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Islamic Investment: Funds that keep the faith

Western banks and money managers are battling for a share of the emerging markets as a provider of investment funds. One of the fiercest fights is for the short-term cash deposits of Muslim investors, whose volume worldwide is estimated at $50 billion. Despite setbacks and strict rules against investment in interest-bearing securities, Islamic funds are all the rage.

"They seem like a gimmick," says the manager of one such fund. "But in fact they are not really any different from socially responsible or ethical investments, such as environment-friendly funds. And by setting a minimum investment requirement of only $15,000, the fund is available to lower-income Islamic investors."

Six such funds were launched last year and are performing satisfactorily. These include Robert Fleming's Oasis Fund, and PFM's Ibn Khaldun fund. "Islamic investors are delighted," says Thomas de Sausmarez, assistant to the managing director at PFM in Doha. "At last western finance is taking an interest in the needs of Islamic investors who have until now been restricted by their faith."

Even though these funds avoid buying stock of companies that pay substantial interest on debts, and eschew bonds, they are performing as well as many conventional western-style funds. In some cases, returns are even higher than their respective benchmarks. "Avoiding highly geared companies can be of benefit," says Dhaval Joshi, investment manager at Robert Fleming. "Since its launch there has been little difference in performance between the Islamic fund and the world index. But an Islamic equity fund that requires purification has a necessary penalty as it's difficult to avoid interest income totally.

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