The unique investments that are protecting the wealth of rich South Africans

Amid elevated global uncertainty and market volatility, an often overlooked winner has emerged in the form of Islamic equity funds or Shari’ah-compliant portfolios. 

These funds have benefited from the strict discipline imposed on their investments, which tends to result in a more diversified portfolio than typical funds. 

Old Mutual Islamic Equity Fund portfolio manager Maahir Jakoet explained how the principles baked into these funds have resulted in outperformance amid elevated volatility. 

This has resulted in Islamic portfolios becoming increasingly popular in South Africa as part of an investment strategy to hedge against volatility while remaining invested in equities.  

The popularity has gone beyond the expected customers, with South Africa’s largest asset managers launching their own Shari’ah-compliant funds to capitalise on the trend.

Jakoet explained that picking stocks has become extremely difficult for active managers in a highly concentrated market where returns are driven by a handful of United States tech giants.

This concentration has been coupled with geopolitical uncertainty, where the world appears to be somewhere between the old order and a new order.

Most pressingly for investors, inflation appears to be structurally higher, with it yet to return to target in the United States since the Covid-19 pandemic.

This continues to erode consumers’ purchasing power and is likely to result in a tightening of central bank policy at some point in the future. 

While this combination of factors has negatively impacted the performance of some actively managed funds, it has boosted the performance of Islamic equity funds. 

Jakoet explained that Islamic equity screening imposes sectoral limits, excluding companies engaged in prohibited activities, such as the sale of alcohol or tobacco.

There are also specific financial ratio thresholds, including limits on leverage and interest-based income. 

This results in a natural tilt towards businesses with stronger balance sheets and more conservative capital structures.

In such an environment, these characteristics are immensely valuable, as companies with strong balance sheets are better positioned to navigate volatility and economic slowdowns. 

Furthermore, the absence of heavy exposure to banks reduces vulnerability to systemic financial stress, which tends to occur during periods of monetary tightening. 

Diversification is key 

The benefit of intense focus on high-quality companies is coupled with unique diversification through its investments alongside ‘sukuk’ in global portfolios. 

A ‘sukuk’ is an Islamic financial certificate that complies with Sharia law. Often referred to as an “Islamic bond”, it differs significantly from conventional bonds. 

The main difference is that it represents partial ownership of a tangible asset or project, allowing investors to earn returns through profits or rent rather than interest. 

Jakoet explained that sukuk are designed to provide income stability and asset-backed exposure, with returns linked to profit distributions and credit conditions. 

This makes them a strong foil for investments in equities as their return drivers differ substantially. 

Jakoet noted that equities and sukuk tend to exhibit lower correlation relative to assets within the same class, providing true diversification. 

While both adhere to Shari’ah principles, their market behaviour can diverge meaningfully, particularly during periods when interest rate movements dominate fixed-income performance or when equity markets respond to growth expectations.

Jakoet explained that the lower correlation between these assets improves overall returns as the downside is relatively limited. 

As Shari’ah-compliant investing continues to evolve, Islamic equities are emerging not simply as an alternative allocation, but as a strategic pillar within modern portfolios. 

Investing in Islamic funds is no longer only about faith, Jakoet explained, but is increasingly about returns and participation in global growth. 

The strict investment principles of these funds have dovetailed with an uncertain global environment to drive outperformance in recent years. 

Since its inception ten years ago, the Old Mutual Islamic Equity Fund has delivered returns of 12.2% on an annualised basis, outperforming the JSE Top 40 index.