Arabesque: An Islamic Fund That Bucks the Trend

One of our pet peeves with Islamic stocks and shares investing right now is the lack of any real thesis or strategy-driven funds.

What we mean by that is that most Islamic funds just invest in a selection of large European and US companies that are sharia-compliant with the focus more on trying to get as diverse a coverage of the market rather than following a particular strategy.

In this article, we take a look at Arabesque – a potential disruptor of financial investment solutions. We will take a look at some of their products and see if they are indeed halal. Then we will outline who would be best suited to their products as well as drawing a final conclusion.

Who are Arabesque?

Arabesque is a UK based fund manager. Their basic premise is that they combine cutting-edge artificial intelligence and algorithms with a powerful ethical screening tool.

The thesis behind their funds is to eliminate the errors that human biases bring to decision-making and to make decisions at a rapid, large scale using algorithmic trading. The ethical component is also important for them as over the long-term ethical investments have consistently been shown to outperform others.

Within their portfolio of funds that they manage, they also have a sharia-compliant fund.

How does Arabesque work?

Arabesque consists of academics coming from a diverse array of fields including physics, computer science, artificial intelligence, and engineering. These brainy guys then leverage deep learning, natural language processing, reinforcement learning, Bayesian inference, agent-based modelling, high performance computing and other disciplines[1]. A lot of cutting-edge technology.

So, what exactly is the AI engine?

Arabesque AI is the group’s artificial intelligence and machine learning research arm, focusing on the application of AI and machine learning technologies within a financial environment and providing the scalable technological infrastructure for Arabesque S-Ray, Arabesque’s sustainability data company.

Then there’s Arabesque S-Ray – a global data providing solution developed to assess the performance and sustainability of over 7000 of the world’s largest corporations.

Through machine learning, big data and over 250¹ environmental, social and governance metrics (ESG), its help investors to make more sustainable decisions. It also live-captures news signals from over 30,000 sources from over 170 countries and quantifies this information to form part of the analytics.

Are Arabesque Halal?

Arabesque S-Ray has unique ways of assessing companies.

First, they judge companies against the UN Global Compact principles and give an ESG Score.

Next, they judge companies on their climate-friendly credentials and give a Temperature Score.

Finally, they have a Preferences Filter which lets you filter and check the company’s involvement with alcohol, tobacco, gambling, fossil fuels, adult entertainment, defence, GMO, Nuclear, pork, stem cells, weapons etc^[3]. It looks at revenue streams and will flag a company involved in any of these selected filters when its annual revenue stream activity exceeds 5%.

That is important from a sharia-compliance perspective as 5% from haram revenue sources is the limit set by sharia-screening standards.

[4]

Arabeque’s Halal Fund: Arabesque Q3.17 Systematic.

The name of the fund itself is a reference to Surah Imran (chapter 3) verse 17:

اَلصّٰـبِرِيۡنَ وَالصّٰدِقِـيۡنَ وَالۡقٰنِتِـيۡنَ وَالۡمُنۡفِقِيۡنَ وَالۡمُسۡتَغۡفِرِيۡنَ بِالۡاَسۡحَارِ‏

In English: “men who are steadfast, truthful, obedient, spend (in the way of Allah) and implore the forgiveness of Allah before daybreak”[5].

The verse praises those who are righteous and true believers of Allah (swt), those who spend in the way of Allah (refusing to contribute to industries and activities that have been made prohibited by the Qur’an, spending in a way that spread the message of Islam), and those who seek forgiveness at dawn (fajr).

This is probably the coolest name for a halal fund that I have come across so far. I’ve given them the best named halal fund award, now let’s see if they live up to receiving the ‘legitimately halal’ award too.

Arabesque Q3.17 Systematic is a global Shariah compliant fund launched in 2015, adhering to Shariah investment guidelines and utilising the Systematic strategy.

The fund has a portfolio of c1200 global companies that it picks stocks from and which have been screened for liquidity and how well they perform in sustainability based on Arabesque’s S-Ray UNGC (United Nations Global Compact) and ESG (Environmental Social and Governmental) scores.

The fund’s objective is to provide investors with returns above the market average over a full market cycle with mid to long term capital appreciation. The portfolio fund consists of 100 equally weighted stocks when fully invested. In addition, Q3.17 Systemic hold cash as well as equity at a 20/80 ratio, so there is also a cash holding required in the fund.

So, who is picking the stocks and where are they basing their decisions on?

AI is picking them. The smart algorithms adhere to a strict rules-based, quantitative approach and incorporate the Islamic shariah guidelines from AAOIFI[7].

Side note: AAOIFI were established in 1991 are based in Bahrain and provide the leading standards of Islamic finance globally. It is supported by central banks, regulatory authorities, financial institutions, accounting and auditing firms and legal firms in over 45 countries.

In addition, Arabesque has another product titled Q3.17 Sustainable Global Equity.

This fund utilises the Sustainable Global Equity Strategy. This fund picks stocks from a portfolio of c3000 global companies that have been screened exactly similar to Q3.17 Systemic and it also adheres to the Islamic guidelines set out by AAOIFI.

The difference is that Q3.17 Sustainable Global Equity is just equity based and with no cash component to the portfolio. When there’s a high risk, the computer algorithm’s ‘risk appetite’ auto-adjusts to defensive stocks, when there’s a lower risk it goes into aggressive stock.

Who are the Q3.17 Funds for?

Arabesque is primarily a fund manager for institutional and high net worth clients. However, they are increasingly keen to tap into the smaller investor market too. You can now make an investment into their platform now via Simply Ethical. (Please do choose “IFG” as the place you heard about them when you sign up).

Pros

• Automated and dynamic cash allocation.
• Clear, unbiased approach to investing.
• Criteria of transparency.
• Shariah compliance through automated and rules-based algorithms that incorporate AAOIFI guidelines – leading standards of Islamic finance.
• Leveraging large datasets increasing safety, minimising volatility and drawdown.
• More than one shariah compliant products with the option to have part-cash and part-asset or to invest in full equity.
• Customer support available.

Cons

• Historically more focused on institutional investors so the retail aspect is not as built out but this is a big target for Arabesque so expect this to improve quickly. So, for example, Wahed has lots of content targeted at the ordinary investor, while Arabesque’s content is more targeted at institutional investors.
• The investment strategy is a more aggressive strategy than the other Islamic funds out there.
• The Arabesque funds are not widely available via mainstream brokers at the moment unfortunately.

Conclusion

Overall, Arabesque is a welcome addition to the market, and we hope to see its funds more widely available across the mainstream brokers in coming months and years.

By: Nazaqat Mohammed

Naz is a Muslim, Pakistani-British creative web developer, and digital designer. He graduated from the University of Leicester in 2018 with a Bachelor of Science in Computer Science and has been working in IT consulting since. Lately he has taken a break from his corporate career to focus on his other passions and areas of interest. 

[1] https://www.arabesque.com/ai/about-us/, 27/08/2020.

[2] https://www.arabesque.com/ai/ai-research/, 27/08/2020.

[3] https://sray.arabesque.com/, 27/08/2020.

[4] https://sray.arabesque.com/, 27/08/2020.

[5] https://www.islamicstudies.info/tafheem.php?sura=3&verse=14&to=17, 27/08/2020.

[7] https://aaoifi.com/?lang=en, 27/08/2020.