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Home > Asset Management Best Practice > Managing Shariah-Compliant Portfolios: The Challenges, the Process, and the Opportunities

Asset Management Best Practice

Managing Shariah-Compliant Portfolios: The Challenges, the Process, and the Opportunities

by John Sandwick

Executive Summary

  • There is US$2.5 trillion or more in managed Muslim wealth worldwide, almost none managed according to the simple rules of shariah. Like everyone else, Muslim savers want professional investment management, but with shariah-compliant investments.

  • About US$30 billion total assets are managed in fewer than 100 shariah-compliant funds that meet professional standards and are primarily composed of money market and equity funds. This is a less than optimal universe but sufficient for Islamic wealth and asset management.

  • The overall goal is to produce a business model that follows the prudent-man rules of full liquidity from a transparent asset base through defined risk and reward profiles across income, balanced, and growth strategies that are feasible using the existing universe of Islamic funds.

  • Modern portfolio theory can be applied to Islamic investing to achieve the same levels of sophistication and returns as conventional allocations. There is no need to introduce exotic or illiquid securities to achieve the standard investment objectives shariah-compliant investors.

  • Banks and asset managers everywhere can offer shariah-compliant investment management now. The total potential size of the Islamic wealth management market is at least US$1 trillion, and growing.

Introduction

It is still puzzling to understand why something as straightforward as Islamic wealth and asset management has eluded the professional classes to date. At the time of writing, only one single major global money center bank, and paltry few independent asset managers, had constructed credible service offerings for Muslim clients who wish to enjoy shariah-compliant investing along with professional investment management.1

This seems counterintuitive in a time when all banks are seeking to bolster their off-balance-sheet revenue with business lines that involve small capital inputs and manageable regulatory environments. It also does not match what is obviously an important new area of business development in the asset management industry, matching new supply with an apparently large demand.

Shariah-Compliant Toothpaste

Recently reported in the New York Times2 was an illustration of the lengths to which marketing specialists will go to reach the market of Muslims conscious of their spiritual identity. Colgate Palmolive and Unilever, for example, have launched new lines of shampoo and toothpaste that have been approved as halal and acceptable to Muslims (in these cases shampoo without pork fat derivatives and toothpaste without alcohol). Nokia has lines of mobile phones that specifically cater to the interests of Muslims. There are many other examples. One marketing specialist has remarked that ignoring this vast potential market is akin to ignoring the potential of China in the early 1990s. Another said that focusing on the individual needs of Muslims is the next big thing in marketing.

Anyone who spends any time in a predominantly Muslim country can witness the proximity of spirituality to daily life among the majority of adherents of the faith. Whether in Almaty or Riyadh, Kuala Lumpur or Karachi, there are hundreds of millions of Muslims who profess a faith that fills all aspects of their personal lives. And they have a very high savings rate.

Not wanting to sound crass, it is therefore very puzzling that global consumer product companies try to achieve market penetration with halal toothpaste, but that global—and even most regional—banks don’t offer shariah-compliant investing. There is a gap, a very big divide, between the consumer products now offered to Muslims and what they evidently desire for allocation of their long-term savings. Islam matters to hundreds of millions of people, and it is not a trivial matter to them, whether in consuming food or in making investment decisions.

History of Islamic Wealth and Asset Management

Prior to the financial crisis there were some dedicated efforts in this area. Wealth management units at Citi Private Banking and Merrill Lynch were relatively advanced in creating global platforms for Islamic asset management. Citi made the greatest advances, with real-world allocations that were being tested against the bank’s own conventional portfolios. Merrill Lynch, while further behind, was compiling a dataset of the world’s known shariah-compliant funds for an open architecture offering that would involve best-of-class portfolio allocations.

Both these units, unfortunately, were disbanded. Citibank’s well-known travails caused the bank to end efforts toward a global platform for Islamic asset management, while Merrill Lynch teams were in place right up to and through the early days of its takeover by Bank of America, but were then disbanded. Since then neither has progressed in this sector, perhaps due to other priorities rebuilding bank balance sheets.

A third bank, HSBC Amanah Private Banking, made more progress than the others—mainly from Dubai. There a highly professional effort led to the establishment of fully shariah-compliant allocations for private clients, using some innovative techniques to overcome certain allocation hurdles (in particular for fixed-income allocations). However, before the crisis this service featured high minimum balances for new clients, usually above US$3 million. Further, the unit saw the typical staff changes that were common everywhere during the financial crisis, impeding the unit’s progress toward more encompassing client generation. Today, under new staff, the unit is again offering investment across the full spectrum of asset classes. However, the growth of assets under management has not been stellar, and the unit does not seem to be advertising its existence widely to the broader market.

There are some other notable efforts to consider. The Family Office in Bahrain has for several years offered a fund product that encompasses all conventional asset classes (cash, fixed-income, equities, and alternative investments), but distribution and widespread allocations of this one-for-all product have not been excessively large.3 The new management team at Faisal Private Bank in Geneva, Switzerland, is said to soon be offering Islamic wealth management for individual customers, although the date of this service’s launch is still unknown and the bank itself is recovering from zealous but failed investments in speculative real estate. It is said that the only truly dedicated Islamic wealth management unit in the world, with both size and experience, belongs to the family office of a well-known royal family in the lower Gulf region. However, its existence is not generally public knowledge, and even less is known about its allocations and track record.

When one considers that the worldwide managed wealth owned by Muslims is at least $2.5 trillion, and perhaps well above $3 trillion,4 one has to ask why so little is available in the Islamic wealth and asset management space.

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Further reading

Books:

  • Sandwick, John A. “Islamic wealth management.” In H. Dar and U. Moghul (eds). The Chancellor Guide to the Legal and Shari'a Aspects of Islamic Finance. London: Chancellor Publications, 2009a; pp. 105–126.
  • Sandwick, John A. “Islamic asset management: A review of the industry.” In H. Dar and T. Azami (eds). 2010 Global Islamic Finance Report. London: BMB Islamic UK, 2010a; pp. 71–78.

Articles:

  • Sandwick, John A. “If there’s a will, there’s a way.” Islamic Banking and Finance 9 (May 2006a): 10–12.
  • Sandwick, John A. “Islamic wealth management.” Business Islamica (November 2006b): 24–28.
  • Sandwick, John A. “Divergence of views, divergence of allocation.” Islamic Banking and Finance 17 (June 2008): 19–21.
  • Sandwick, John A. “Islamic asset management: Myth or reality?” NewHorizon 172 (July–September 2009b): 28–30.
  • Sandwick, John A. “Islamic asset management—Asia vs Arabia.” Islamic Finance News 7:11 (March 17, 2010b): 12–13.
  • Sandwick, John A. “Where did all the money go? Private equity, investment banking and asset management in Arabia.” Business Islamica (June 2010c). Online at: www.islamica-me.com/article.asp?cntnt=463

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