Gold in Islamic finance – The rise of robo-advisers

Gold in Islamic finance – The rise of robo-advisers

Wahed is the world’s first automated investing service for the US$2 trillion Shari’ah investment market. Based in the US with a growing international footprint, Wahed gives retail investors access to low-cost, diversified, Halal portfolios. Global Head of Portfolios Samim Abedi explains the inspiration behind Wahed and why gold is such an integral part of its offer.

Samim Abedi
Global Head of Portfolios
Wahed

Q: Why was Wahed created?

A: We built our digital investment platform to help solve a specific issue: increasing access to Shari’ah-compliant financial products. There shouldn’t be an additional cost for investing ethically, so we’ve harnessed the power of fintech to develop a fully regulated robo-adviser, based on the principles of Islamic investing, which can be accessed by retail investors at their own convenience. Many Muslims around the world struggle to access affordable, ethical investment products. We are facilitating investment for those consumers.

 

Q: What role does gold play in Wahed portfolios?

A: Shari’ah-compliant investing does not just involve screening specific sectors and companies; there are also limitations on the types of transactions you can undertake. Products such as leveraged instruments, speculative instruments and synthetic derivatives are excluded so our portfolios are largely just traditional blends of equities and Sukuk bonds. The investment universe is therefore smaller and more concentrated so gold is really important for us, as it is one of the few ways that we can diversify our portfolios and increase risk-adjusted returns. We try to ensure that the sub-asset classes we invest in behave differently from stocks and fixed-income so that they really help the risk/reward characteristics of our portfolios: as a Shari’ah-complaint safe haven asset, gold fulfils that function.

 

Q: What are the typical allocations to gold?

A: When we engage with our clients, we try to understand what they are trying to achieve with their portfolio and the role that gold fulfils. Clients have different time horizons, goals and risk tolerances so we build different portfolios to cater for those variations. But we tend to look at gold as a very complementary asset that works alongside fixed-income and equities. Equities are the largest source of return and volatility; Sukuk bonds provide stability and gold is a diversifier – an uncorrelated and sometimes negatively correlated asset, which will behave differently when other assets are not doing well. As such, we usually allocate up to 10% of our portfolios to gold.

 

Q: Would Wahed have included gold in your portfolios if the AAOIFI Shari’ah Standard on Gold did not exist?

A: We have an Ethical Review Board that looks at all our products to make sure they are as compliant as possible. This group of people shows our clients that we are not cutting corners and provides an extra layer of scrutiny in addition to the boards and advisers of our underlying funds and instruments. We were able to invest in gold before the AAOIFI Standard on Gold was adopted, but the AAOIFI Standard makes it much easier to do so as it provides greater comfort to our scholars. The AAOIFI Standard is a set of international guidelines from a reputable source so our Board just has to review the logic and methodology rather than starting from scratch. The AAOIFI Standard makes it much simpler and more straightforward for us to access the gold market.

 

Q: The Shari’ah-compliant investment market has grown extremely fast. What do you feel about the outlook for this market?

A: We are very optimistic about it. There’s a lot of interest in gold already but there is capacity to invest more. Cash savings still play a large role in individual financial portfolios as investors wait for low-cost, attractive, investment-implementation vehicles to become available. If you look more broadly at Shari’ah-compliant investment principles, they are not just rules made up for the sake of it. The spirit behind many of these guidelines comes from a desire to invest in a way that is conscientious and ethically grounded. In that regard, there’s a real overlap with the socially responsible, ESG space, which is already pretty prevalent in Europe and is starting to become important in the US too. So I would argue that the appeal of Shari’ah-compliant investing goes beyond the ‘Muslim’ market, resonating with a broader subset of investors who want to know that their investment returns have an ethical dimension. And I think the market will really develop, as this type of investing becomes cheaper and more available.

 

Q: Robo-advice is a relatively new phenomenon but it is catching on fast. How do you think the Shari’ah-compliant robo-market will develop?

A: There has been a massive shift towards passive investing, particularly in the developed market equity space. And the growth of robo-advisers has been in tandem with the growth of a low-cost, indexed approach to investing. Shari’ah-compliant investing should be no different so we believe that robo-advice will play a substantial role in this market. A lot of Muslim money has simply not been invested to date and most Shari’ah-compliant investments are in active funds that can be pretty costly. Obviously, there are some areas where advice is important. In fact, even though our platform is largely digital and automated, some of our clients prefer an advice-based approach so we offer that too. But for developed markets, the ‘get it and forget it’ approach is often the best way and robo-advice is tailor-made for that type of investment. In fact, it may leave financial advisers freer to focus on more value-added services, such as estate planning and tax.

 

Q: Robo-advice is associated with young, digitally savvy investors. What is the make-up of your client base?

A: At Wahed, we aim to be accessible to people across the sophistication spectrum, the career spectrum and the age demographic spectrum. As a result, our clients are broadly spread across different categories and geographies. That said, we do resonate with the younger generation in particular, as they are tech-savvy, used to phone apps and often prefer to avoid face-to-face interaction if they can do things digitally instead. Also, our minimum investment amounts are deliberately low so that we can appeal to people at an early stage, such as students, recent graduates and young professionals.