Shariah-compliant index derived from the FTSE100 vs. FTSE 100: 2003-2014 performance comparison
Thesis (MBA)--Stellenbosch University, 2014.
This research study critically reviewed the performance of a Shariah-compliant index compared with that of the UK FTSE 100 between 2003 and 2014. Two broad indices were constructed based on business evaluation techniques, one using market capitalisation and the other total assets as a means to value a company. Shariah-compliant equity screening combines a financial ratio screen as well as business activity screening, which excludes a company’s involvement in any unlawful activities in the eyes of Islamic law. The sample period was further broken into three sub-periods, namely the bull period (2003-2007), the financial crisis period (2008-2009), and the post-crisis period (2009-2014), reflecting the various stages of the business cycle. A comparison of the risk-adjusted returns shows that the Shariah-compliant index, using market capitalisation as the means for valuing a company, delivers superior returns at lower risk levels than the FTSE100 over the sample period. Although the Shariah-compliant indices underperform to the FTSE100 during the bull market period, both of the Shariah compliant indices outperform the FTSE 100 during the era of the financial crisis. This can be explained by the fact that Shariah screening excludes companies that are highly leveraged and therefore it remains buffered from an economic crisis. In general, this research contends that the application of a faith-based-screen does not have an adverse effect on returns.