With the start of the Muslim fasting month Ramadan, could UK pension trustees find themselves confronted with member requests for Islamic investments – and what are their options in this sector?

 

Sharia-compliant finance, which excludes interest-bearing loans, has some tradition in the UK; most high street banks and some specialist providers offer sharia-compliant savings vehicles now, and a number of Islamic stock market indices are available from the major index providers, including the FTSE Global Equity Shariah index series, the MSCI Islamic Index series or the Dow Jones Islamic Market indices. 

 

In 2018, Al Rayan Bank (UK) issued what was then the largest ever sterling sukuk – a sharia-compliant bond – worth £250m. This was surpassed in late March this year by the UK government, which announced it was issuing its second sukuk, worth £500m. It follows a first issue of £200m in 2014, when the UK became the first country outside the Islamic world to issue a sukuk. 

 

 

Some defined contribution pension schemes have added sharia-compliant funds to their self-select range, such as master trust Nest, but with the majority of people remaining inert when it comes to pensions, only a small proportion tend to use these funds. 

 

However, demand could increase and so could the product range, predicts Iqbal Asaria, economic adviser to the Muslim Council of Britain. He points out that some providers are now offering sharia-compliant ETFs in addition to other products already available. “I expect in the next six months this field will be quite rich, there is demand from people,” he said. 

 

He said this is driven partly by the fact that one of the favoured investments of the target audience – residential property – has become increasingly unaffordable in the past few years. “Up to now most surplus funds were parked in property. That is becoming beyond reach with increasing house prices,” said Asaria, noting that deposit funds are also still unattractive given the low returns. 

 

In addition, the Muslim population in Britain is not as young as it was two or more decades ago and is therefore more likely to think about pensions, he noted. 

 

Growth could also be driven by the blending of environmental, social and governance investing with sharia-compliant investing. Combining the two makes the target market bigger, he said, citing asset manager Arabesque and ISA provider Wahed Invest as among those that are working on such products.  

 

 

Islamic finance tends to be equity heavy because it has to avoid interest payments, but REITS are also included and could become more popular as the target audience likes property as an asset class, said Asaria.  

 

The government’s sukuk makes bonds more of an option, but he said the investment vehicles to make the sukuk available are still largely lacking and pointed out that the latest government sukuk was not nearly as oversubscribed as the first such issue. 

 

This might also be a factor for master trust Nest’s sharia fund. Stephen O’Neill, who heads up the private markets team at Nest, said the Nest Sharia Fund invests in a passive portfolio of global equities which tracks the Dow Jones Islamic Titans 100 index. 

 

While he said Nest is “always open” to adding more sharia-compliant asset classes, such as sukuk,"we haven’t found an appropriate solution yet”. 

 

The fund is globally diversified but with some stocks screened out, “it remains true that it is somewhat more concentrated than an unscreened equity portfolio would be, and isn’t as diversified as other Nest funds”, added O’Neill.  

 

Sukuk could be a way to diversify; the UK government’s sterling sukuk “is certainly something we’ll consider”, he remarked. “However, the challenge is finding a way to operationalise it; we haven’t invested in sukuk to date because – amongst other reasons – we haven’t seen asset managers providing access to low-cost fund vehicles specialising in this asset class,” he said. 

 

This lack of products could be a sign that it is still somewhat unclear which direction the market is taking in the UK. O’Neill noted that some providers and products have left the market in the past 10 years, “which would suggest sharia-compliant investing hasn’t taken off as anticipated in the UK”. 

Most recently, Aberdeen Standard Investments closed the Aberdeen Standard Islamic SICAV Islamic Global Equity Fund on 2 March 2021. 

A spokesperson said that following a strategic review of the fund and in particular its size following the redemption of a majority investor, the board of directors decided that the fund was no longer considered to be cost effective to run. The firm continues to manage other sharia-compliant funds, including several segregated mandates and the Malaysia-based ASI Islamic World Equity fund.

Among Nest’s membership, only 0.7% invest in the scheme's sharia fund, with 98% being in the default option. However, “at the same time in gulf states and Malaysia, we understand it is more commonplace than ever”, said O'Neill. 

 

Despite the relatively low take-up at Nest, he said it is important for the master trust to offer a sharia fund so that members who are automatically enrolled do not miss out on saving because they can't find investments that align with their beliefs.