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S&P launches Canadian sharia-compliant index

Toronto Stock Exchange

Standard & Poor's is launching a Canadian stock index to give investors who follow Islamic law a guide to the country's equity market - but those who follow it had better be devoted to resource stocks.

The index can be used as a benchmark or model for funds created to invest in Canada in a manner that is compliant with Islamic law.

The S&P/TSX 60 Shariah includes the biggest stocks in Canada that Islamic investors are allowed to invest in, which means no banks, no pork producers, no entertainment companies and no gambling. It also means no investment-management companies.

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As a result, almost 80 per cent of the index is comprised of energy and mining companies.

It's the second such index in the country, following on the heels of the Dow Jones Islamic Market Canada Index. For S&P, it's one of more than 50 Shariah indexes around the world.

"Shariah investors around the world have the same requirements that a conventional investor has, that means they like geographical diversification, they want sectoral diversification, they want the whole kaboodle," said Alka Banerjee vice-president of Standard & Poor's Index Services "Canada is an integral part of any global equity portfolio strategy."

Still, some investors are concerned about the concentration of the index in energy and mineral stocks, which are mostly all that's left when all the types of companies that aren't allowed are stripped out of Canada's already resource-heavy market.

"That's fairly heavy concentration," said Glenn Moore, vice-president of Global Prosperata Funds Inc., a Toronto-based firm that offers a sharia-compliant mutual fund.

Global Prosperata's Iman Fund doesn't just invest in Canadian stocks, instead choosing to look around the world to become more balanced, Mr. Moore said. He said his firm would look at a Canadian only fund but "we'd have to really examine the concentration issue because there's so much out there that we couldn't invest in Canada. It really limits you."

It also guarantees a wild ride. The existing Dow Jones Islamic Market Canada Index is down almost 44 per cent in the year leading up to April 30, thanks in large part to its heavy weighting in energy stocks.

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The sharia investing offerings in Canada are tiny at the moment, with only a handful of funds such as the Iman fund that follow Islamic law. So far, the Iman fund and its main competitor each have less than $2-million in assets.

S&P is hoping that more will spring up, because the index company makes money by licensing indexes such as the S&P 60 Shariah to fund companies that want to use it as a model or a benchmark. So far, none has done so, but there have been inquiries, said Ms. Banerjee.

Mr. Moore estimates that, given the size of the U.S. market, Canada's Muslim community of approximately one million people could support funds with as much as $100-million in assets.

The reason the sector has lagged in Canada is that there haven't been enough funds to meet demand, he said.

"I think there's a lot of potential out there," he said.

"The availability is becoming more and more apparent and the voice from the community is becoming a little bit louder and the demand for these kinds of products is becoming louder."

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The biggest community of users is likely outside Canada, with most of the sharia-compliant investing world centred in the Middle East.

Many investors in the Middle East have yet to move into Canadian equities, brokers who have tried to sell Canadian stocks to buyers in the region say.

TheS&P/TSX 60 Shariahindex's top holdings are:

EnCana Corp. (12%);

Research In Motion Ltd. (12%);

Potash Corp. (9%);

Barrick Gold Corp. (9%);

Suncor Energy Inc. (8%);

Goldcorp. Inc. (7%);

Petro-Canada (5%);

Talisman Energy Inc. (4%);

Canadian Oil Sands Trust (3%);

Cameco Corp. (3%).

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