Hang Seng Islamic China Index Fund

2. Financial screening: Companies which total debt, accounts receivable or cash level is higher than 33% of their trailing 12-month average market capitalizations are removed from the selection pool.

 

After the two screenings, the 30 largest compliant companies become constituents of the Index, which in turn forms the investment list of the Index Fund. The Fund adopts the full replication strategy by acquiring stocks of index members according to their respective weightings in the Index.

 

Portfolio Analysis
In terms of industry distribution, the biggest difference between the Index Fund and other conventional China/HK equity fund is its zero weighting in financials and real estate in compliance with Shariah laws. Its top three sectors are telecom (28%), energy (18%) and consumer cyclical (14%). The weighting of telecom is higher than the 15% average weighting in conventional China equity funds, of which China Mobile (0941) and China Unicom (0762) together account for over 23%. The traditionally defensive utilities made up 9% of the Fund, with HK & China Gas (0003) and HK Electric (0006) both in the Fund's 10 holdings

 

According to information from Dow Jones, in early November the index is composed of red chips (46.8%), Hong Kong stocks (40.5%) and H-shares (12.7%). In comparison, the Hang Seng Index composition is Hong Kong stocks (52.3%), H-shares (25.5%) and red chips (22.2%) on September end. Red chips carry a much higher weighting in the Fund. Since the index has only 30 members, the Fund is a fairly concentrated portfolio, which top 10 holdings accounted for almost 70% of fund assets. The weightings of China Mobile and CNOOC (0883) are 16.7% and 13.2% respectively. Actively managed funds usually have a 10% cap on individual holdings, in comparison the impact of heavyweights on this Index Fund is considerably higher.

 

In terms of fundamentals, according to information from Dow Jones, the trailing P/E ratio of the DJICHK is 27.2 times, slightly higher than the 24.3 times of the HSI but lower than the 36.2 times of the HSCEI. The Index's 1-year historical return and standard deviation also fell between those of the HSI and HSCEI, illustrating its risk and return profile could be somewhere between the two indices.

 

In following Islamic investment principles, the Fund may be required to donate a small portion, roughly 5%, of its dividend income to Shariah approved charities. Although the absolute impact is not substantial, but since the Index is not bounded by the same mechanism, the discrepancy is expected to increase the Fund's tracking error. Regarding the fee, the Fund charges an annual management fee of 1%, inline with other index funds offered by Hang Seng.