Shariah’s Black Box

As discussed at the beginning of this memorandum, the Dow Jones Islamic Index (“DJII”) provides a standardized universe of Shariah-compliant publicly-traded companies. Private investors and mutual funds who wish to invest in only Shariah-compliant companies can select the DJII or any of the other Islamic indexes established by Dow Jones for U.S., non-U.S., and specialty markets. One such mutual fund which has licensed the right to utilize the Dow Jones Islamic U.S. Index (“DJII-US”) and the Dow Jones name is the Dow Jones Islamic Fund (“the Fund”). Before proceeding to an examination of the Fund, it would be worthwhile to pause briefly to understand what Dow Jones & Company (and their lawyers) deem reasonable due diligence and disclosure for one of the world’s premier financial research companies in the context of an index marketed to the world of Shariah-compliant Muslims as authoritative.

Dow Jones & Company (“Dow Jones”), which was recently acquired by News Corporation[351], was the first company to offer Shariah-compliant indexes. Standard & Poor’s has created its own suite of such indexes. Dow Jones represents itself as “a leading provider of global business news and information services.”[352] It markets “Dow Jones Indexes [as] a leading full-service index provider that develops, maintains and licenses indexes for use as benchmarks and as the basis of investment products.”[353] DJII describes its “Key Attributes” as follows:

Shariah Law Compliance: The Dow Jones Islamic Market Indexes are stringently monitored to ensure their continued compliance with Shariah Law. The independent Shariah Supervisory Board supports index integrity by conducting periodic reviews.

Liquidity: The Dow Jones Islamic Market Indexes include only actively traded stocks that are easily accessible to investors. The selection universe for the family is the Dow Jones World Index, which covers approximately 95% of underlying market capitalization and expressly excludes the very smallest and most thinly traded stocks.

Comprehensive Coverage: The DJIM Index provides broad coverage across countries, regions, market cap ranges and Shariah-compliant industries. Subindexes allow the individual tracking of these various market segments.

Systematic Methodology: The Dow Jones Islamic Market Indexes are created and maintained according to a systematic and published methodology. The selection universe is constructed based on a quantitative set of rules, and stocks must pass consistently-applied industry and financial-ratio screens to be included in the index.[354]

According to the DJII Internet site, the sum and substance of these “screens” are:

The DJIM Index includes all securities in the Dow Jones World Index that pass the following screens for Islamic compliance:

Industry Type: Excluded are companies that represent the following lines of business: alcohol, tobacco, pork-related products, financial services, defense/weapons and entertainment.

Financial Ratios: Excluded are companies whose:

• Total debt divided by trailing 12-month average market capitalization is 33% or more.
• Cash plus interest-bearing securities divided by trailing 12-month average market capitalization is 33% or more.
• Accounts receivables divided by 12-month average market capitalization is 33% or more.[355]