Modern portfolio theory with sharia: a comparative analysis
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ORIGINAL ARTICLE
Modern portfolio theory with sharia: a comparative analysis John A. Sandwick1 · Pablo Collazzo2 Revised: 19 August 2020 / Accepted: 7 September 2020 © The Author(s) 2020
Abstract Despite Muslims comprising a quarter of the world’s population, almost none of the $100 trillion in professionally managed global assets are sharia compliant. Constraints such as ESG and SRI are common among pension funds, endowments and sovereign wealth funds. Typical constraints include alcohol, tobacco, weapons and environmentally damaging activities. Such securities are excluded from morally constrained portfolios. Sharia applies the same, but adds one more key constraint: securities with debt-related features. Otherwise, sharia is identical to most ethical constraints. This study shows the results of constructing optimized, multi-asset, globally allocated portfolios while respecting sharia. The construction of these portfolios follows contemporary regulatory standards and professional best practices that evolved from investment theory. Results indicate multi-asset sharia portfolios have at least equal return and risk characteristics to conventional peers, or are perhaps in some ways superior. Many Muslims profess to care about sharia, including with their savings. This study provides insight for professional asset managers in applying sharia with modern portfolio theory, which could substantially enhance wealth and asset managers seeking business in this sector. Keywords Islamic asset management · Islamic wealth management · Portfolio investing with sharia · Sharia-compliant portfolio investing
Introduction and relevance Muslims comprise about one quarter of the world’s population, but as yet cannot thoroughly enjoy the benefits of modern portfolio theory (MPT). There are arguably no asset managers offering Islamic asset management on a systematic, broad basis in the world today. Whether conventional or Islamic, the same portfolio management principles and processes would apply, namely find securities in each asset category (money market, fixed income, equities and alternatives), filter and sort them into a Buy List, and subject the Buy List to optimization within and among asset classes. These asset management functions * Pablo Collazzo pablo.collazzo@donau‑uni.ac.at John A. Sandwick [email protected] 1
Safa Investment Services SA, 17, chemin des Courtis, 1252 Meinier, Switzerland
Danube University, Dr. Karl Dorrek Straße 30, 3500 Krems, Austria
2
have been the subject of numerous academic studies for decades, including multiple moral constraints, but none in the context of sharia. Like people of all other faiths, Muslims save for their future. Constrained investing is common, so there should be no barriers to constructing Islamic asset management. Extending MPT to sharia-constrained investing could be useful. Market opportunities may abound for asset managers who produce services for clients who demand shariacompliant wealth and asset management.
Overview of the literature The foundations of asset ma
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