Innovative fund will be run out of Silicon Valley, leveraging access to the tech sector.

Manama: Franklin Templeton Investments, one of the largest asset managers in the world, is set to launch a new Sharia-compliant technology focused fund.

The Franklin Shariah Technology Fund is a sub-fund of the Luxembourg-domiciled Franklin Templeton Shariah Funds (FTSF) range. At present the fund is available in the UAE, and is set to launch in the near future in the UK, Switzerland and Singapore. Franklin Templeton Investments manages around $1.5 trillion in assets globally, including $3 billion in Sharia-compliant assets.

The fund’s investment objective is capital appreciation. It will invest in a wide range of Sharia-compliant technology-related equity companies and other Sharia-compliant eligible assets globally and seeks to minimise investment risk exposure through diversification.

The fund’s investment strategy will focus on sub-themes including: (1) artificial intelligence (AI), machine learning and data analytics; (2) new commerce; (3) software-as-a-service and secure cloud computing; (4) digital media transformation and the metaverse; (5) digital customer engagement; (6) fintech and digital payments; (7) internet of things (IoT) and 5G; (8) electrification and autonomy; (9) cyber security; and (10) the future of work.

It will invest in companies across the market-capitalisation spectrum. Its largest exposure will likely be within the large cap segment of the market followed by the mid-cap segment. Although the fund is primarily an equity technology fund, it may also invest in debt securities of any type of foreign or US issuer as well as in American, European or Global Depositary Receipts.

A depository receipt is a negotiable instrument issued by a bank to represent shares in a foreign publicly listed company which allows investors to trade in the global markets.

The fund’s lead portfolio manager is Jonathan Curtis, senior vice president, research analyst, who also has nearly three decades of experience in the technology sector. Based in California, Curtis will be supported by a team of analysts and in-house ESG professionals responsible for developing research and proprietary securities ratings to support the investment management process.

“This new fund brings a distinct investment strategy to the Sharia-compliant space,” said Curtis. “Our investment process leverages a robust, proprietary screening system and fundamental bottom-up research to identify Sharia-compliant technology companies that match our quality, valuation and growth potential criteria.”

“Our strategic location in Silicon Valley also gives us unique insight into the technology sector, with access to the largest and most established technology companies, emerging technology leaders and early-stage companies, and a network of industry, finance, academic and other contacts dedicated to innovation,” he said.

In terms of Sharia screening with this new fund, companies must initially pass a business activities screen and an interest income screen, which limits income from prohibited activities to 5% or less.

This will include non-Sharia compliant activities like production/distribution of music, production/distribution/screening of movies and television shows, defence and weapons manufacturers, and owning/operating casino and gaming facilities.

In addition, the financial ratio Sharia screens check that a company’s debt and cash/interest bearing securities do not exceed 33.33% of their total assets, or the average 24-month trailing market cap given many technology companies are asset-light.

Franklin Templeton has over $3 billion in assets within its existing Sharia offering which is led from its office in the Dubai International Financial Centre. It also offers dedicated Sharia investing in Singapore and Malaysia, which combined cover a range of asset classes including sukuk and global, regional and local equities.

A welcome addition

Overall market participants have welcomed the introduction of Franklin Templeton’s Sharia tech-focused portfolio and said it is a natural move.

Khalid Howladar, Head of Credit/Sukuk Advisory at R.J. Fleming & Co said the portfolio will make halal investing into technology a more frictionless process.

“Sharia sensitivity is definitely on the rise and technology is the cornerstone of any growth portfolio, so it absolutely makes sense to add this 'filter' to the investment selection,” he said. “Equity is also a much better fit for halal investing vs credit which is obviously challenging from a Sharia compliance standpoint.”

One multi-asset portfolio manager also based in Dubai, believes that scalability of a Sharia-compliant tech focused equity fund could pose a challenge.

“Very few Sharia equity funds have large AuMs [assets under management] and sector focused ones even less,” he said. “Moreover, techs have turned down recently and there is a preference for local equities that have done well.”

Nevertheless, practitioners said that a large asset manager expanding its Sharia product offering is overall positive.

“I think it’s good to have initiatives and I like that Franklin Templeton is moving away from just sukuk and instead of just replicating existing S&P 500 Sharia Index or the Dow Jones Islamic Market World Index and going towards more sophisticated products,” said one Dubai-based Islamic finance market practitioner. “All in all, I hope to see more of these kinds of initiatives.”

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