The previous decade saw tremendous rise in the acceptability and growth of Islamic financial products in Pakistan.
Deposits of Islamic Banks grew from an insignificant amount in 2002 to over Rs 400 billion in mid 2011, representing 8% market share of the entire deposits in banks.
With the development of the financial markets in the country, there was a need felt for new investment products to facilitate the growth and promotion of savings.
Mutual Funds industry has played an active role in providing new investment alternatives.
Presently, the stands at Rs 333 billion, in which the size of Islamic Funds is Rs 45 billion.
The market share of Islamic mutual funds has shown incredible growth over the period and has increased to 14% from 7.54% in mid 2008, also illustrated in the Figure below:
Need for an Islamic benchmark The index helps Shari’ah conscious investors to identify the Halal equity investments.
With the rapid growth and acceptance of Islaamic products in the market, a void was created for a benchmark that can accurately compare the performance of Islamic equity funds.
As a result, KSE-Meezan Index (KMI-30) was established by the collaboration between Al Meezan Investment Management Ltd (Al Meezan) and the Karachi Stock Exchange (KSE) in 2008.
Al Meezan, in consultation with Shari’ah Department of Meezan Bank, provides Shari’ah expertise, guidelines, skills and stocks screening towards the activities pertaining the re-composition of the Index; whereas, KSE provides maintenance and dissemination support for the index.
The index helps Shari’ah conscious investors to identify the Halal equity investments.
It also provides them with a suitable benchmark to compare the performance of their investments.
Besides tracking the performance of Shari’ah compliant equities, its construction aimed to increase trust of Shari’ah conscious investors and enhance their participation.
The following table lists the Islamic Equity Funds in Pakistan, all of which use the KMI-30 Index as a benchmark.
In addition, it is also used by five Islamic Balanced Funds and Islamic Asset Allocation Funds for benchmarking.
— We attempt to evaluate the performance of the KMI-30 Index against the other indices on Karachi Stock Exchange since its launch in 2008.
Some interesting facts emerge through this exercise:
Since inception, the KMI-30 index has provided a return of 41% to its investors.
During the same period, KSE-100 (which tracks the performance of the top 100 market capitalised companies) and KSE-30 (which tracks the performance of the top 30 most liquid stocks based on free float methodology) both underperformed considerably; and, in fact, provided negative returns.
The time when KMI-30 Index was launched concurred with a financial crisis that swept the global markets, which also affected Pakistan’s Capital Market.
Despite these setbacks, the KMI-30 has been able to outperform KSE-100 and KSE-30 by 42% and 60% respectively.
Let us illustrate this with an example.
We take three hypothetical passive investors, each of whom invested a capital of Rs 1,000 in the stock market at the start of the FY’08.
They chose to invest differently however.
Investor A invested in the KMI-30 index, while B and C invested in KSE-100 and KSE-30 respectively.
Investor A’s investment has grown to Rs 1,413.57 yielding 41%.
Investor B’s portfolio was worth Rs 991.97 (a loss of 1%) and investor C lost 19% of his investment, which was worth Rs 806.93.
It can be inferred from the same example that once recovery began in the market, KMI-30 index outperformed the KSE-100 and KSE-30 indices over the entire period.
At times, the gap widened substantially.