Shariah compliant asset management in North America


(ISLAMIC FINANCE NEWS: October 7, 2020)

As Muslims have become more  affluent, the need for more Islamic products and  services  became apparent. First-generation Muslims in North America were usually not that concerned about retirement accounts or company 401(k) plans. Many of them sacrificed dearly to give their families a better life. They took big risks and worked hard so that their children would have better opportunities. They paved the way for future generations to enjoy the benefits of their hard work.

Second- and third-generation Muslims were fortunate to get good education and the ability to enter  the  workforce as physicians, engineers and business owners. They found themselves in need of ways to better prepare for retirement and be more tax-efficient, without compromising their personal values. Many felt they were underserved because it was so hard to find Shariah compliant solutions.

Against this backdrop, modern Islamic asset management has taken off in the form of traditional financial advice, wealth management and robo-advisors. Wealth management firms like ShariaPortfolio — founded in 2003 — addressed the demand head-on by taking the risk of putting the word ‘Shariah’ right in their company name. The company is now expanding internationally as demand continues to be strong. Newer companies like Aghaz Invest and Wahed Invest offer a modern twist to investing in the form of a robo- advisor. This allows investors a quick and easy way to get started and manage their portfolios online with customizable automation.

One of the challenging aspects of Islamic asset management is with asset allocation. Traditionally, most conventional portfolio managers will mix asset classes like equity (stocks), fixed income (bonds), commodities (ie precious metals) and real estate. In the past, it was very challenging to apply this methodology given the lack of diversity in Shariah compliant products. Today, there are many Halal equity funds. We now also have a Shariah compliant fixed income ETF which allows anyone to easily add a fixed income component to their asset allocation. There are many private real estate funds in the market. There is also an upcoming Shariah compliant global REIT. With all these new products, Islamic asset management can finally come to the forefront and address the needs of a large variety of investors based on their diverse objectives.

One interesting point to note about Shariah compliant investing is that  it is not only a faith-based narrative. Islamic investments not only rule out  ‘sin stocks’ but also avoid companies with substantial debt. This is a very important point of consideration in volatile environments. One of the  reasons that Shariah compliant investing started to take off in 2008 is that these strategies held up very well during the financial turmoil of the housing crisis. It turns out that Shariah compliant investing may be the best way to hedge against leverage.

Firms that do not offer Shariah compliant asset management are beginning to  find themselves at a disadvantage against the many companies around the world that already have these solutions.  The global Muslim community represents 24% of the world’s population. As the Muslim community continues to grow economically, the demand for Islamic financial solutions will keep increasing. One question for conventional financial firms is how to offer Islamic asset management services to their clients.

The easiest way is to utilize the existing funds that are available in the market. Some companies already have Shariah compliant equity, fixed income (Sukuk) and real estate offerings that any advisor can utilize. Advisors can choose to allocate between these asset  classes based on current market conditions and economic forecasts. For example, during bull markets, one could allocate 75% to equity, 10% to fixed income and 15% to real estate. During more challenging markets, allocations could change to 25% equity, 50% fixed income and 25% real estate. Advisors have the Shariah compliant tools to meet the needs of clients with various risk tolerance and financial goals.

Another option is to engage in an institutional relationship with an Islamic asset manager that can assist with the asset management while clients remain with their existing firms. This allows advisors to maintain the client relationship while also being able to  offer additional service  offerings  that can lead to significant growth. Both of these options provide a relatively quick and easy way to begin offering Shariah compliant solutions to  clients  around the world.

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