Forte, Gianfranco, and Federica Miglietta. Islamic mutual funds as faith-based funds in a socially responsible context. Working Paper, Bocconi University, Milan, 2007.

This strong study compares and contrasts the FTSE Islamic Europe index with three sustainability indexes, the FTSE4Good Europe, the Dow Jones Sustanability Europe, and the DJ Sustainability Europe ex AGTF (alcohol, gambling, tobacco, and firearms).

A sector composition analysis shows that the Islamic index has zero weighting in the Financial sector, while finance stocks account for 25-29% of the sustainability indexes. The Energy weighting of the Islamic index is roughly double that of its sustainable counterparts. Country weightings are also notably different ("the FTSE Islamic completely neglects Germany"), which the authors attribute, in part, to sector influences.

A cointegration analysis demonstrates that the FTSE4Good and FTSE Developed "are cointegrated with interest rates", but surprisingly, so is the Islamic index. The authors comment that "theFTSE Islamic, even if based on riba avoidance, is a market index, and the market, as a whole, is affected by interest rates."

But the Islamic index is not cointegrated with the sustainable and conventional indexes. "The Islamic index possesses a stochastic trend that is not comparable with any of the other two indexes. So, in econometric terms, these indices are different...we find that the application of Islamic filters create an Islamic index that has a a peculiar econometric profile that is not affected by the market as a whole, proxied by the FTSE Developed, but is, instead, cointegrated with interest rates."

With excellent introductory text, this study is a very useful one for portfolio managers trying to deal with the challenges of Islamic portfolios.