June 3, 2007
Islamic investors in the region get their first chance to buy Deutsche’s Croci certificates.
Deutsche Bank is bringing its Islamic index certificates to Asian investors for the first time. The notes use the bank’s proprietary equity valuation model, known as Croci (short for cash return on capital invested), to pick stocks that meet Islamic investment guidelines.
Investors in the Middle East and Europe already have the opportunity to buy the bank’s four Islamic Croci certificates and Deutsche says that investors in Asia, particularly Malaysia, are now keen to get a piece of the action – during the past five years the notes have all averaged year-on-year returns around 10% better than their benchmarks.
Three of the certificates are linked to specific geographic regions – Europe, Japan and the US – and the fourth is a global certificate, which takes exposure to 30 equally weighted stocks from the US, 20 from Europe and 10 from Japan.
The relevant Dow Jones Islamic index provides the base for the universe of stocks. Each month the indices are re-balanced, with Deutsche applying its Croci analysis to pick the cheapest stocks from the Dow Jones index.
In effect, Croci is a way of comparing companies on a like-for-like basis regardless of the accounting techniques they use. Deutsche’s team of analysts burrow through a company’s accounts and revamp them so that companies from different parts of the world and different sectors are directly comparable.
From this analysis Deutsche ranks each stock in the index by an economic price-earnings ratio that is derived through the Croci method of analysis. This lets investors see at a glance which stocks are the cheapest. According to Deutsche, returns from Croci indices more or less match a rising market and outperform a falling one.
Comparing the historic returns of the Croci US index against the S&P500 bears this out. From its inception in 1996, the Croci index neatly tracked the broad bull run on the S&P500, lost ground during the irrational returns of the dot.com era and streaked ahead in the bubble’s bearish aftermath. As confidence has returned during the past two years, the Croci methodology has again been generating similar returns to the S&P500.
To be sure, the Croci method has certainly proven its worth in the Islamic sector. Annualised five-year returns for the four indices are impressive: up 11.78% against the Dow Jones Islamic Europe index, 9.8% against the Dow Jones Islamic US index, 11.5% against the Dow Jones Islamic Japan index and 11.63% against the Dow Jones Islamic Global index.
Investors in the certificates pay an initial fee of up to 3% and 0.375% a quarter in management fees. The US and global certificates are denominated in dollars, the Europe certificates in euros and the Japan certificates in yen.
As well as the certificates, investors can take exposure to the index through swaps or options, which Deutsche can use to create structured products.
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