CASE STUDY

Shariah-compliant Public Equity

Middle Eastern Financial Institution | 2021-2022

Engagement at a glance

Client Country/Type: Middle Eastern Financial Institution
Year: 2021-2022
Asset Class: Shariah-compliant Public Equity
Mandate Size: USD 100 million (across multiple funds)
Mandate Geography: Any (global, regional, country-specific)
Mandate Type: Pooled funds
Service Provided: Manager selection
Investment Objectives: +2% outperformance of benchmark gross of fees over a market cycle

Shariah Compliant Public Equity

 

Client-specific concerns

The client, a large Middle Eastern financial institution, was seeking to build a Shariah-compliant global multi-asset class fund with the listed equity sleeve managed by a diversified roster of external fund managers. The search involved looking at all types of actively managed, Shariah-compliant equity funds, irrespective of region or investment style—including global emerging markets, country-specific, sector-specific (e.g. listed REITs) and thematic funds. The client’s slight bias towards income-oriented strategies and/or distributive share classes influenced the selection of potential solutions. The client also had strong preferences regarding minimum fund size (at least USD 100 million in assets under management) to mitigate client concentration risk and minimum track record (at least three years live) that managers had to satisfy; prospective managers also had to offer (or be prepared to launch) a dedicated SAR- or USD-denominated share class.

Outcome

 

  • Laying the groundwork for better choice: before initiating the formal search, bfinance conducted a bespoke market review exercise on the client’s behalf, liaising directly with prospective managers in the Shariah funds universe to better understand how feasible the client’s requirements would be, specifically as they related to concentration risk and scalability of the strategy.

  • Adapting search parameters for optimal results: bfinance subsequently advised the client on amending some of its search parameters regarding fund suitability as a result of this additional insight: the required level of minimum fund assets under management, for example, was reduced from USD 200 million to USD 100 million to ensure a sufficiently deep manager universe for the search—while retaining an institutional-scale threshold and investment scalability.

  • Identifying alpha generation: bfinance conducted in-depth analysis of managers’ track records, style profiles, exposures and fundamentals of fund holdings against the managers’ own respective benchmarks. A range of investment styles and strategies across different geographic remits made this more challenging than reviewing a singular fund universe.

  • Taking a broad view on Shariah compliance: different managers take different approaches to Shariah compliance and implementation, so bfinance scrutinised each fund against the manager’s own stated process, rather than applying an ex ante preference for a single type of approach.

 

Our specialist says

  • Going into this search, the investor was clearly focused on identifying existing Shariah-compliant pooled funds that could offer institutional scale and proven track records. In setting out the terms for this new project, bfinance’s experience and manager network proved essential to scoping out the universe of possible solutions—and helping the client’s team set feasible fund parameters and manager requirements ahead of the search.

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