance and the broad market cap benchmark, typically the Shariah-compliant fund will show as having a better impact on the world than the market cap benchmark.
At Schroders, we measure that through our propriety tool SustainEx, which seeks to put a dollar value on all of the things a company does that make the world a better or worse place which don’t show up on their balance sheet. The key element of Shariah-compliant investing is that it excludes many of the worst offenders, and those include stocks like tobacco, gambling, and alcohol. Some of the worst polluters are also excluded from the Shariah-compliant universe, because of the large quantities of debt that they have.
The other reason why end investors might be interested in ESG is that it’s a source of risk-adjusted returns, and there we see a lot of convergence across funds. Because if you think that you have a source of long-run returns, then you should include that in your portfolios whether you’re seeing impact or not. That’s the focus of a tremendous amount of research by my team and it’s clear that the direction for us and probably for the industry is to include across all of our funds more cognisance of the ways in which ESG factors can contribute positively to the return profiles of our investment portfolios.
In terms of our Global Islamic Equity Fund, for various product-specific and regulatory reasons, we ended up launching it without the ESG label. We nevertheless measure it relative to the overall benchmark, and inherent in the Shariah investment itself is ESG advantages over traditional investments. Second, in terms of the evaluation of which stocks to buy within that universe, ESG factors are inherent to the whole process and becoming more so. The easiest example I can give is of factors which relate to governance. There’s probably a longer tradition of funds using governance factors as a source of excess returns than there is of social and environmental factors. So we use governance factors that reflect the extent to which management of a firm is aligned in its interest with the firm’s shareholders as an integral part of our investment process in this fund.