Update on Operating Expenses for the BlackRock ACWI Islamic Equity Index Segregated Fund (“Shariah Fund”)

We want to inform you of an update to the disclosure of operating expenses for the BlackRock ACWI Islamic Equity Index Segregated Fund (“Shariah Fund”) offered on the Sun Life GRS core investment platform. We recently learned that the operating expenses we disclosed for the Shariah fund were incomplete. At Sun Life, we’re committed to providing you with complete and accurate information about investments. As of April 1, 2023, we updated the operating expense disclosures for the Shariah fund to reflect all costs.

What happened:

As you may be aware, we added the Shariah Fund to the Core investment platform in April 2022. Until recently (April 1, 2023), the operating expenses in our fee disclosures for the Shariah fund included only the top-level (direct) pooled fund operating expenses of 29 basis points (bps). They didn’t reflect the underlying Exchange Traded Funds (ETFs) (indirect) operating expenses of approximately 31 bps.

As a result, there is a discrepancy in the fees that we disclosed, and the fees charged to plan members.

Direct operating expenses are the costs incurred to manage the pooled fund like custody, accounting, audit etc. Indirect expenses are costs incurred by underlying holdings in the pooled fund, like ETFs.

The estimate of operating expenses that BlackRock originally provided didn’t include the expenses of the two underlying ETFs held within the pooled fund. The two ETFs and their Total Expense Ratios (TERs) are as follows:

  • iShares MSCI World Islamic ETF – 0.30% TER
  • iShares MSCI EM Islamic ETF – 0.35% TER

The pooled fund invests in these two ETFs to create an overall fund exposure that closely aligns with the MSCI All-Country World Islamic Index. The average TER between the two ETFs is estimated at 31 bp.

The segregated fund operating expenses are correctly represented at 5 bps.

It is important to note that the correct fees and operating expenses have been deducted from the pooled fund.

How we’re fixing it:

We are updating all of our materials, including our Letters Of Commitment and pricing for the Shariah Fund, to fully reflect both the direct and indirect operating expenses.

Client Relationship Executives will be contacting impacted plan sponsors in early May 2023 to inform them. In addition, we will be contacting all impacted plan members later in May 2023 to inform them.

We recognize that plan members may have relied upon incomplete expense disclosures when choosing to invest in the Shariah Fund. As a result, we have decided to compensate impacted plan members.

  • Plan members who invested in the Shariah fund between April 2022 and the date the expenses were fully disclosed (April 1, 2023) will receive compensation in May 2023.
  • This compensation will be a deposit for 32 bp of their invested money in the Shariah Fund. The deposit reflects the difference between the disclosed operating expenses (29 bp) and the actual operating expenses (61 bp).
  • There won’t be a minimum amount for current plan members; all affected members will be compensated.
  • We’ll compensate former plan members where the amount has been calculated to be $25 or more.

About the Shariah Fund

The Shariah Fund is a new fund that was created jointly between Sun Life and BlackRock in April 2022. It was initially created using two underlying ETFs [instead of direct securities (“full replication”)] in order to ensure close tracking to the index. As the fund grows in size, it will eventually move to a full replication approach.

The Shariah Fund closely tracks the MSCI ACWI Islamic Index. The index applies screens to exclude securities based on business activities and financial ratios derived from total assets. The Index doesn’t allow investments in:

  • Companies that are directly active in or derive more than 5% of their revenues from alcohol, tobacco, pork-related products, conventional financial services, defense/weapons, gambling or adult entertainment.
  • Companies which derive significant income from interest or companies with excessive leverage.

As at March 31, 2023, there are 38 plan sponsors offering the Shariah Fund and total segregated fund assets are $12.6 million.

More about Shariah Fund expenses

BlackRock will periodically update their estimate for the Shariah Fund operating expenses. As of December 31, 2022, the estimated pooled fund operating expenses are 59 bps. This estimate includes both:

  • the direct expenses to the pooled fund such as custody and accounting (estimated at 28 bps), and
  • the indirect expenses of the ETF operating expenses (estimated at 31 bps).

As assets grow in the Shariah fund, the direct operating expenses will gradually decline. The indirect expenses will remain at a fixed percentage (31 bps).

When the Shariah fund moves to a full replication approach, the ETF operating expenses will end. The timing of the switch is at the discretion of BlackRock and will be dependent upon how fast assets increase.

The Shariah fund will eventually move towards Shariah certification. Currently, the MSCI ACWI Islamic Index and the two underlying ETFs are Shariah-certified, but the pooled fund isn’t. Shariah certification of the pooled fund will result in an increase in operating expenses due to the costs involved in the certification process.

We continue to believe in the importance of offering the Shariah Fund in group plans to meet the needs of Muslim plan members who may otherwise not invest in their group plans. We’re confident that the ETF structure makes the most sense as the fund grows to a sufficient scale that allows for direct securities.

Questions?

Please contact your Sun Life Group Retirement Services representative