Australia’s only sharia-compliant superannuation fund intends to further diversify into new alternative asset classes in the next two to three years, likely via external fund managers, as more options become available.
Crescent Wealth is a small superannuation fund, with just A$300 million ($214.29 million) under management. That makes it the 124th largest of 150 super funds tracked by Chant West. But it is one of the fastest growing: it took on a little over A$50 million over the last 12 months via contributions, an annual growth rate of roughly 25%.
With that growth will come a need to find new areas to invest, as the fund finds itself limited by its need to avoid investing in types of stocks or debt deemed impermissible by Islamic law. For Jason Hazell, chief investment officer of Crescent Wealth, that means stepping into alternative assets.
“The next step is infrastructure and private equity. You’re starting to get structures in Australia, such as infrastructure funds with very low gearing, that are – or will soon be – sharia-compliant,” Hazell said, without elaborating how much it could end up allocating to such assets.
With just under 10,000 members, Crescent Wealth members account for less than 3% of the estimated size of Australia’s working age Islamic population and Hazell predicts this growth rate will continue at a comparable rate.
Crescent’s focus on being sharia compliant means it has several restrictions. The fund limits the ratio between debt-to-total-assets of one third for any investment or fund holding. And when it awards mandates, the successful managers implement rules drawn up by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), an international non-profit organisation. These include a limit on the ratio between debt-to-total-assets of one third for any company whose shares it owns.
The fund also excludes all financial sector stocks as well as most fixed income investments because of the ban on riba (‘unjust’ gains, which cover most interest charges). That prohibits a huge asset class; in March more than 40% of conventional super funds’ total assets were invested in interest-bearing securities such as cash and bonds, according to The Association of Superannuation Funds of Australia (ASFA).
Despite its investing limitations, Crescent Wealth is generally more internationally oriented fund than its peers on the stock front.
It has 35% of its portfolio in global equities (managed by AGF in Toronto) – 10% of which is unhedged, and 7% in Australian equities (managed by SG Hiscock in Melbourne). In contrast, the average Australian growth super fund has 25% allocated in local shares – of which a large proportion are financial companies, prohibited by Islamic investment principals – and 29% in international stocks on average, according to Chant West.
The exclusion of other defensive but non-Islamic compliant sectors, including tobacco, weapons, pork and gambling, means the fund risks being more cyclical than most super funds, Hazell admitted.
Crescent Wealth began adding Reits – both international and Australian – to the portfolio over the last three years, as sharia-compliant options became available. Beginning a year ago, it also introduced sukuk allocations – after a period where it had not invested in the asset class – to make the fund more defensive.
Its sukuk holding currently yields 3.8% and are expected to offer capital growth of between 2.5% and 3% over the next five years. That would result in a long-term return comparable to the asset class as a whole.
Additionally, the fund added currency hedging 18 months ago at Hazell’s request, after the board was satisfied it could be done without ‘speculation’ (the forward contracts used by manager Principal Islamic are permitted because their purpose is risk management rather than speculative gain).
The fund currently has 18% allocated into Islamic cash (managed by Principal Islamic in Malaysia), 15% direct property (managed Centuria Healthcare); 10% Global Sukuk (managed by Principal Islamic in Malaysia), 15% Australian and global Reits (managed by Karara Capital in Melbourne).
Within property, the fund focuses on healthcare property to ensure sharia-compliance.
“For retail, industrial and office investments it would be much harder to filter out non-permissible income,” said Hazell. Office or shopping centre assets would require constant monitoring of tenant listings, to ensure that sectors like banks are excluded.
Crescent Wealth’s relatively unique approach led to some topsy-turvy results in the first half of 2020.
In the first three months its large allocations to cash, smaller ones to equities, and exclusions on financial sector stocks and all bonds, led it to outperform most peers. While the fund lost 8% from January to March, that was better than the 11% median drop recorded by growth superannuation funds (the strategy chosen by most Australians that has 61% to 80% allocation to growth assets).
It was also higher than the Dow Jones Islamic Market World Index, a sharia-compliant index of global equities, which fell 19.9% in the first quarter. It has returned 15.3% in the last 12 months.
“Strong performance in the first quarter was due to our inherently conservative positioning due to our Islamic investment process and also due to our concerns that markets were overvalued,” said Hazell.
However, in the second quarter the fund gained 2.3%; over the same period Australian growth super funds returned 6.5%, and the Islamic Market World Index gained 28.1%.
Hazell said Crescent Wealth’s underperformance was down to its relatively low equity allocation – 42% compared to 54% for the average super fund according to Chant West, a super fund data provider – which meant it did not benefit as much from the recovery in international equities markets after March. The fund has a total equity allocation of 42% compared to 54% for the average super fund.
Despite the underperformance Hazell said the company remains committed to this approach, noting the volatility of these Covid-19 times.
“We continue to be comfortable with our conservative positioning as the gap between the valuation of markets and the fundamental economic strength of economies globally becomes increasingly difficult to fathom.”