Both worldwide and in Israel, they have become a unique investment niche that belongs in the family of conscience-based investments: investment instruments with an economic and financial logic which operate according to religious principles. The Ave Maria Catholic Values Fund (AVEMX), for example, is a fund that plays a double game with the concept of value - it invests in value stocks and also invests according to Catholic principles, which it means does not invest in companies that are involved in abortions or pornography, or that support the idea of one-parent families, or parenthood outside marriage.
French bank BNP Paribas recently launched the Islamic Equity Optimizer, an exchange-traded fund that tracks the Dow Jones Islamic Market Titans 100 Index, one of the company's eight Islamic indices. The index selects companies according to clearly defined financial principles, but screens out industries classed as unethical under Islamic Shari'ah law, such as alcohol, pork production, financial services, entertainment (such as casinos), and pornography. The tobacco, defense, and arms industries are not banned entirely by Shari'ah, but are nevertheless excluded by the fund.
In Israel too, there are investment products and entities that operate in the spirit of Judaism. Just two months ago, Mercantile Discount Bank announced that it intended to launch kosher mutual funds, which would invest in companies operating in the spirit of Jewish law (halacha), with Rabbi Arie Dvir, head of the Halacha Institute of Economics, acting as adjudicator. So far two such funds have been launched. They do not invest in companies that violate principles of Jewish law, such as working on the Sabbath, or lending money with interest. The launch of the funds is part of the bank's strategy of becoming the leader in the haredi (ultra-orthodox) sector.
Seats on the board for the rabbi's aides
The oldest of all the companies that focus exclusively on kosher investment products is Hilat Shoham (Hilat is a Hebrew acronym which is short for specialist investment under Torah principles). The investment house, which is managed by Yaacov Moreshet, manages four mutual funds, three provident funds, and portfolios for private customers, all in strict compliance with halachic requirements.
Hilat was born out of Moreshet's personal desire to combine two worlds distant from each other, Judaism and finance, and the investment house's activity is based on the rulings of Rabbi Yosef Shalom Eliyashiv, (the leading arbiter for Israel's non-hassidic haredi Jews), who even has a representative on the company board. The representative examines the halachic aspects of each transaction that Hilat Shoham carries out, whether they relate to the "kashrut" of the investment or the management's conduct towards its customers.
According to Shoham, although Hilat is defined as a company that observes Jewish law, most of its customers are not actually from the religious sector, and he does not tailor his products solely with this sector in mind. Moreshet, an observant person himself, attaches great importance to investment management according to halachic rules, even though he admits that it is no easy task.
So how can investment and halacha be combined? Hilat starts by applying investment management philosophy - multiples, knowledge of the company management, technical analysis, and all the standard criteria. It then follows these with further assessments designed to ensure that the investment complies with halacha. "Trying to explain the range of laws covering investment according to halacha in a nutshell, is like trying to teaching the Torah in a nutshell. It's simply impossible," says Moreshet. Because of this, he recalls, it took him an entire year to organize the investment house, before he could open it for business.
Hilat has a long and detailed list of stringent rules that govern its choice of investments. Before investing in a company, the firm whether it closes on the Sabbath, sells its Hametz (leavened bread) on Passover, and has a "commercial dispensation," which circumvents the prohibition against lending at interest, a prohibition that does not apply in the case of commercial loans. Moreshet, with the help of Rabbi Eliyashiv's representative, has to tread a fine line, employing creative solutions that will be acceptable to Rabbi Eliyashiv, when selecting portfolios for his company to manage.
But the work doesn't end there. In the era of globalization, with investment management based on diversification, the challenge is even greater. Including foreign companies in a fund that operates according to halacha is no easy task. When it comes to companies like these, Hilat's investigations are even more extensive, addressing issues such as the composition of company boards and their religions, and the number, if any, of Jewish employees.
Hit and miss
Does investment according to halacha also make money? Apparently not. The returns of the mutual funds managed by Hilat Shoham (hosted by DS Securities & Investments), do not look encouraging. Not one of Hilat's four funds has recorded positive return since the beginning of 2007. Moreshet claims the reason for this is not the company's unconventional investment policy. "It's obvious that you'll be more limited than other investment managers, if you go according to the Halacha," he says. "I think that over the long-term we have proved ourselves, and that's what we aim at. We don't deal in investments for a week or two, nor for a month or two months. I look for the long-term, so in the short-term we have been slightly harmed by the current state of the market. I still believe in my position."
The religious sector is a large consumer group in Israel, and the investment industry tries to attract it just it as it would any other consumer group. But in contrast to other fields, market sources are not sure that this particular target group is ready for financial investment. There were attempts in the past to build specialist products for the sector, some of which folded due to lack of interest. The repeated changes in ownership of the Rahkia funds recently, are a further example of this.
Market players who tried to market financial products to this group found that it tends to pay into saving plans at banks through direct debits, usually with the aim of helping children when they get married and set up their own homes. Yet despite the developed savings culture, a significant part of this group sticks to deposits only and avoids investments - a fact that highlights their aversion to risk. Market sources believe the reason for this is a lack of familiarity with the existing investment instruments, and their advantages and disadvantages.
The market had hoped to attract consumers with long-term savings habits that would also suit the investment industry, but found that many of these people were not yet ready to move their money into the capital market. One of the sources that "Globes" talked to feels that it will take a great deal of spending to educate the religious sector about investment in the capital market, and that it will take a long time before any profits are seen on the investment.
Published by Globes [online], Israel business news - www.globes.co.il - on September 23, 2007
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007