Investing Islamically

As previously mentioned, I and a very few others have taken a very serious look at what constitutes Islamic asset management and Islamic wealth management. We have developed quantitative models that start with a deep scan of the available universe of Islamic products, and then combines them in a format that achieves the desired results required by MPT.

Many investors are seeking the golden egg, the one style of investing that is foolproof during all economic conditions. Unfortunately no one has come up with that bird. There still remains more than abundant risk in the world, and avoiding risk occupies as much time of a professional asset manager as actually seeking profits.

However, I can state unequivocally here that Islamic asset management is no different than conventional asset management when it comes to constructing a portfolio that will have a high probability of achieving an investor’s goals. To do that an investor seeking professional investments with competent fatwa does not need to sacrifice anything: not performance, not transparency, and not pricing.

The process starts by choosing an asset manager who understands sharia. For many bankers the entire concept of socially conscious investing is perfectly acceptable, but the idea of sharia-compliant investing is strange and exotic. It isn’t. Sharia is not rocket science, understood only by a rare qualified few. It is the guiding principles of a faith with over a billion adherents. Surely such a popular and common religion doesn’t exist based on mysteries and secrets. The moral precepts of sharia are abundantly clear to anyone who wishes to pick up a copy of the Holy Koran. Bankers unfamiliar with Islam will find nothing alien in sharia, in particular when it comes to sharia compliance of investment products.

The community of generally accepted sharia scholars makes it easier for the novice investment manager to achieve a balanced, professional portfolio allocation. By choosing assets that have been granted a fatwa by that group of sharia specialists who closely follow financial markets, any investor or asset manager can start the process to assemble a portfolio allocation that meets both sharia and MPT standards.

All that said, we are living in dangerous times. One major investment company chairman declared in early 2009 that nearly 40% of worldwide wealth had been destroyed by the global credit crisis. Clearly we have to be careful.

Being careful means diversifying your assets. It means not overloading on any single asset class, but instead insuring that your portfolio is carefully constructed with certain amounts of cash, fixed-income, stocks and alternative investments. A typical allocation today for a non-Muslim investor might be 5% in money market investments (cash), 45% in a diversified mix of bond funds (fixed income), 35% in a globally diversified allocation of stock funds, and 15% in a mix of real estate funds, hedge funds, commodity funds and other alternative investments (but no structured products, please!). This provides no guarantee of outstanding performance in the short run, but it does guarantee that your savings are protected from the worst of the swings we’ve seen in the world today.

A Muslim investor who wants to achieve the same objectives can do so, as long as he seeks the aid of a dedicated professional who understands both sharia compliance and MPT. Proper security selection can now be made at every level of the allocation spectrum, from cash to fixed income to stocks to alternative investments, all with respectable fatwa from notable sharia scholars.

Unfortunately, there are almost no professional asset managers anywhere that combine dedicated, disciplined investing with an understanding of sharia compliance. I personally will be one of the persons who changes this dismal situation, hopefully to be joined by an army of other professional asset managers who like me witness the enormous demand for sharia-compliant asset management.