The road to a full global economic recovery has once again been plagued by a Greek tragedy. However, unlike the mythical stories, this new crisis has caused global markets particularly in Europe, to tumble. News of Greece adopting its recent austerity plans has subsequently seen global markets rise again, reflecting the optimism for the measures being passed.
Such an event is what Noripah Kamso, the CEO of CIMB-Principal Islamic Asset Management, refers to in her article [Shariah investing: Resilient performance through black swan incidences (2006 – 2011), see Islamic Investor Feature on pg 32 as a ‘black swan’.
Kamso cites the term was coined by Nassim Nicholas Taleb, a hedge fund manager, used to describe events that are unexpected, have an extreme impact and are rationalized in hindsight after their occurrence.
The global financial crisis and its ever volatile recovery process have forced investors to educate themselves in order to make more informed investment decisions. So increasingly there is a demand for transparency.
Transparency leads to good corporate governance resulting in an increasing awareness of the importance of protecting the rights of stakeholders. Transparency is not a new concept in Islam. Advocates of Islamic finance are more than happy to proclaim that unique attributes of Shariah law, including transparency, have played a pivotal role in not only helping the industry avoid the fate of its conventional counterpart but also in excelling through the ‘dark times’. But such a view is not shared by all.
The prospectus of a mutual fund is akin to an ownership manual. The key information made available includes the investment objectives; strategy; shareholder information; risks associated with investing in the particular investment; performance information such as the investment returns, fees and expenses; as well as the financial highlights.
Such a format, Dr Nienhaus says, provides detailed information and thus better transparency to the customer, who will have all the information at hand before making a decision. Dr Nienhaus adds that it also allows a shift of responsibility from being ‘supply side heavy’, where the risk is placed solely on one party, to a more balanced partaking of risk, which is true to the Shariah principle of ‘risk sharing’.
Despite being well informed , they have been immuned from ‘exotic’ products in the fund industry particularly in exchanged-traded funds (ETFs). Reports have surfaced about the higher risks faced by investors on investing in leveraged and inversed ETFs. It also prompted the Pennsylvania Securities Commission in the US to warn investors to make sure they understand ETFs before they invest and consider whether the investments are right for them.
Once again the common theme that surfaced was the greater need for transparency. In the Islamic space, as long as strict compliance to the Shariah law is practised by asset management companies, such exotic funds should not see the light of day.
The Greece bailout is a clear example of how global markets will continue to remain volatile in the near future. But greater transparency will allow well informed investors to sail through the rough seas to safer waters.