An Overview of the Islamic Fund Management Process

As the Islamic investing industry is flourishing, the focus on re-assessing asset allocation strategies, development and strategic thinking would be critical to achieving the right outcomes. According to Thomson Reuters, global Islamic funds under management are expected to reach US$77 billion by 2019. Mohamed Hage highlights the importance of selecting the right Islamic fund manager and describes a robust selection process in determining which Islamic funds to invest in.

The objective is relatively straightforward: identify Islamic fund strategies that deliver the best risk-adjusted returns in a sustainable and Shariah compliant manner. Importantly, fund selection is based on the unique contribution a strategy offers to the risk and return properties of the total portfolio.

The investment process begins by applying the Islamic sector universe through a number of qualitative and quantitative screens. This step helps to sort through large sets of data from the investible universe and to identify attributes that may indicate a potential to deliver strong risk adjusted returns.

From a quantitative aspect this includes attributes such as tracking error, win/loss ratio, historical alpha, information ratio and the Sharpe ratio. Qualitative attributes include concentration levels, ownership structures, style biases, liquidity and funds under management.

In filtering the Islamic fund management universe, one must be mindful of the dangers of arbitrarily dismissing large segments of the market. By ensuring that the process remains flexible and responsive, researchers are able to identify favourable attributes that may be concealed from traditional screening measures.

More so, the screening process should be supplemented by constant interaction with the market to source ideas through direct referrals and contact with managers.

Once the universe has been narrowed, the review process begins by undertaking extensive desktop research to identify potential competitive advantages. This process utilises historical performance attribution, which enables investors to gauge the strength, consistency and breadth of stock selection. Analysts should also assess a number of qualitative aspects such as the investment team, available resources, process, and strategy and risk management.

For those strategies that pass the initial research step, the aim is to have collected enough information and discussion on points to drive the more thorough and intensive research and due diligence step. During the initial research step, manager blending with other highly rated Islamic investment strategies is also undertaken. This helps to assess the fund’s potential to deliver value-added diversification benefits and to identify strategies that interact together to deliver the most efficient risk and return combination. The aim is to avoid introducing inherent style biases into a portfolio or where return is a function of too few performance drivers, or non-recurring ones.

Strategies that pass the initial research process are then subjected to extensive due diligence to assess their suitability for active use and to be Shariah compliant. The focus is on confirming those attributes and competitive advantages identified during the desktop research process. Importantly, this step requires the consultant and analyst to make a qualitative assessment on the sustainability of these attributes while confirming the quantitative blending analysis.

These forward-looking views are based on extensive onsite-reviews, direct contact with the investment team, assessment of financial models and a review of back office and compliance processes. The process is dynamic, with previously rated strategies continuously reassessed on their relative worth or attractiveness. As previously mentioned, quantitative measures are employed to monitor portfolios after investments have been made.

The output of the process is a list of ‘preferred’ or ‘buy-list’ strategies which together represent the universe in which consultants build portfolios from. Each asset class will typically have between three to four managers that demonstrate the capacity to deliver strong risk-adjusted returns and a cluster of favourable qualitative and quantitative attributes. Strategies rated ‘strong’ are typically back-up managers should the preferred group be at capacity, downgraded or unavailable for one reason or another.

The research agenda should be managed proactively and seeks to continuously challenge existing views on preferred managers. The process needs to be forward-looking and one that fully utilizes all available qualitative and quantitative inputs.


Mohamed Hage is a senior analyst at CPG Research & Advisory.

This article first appeared in Islamic Finance News (23 September 2015, Volume 12, Issue 38, Page 27). For more information, please visit the website at