Global Shariah Equity

Client-specific concerns

Shariah compliance

The investor was flexible on how Shariah compliance could be implemented and was open to, for example: Shariah benchmark universe definitions; a revenue-based exclusion threshold; use of an advisory board; or a combination of these approaches. Prior experience managing Shariah mandates was considered an advantage.

Track record assessments

Many managers were able to provide a long-running ‘conventional’ track record and a shorter Shariah-compliant track record. Our assessment included; reviewing managers' approach to ensuring Shariah compliance (e.g. encoding a Shariah benchmark as the eligible universe, using a Shariah advisory board); the extent to which longer conventional strategies are representative of potential performance for Shariah investors; the constraint imposed on managers' investment process, such as resultant portfolio exclusions required for Shariah compliance; and the drivers of performance and portfolio holdings differences between the Shariah and conventional track records over common time periods.

The calendar year performance differential between the track records was limited by the shorter Shariah compliant track record lengths but we observed clear variability between the extent of returns year on year, which were +/-8 percentage points different in some periods. Given Shariah compliance tends to change the eligible universe and introduce some sector skews compared to an unconstrained universe, we would expect this to introduce headwinds at some points in the market cycle, and tailwinds at others.

Outcome

• Focus on 'global' asset managers: bfinance was able to leverage its knowledge of the active global equity manager universe to include managers with flagship 'conventional' (non-Shariah) strategies but the experience or clear capability to offer Shariah-compliant versions of their investment approach in segregated structure. This offered the client access to a broader range of international asset managers, rather than biasing towards locally based managers.
• Expediting timescales: The investor was mindful of equity market movements and viewed the current time as particularly appealing to invest. As a result, bfinance accelerated its search review in order to meet the investor's desired internal deadlines and enable a prompt assessment timeframe, so the investor could move towards deployment in a timely fashion.
• Balancing alpha generation and defensiveness: A risk-aware investor mindset and prudent approach to downside risk from the insurer led to the investment preference for strategies with a ‘quality’ consideration to companies they select. This was intended to act as a natural capital preservation tool in times of economic or market stress. The search considered different expressions of ‘quality’, including ‘quality growth’, ‘quality value’, ‘blend’, and ‘low volatility’ approaches. Return generation was also important over the cycle, so we assessed both upside and downside manager performance, through different market environments.