Faith Based Investing: A Comparison among Islamic, SRI, and Conventional Investing.

According to Derwall, et. al. (2011)), it is possible to discriminate among investors in terms of their personal, social, and religious beliefs guiding their investment choices. Broadly speaking, two dominant investment strategies have been identified. The values strategy suggests that values driven investors are primarily concerned with the non-pecuniary investment objective of achieving some moral or societal goals. The financial return also exists but as a secondary objective. For this group of investors, there are several choices of investment universe that include the SRI universe of stocks as well as stocks that are classified as being shari‘a compliant. In contrast, profit-motivated investors are primarily motivated to maximize the financial return for a given degree of risk. For this group of investors, values serve minimal role in selecting the appropriate investments. Naturally, there are no restrictions as to what stock universes this group of investors picks. But regardless of the personal, social, moral, profit motives guiding investment choices, the question of what strategy performs best is an empirical question, one that requires a careful analysis of the performances of these disparate investment portfolios. We examine the relative performance of different investment strategies using three different universes of stocks – conventional, shari‘a compliant, and socially responsible - during the recent tranquil and turbulent periods. We find that it is possible to discriminate among various universes of stocks to identify various dominant investment strategies. The performance of these strategies using globally listed stocks varies among various universes of stocks subjected to these investment strategies. Broadly speaking, there is room for both values and profits investing using conventional, SRI, and shari‘a compliant stocks. However, the shari‘a compliant universe has a unique appeal to Muslims and non-Muslim investors. Values investors can construct portfolios by excluding stocks that do not meet strict shari‘a guidelines. The most surprising result in this study is that among the three universes of shunned stocks, only the shari‘a compliant portfolio delivers superior performance. In other words, leverage is good but up to a certain level. Finally, our results show that profits-driven investors can also find shari‘a compliant universe of stocks to deliver attractive returns. In essence, they offer best of two worlds, without sacrificing returns. The results presented in this chapter have significant implications for making shari‘a compliant investment as a mainstream investment strategy.