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Faith - Based Indices - A Shelter in Stormy Times

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With uncertainty in global markets and the threat of the “R” word looming over the dinner party conversations of New York and London, there are those investors who may look for a little succour in the form of the raft of ethical and religious based indices now offered by major index vendors. Although these indices are not new to the market, this article will seek to explore some of the more recent product developments, the concepts underpinning them and the ethical issues being faced in the industry.

Dow Jones Dharma Indices

The Dow Jones Dharma indices were launched in January this year as analogous religious index set to the existing Islamic Index series. The new series provides an investment framework which is sympathetic to the fundamental principles governing the major religions of South East and East Asia: Hinduism, Buddhism, Jainism and Sikhism. Dharma, itself has a number of interpretations, 'duty', 'law', 'ethics' and 'truth', however the underlying principles which guide the creation and inclusion of securities in the indices are those of non violence and stewardship. These principles thus exclude, for example, companies in defence related industries, food retailing, pharmaceuticals and advertising among others. It is obvious that further and on going analysis will be conducted on the “Dharma-ness” of specific companies which fall in to, for example, the large swathes of the health care industry which is currently excluded from the indices.

The obvious target for this product is the emergent economies of SE and E Asia, but also the large Diasporas in Europe and North America.

Of the 6 criteria for what makes a good benchmark (Investable, Measurable, Appropriate, Reflective of current investment opinions, Specified in advance and Unambiguous), the Dharma set of indices hit all factors well, however, it is a little weak on the ambiguity front. There are three oversight boards governing the interlaced responsibilities required for managing a religious based index, a Religious Council, an Academic Advisory Council and a Supervisory board. Given the involved aspects of interpreting the nature of religious doctrine within the heavily prescriptive mono- theist faiths, where set rules on finance and religion are well documented, there may be some apprehension in understanding how to make the indices unambiguous when there does seem to be a greater scope for a range of interpretations within the less prescriptive faiths of SE and E Asia. However, this is a function of degree rather than an absolute. The 3 boards, are stuffed with the good, the brainy and the worthy which also goes some way to counterbalancing the lack of a well defined and transparent inclusion/exclusion methodology.

Dow Jones has created some back history for the world index to back test the methodology which has thrown up some interesting returns 5 Year Total annualised return as at March 31 2008 in USD: 18.54% with a float adjusted market cap of 14.7bn

The other indices in the series are:

Dow Jones Dharma Global Index
Dow Jones Dharma U.S. Index
Dow Jones Dharma U.K. Index
Dow Jones Dharma Japan Index
Dow Jones Dharma India Index

FTSE4Good Indices

The FTSE4Good indices were first launched in 2001 to provide a set of indices which would cater for the demands of the socially responsible investor. These demands focus on companies with good standards of corporate responsibility, social accounting, and an avoidance of traditional bugbears of social responsibility: tobacco, defence and nuclear, and a willingness to invest in firms which will minimise the social, environmental and ethical risks within their portfolios. It is these criteria which form the basis for the inclusion of companies into the FTSE4Good index series.

The index series has a comprehensive and robust methodology for the inclusion and exclusion of securities; moreover new criteria have been introduced for climate change. Existing firms must comply with a series of criteria in order to remain eligible for inclusion into the index. Non-compliance will result in exclusion from the index.

One thing about this index set that does stand out at present is the exclusion of companies which are involved in nuclear power generation. It would seem that the tide of opinion is in flux over the ethics of nuclear power generation and the impact of alternate electricity generation technologies on climate change.

FTSE Index Graphs

It could be that in the next few years the socially responsible investor may be pro-nuclear and the index inclusion criteria may need to be amended.

From the chart above it looks as though being ethical does have a price when compared against the AW index over the last 5 years.

The indices in the series are:


FTSE4Good Europe Benchmark Index
FTSE4Good UK Benchmark Index
FTSE4Good US Benchmark Index
FTSE4Good Global Benchmark Index

Investible Indices

FTSE4Good Europe 50 Index
FTSE4Good UK 50 Index
FTSE4Good US 100 Index
FTSE4Good Global 100 Index

The distribution of wealth in an era of high and rising oil prices favours the supply side. Given the propensity of the supply side of the oil equation to be geographically centred in the Middle East, over time the growth in the importance of investment strategies which take into consideration the religious-economic aspects of Islam will increase.

Dow Jones Islamic Market Indices

The Dow Jones Islamic Market indices were launched in 1999. The index series security universe covers 95% of the market cap across 46 countries (float adjusted). There are currently more than 70 indices. The index series filters securities based on the following criteria:

Companies engaged in alcohol, tobacco, pork related products, financial services, defence and entertainment.

In addition, companies are excluded from the index series which

Total debt divided by trailing 12-month average market capitalization is 33% or more.

Cash plus interest-bearing securities divided by trailing 12-month average market capitalization is 33% or more.

Accounts receivables divided by 12-month average market capitalization is 33% or more. The method governing the eligibility criteria of securities is overseen by a supervisory board. It is the task of this board to interpret Shari’ah law in order to define the parameters and boundaries within which the index can include/ exclude securities, sectors and industries. As with the supervisory boards of the Dow Jones Dharma indices, the board of the Dow Jones Islamic Market Indices is made up of the good and the brainy, however there is only one supervisory board on the DJ Islamic Market Indices as opposed to 3 for the Dharma Indices. This divergence in the number of inputs into the structure and process provides us with some insight on the relative structure of financial principles which underpins Islamic religious thought as opposed to the more fluid interpretations of the SE Asian religions which form the basis of the Dharma Indices.

Looking at the data provided by DJ (31 Mar 2008) on the country allocation the spread of the Islamic Market Index there is no allocation to Israel. Despite this fact there is a probable selection of Israeli securities based on the fact that many Israeli companies do not list on the Tel Aviv Stock Exchange but list directly and only on the NASDAQ. Despite this, according to many Shari’ah legal authorities there is no prohibition on investing in Israel. Looking at the graph below, there seems to be some evidence that investing according to Islamic orthodoxy does pay dividends (Although the price indices in the graphs below excludes them).

Faith and ethical based index products fill a void in the market for investors who heed the call for investing according to their convictions. Without a doubt, this market segment will grow and expand over the coming years. Indeed, recent developments has expanded index provision across asset classes with the establishment of the Dow Jones Citigroup Sukuk index series which provides fixed income index data for investment grade bonds or 'Sukuk' which are Shari'ah compliant.

The complexity of integrating Islamic religious doctrine which prohibits the charging or paying of interest, (which has its roots in the understanding of the function of money: acting as an intermediary for the exchange of assets) with the issuing of fixed income instruments with all the resultant financial requirements incumbent upon them, is a very specialist area and a growing one. These indices merely provide a flavour of the evolving financial landscape which now encompasses god as well as mammon.

Index Performance Graph

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