Asset Allocation Strategy for Islamic Fund Managers

Assalamu alaikum. I’m currently a finance student (not the Islamic one) and I have a question regarding Islamic finance.

In standard finance, there is what they call Efficient Frontier. This is the set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return (via Investopedia). In order to achieve super-efficient portfolio, you must allocate your funds 21% in stocks and 79% in bonds. 60/40 Portfolio is the most common split between stocks and bonds that fund managers use and recommend.

As you we all know, bonds are haram because it involves the element of riba. My question is how do Islamic fund managers construct a portfolio if they couldn’t follow this concept of efficient frontier? What asset allocation strategy do they normally use?

They say that sukuk is an alternative for bonds. Do sukuks have any correlation with stocks?

Walikum As salam Sham_mac,

It appears to me that this is more of a general investment question rather than Islamic finance as you have rightly mentioned that conventional bond = Sukuk bonds (the Islamic version of Bonds).

So theoretically sukuks should behave in the same way as the conventional bonds. Please note that there are numbers of factors for correlation e.g. is the Sukuk bond relates to Developed or Emerging market, Credit rating, duration etc. you may find this article interesting https://www.vanguardinvestor.co.uk/articles/latest-thoughts/investing-success/ugly-correlation-matrix-better-investor?cmpgn=ET0820UKCENLC0102

Its a tough one. Sukuk for retail are sadly few and far between.

So the alternative is looking for other fixed income instruments. If you go on our https://www.islamicfinanceguru.com/halal-investments/ page you’ll see a bunch that could be replacements. E.g. Yielders, Qardus, Godwin, Gresham House, Smartcrowd, Igloo etc.

These products will look to generate fixed-income returns from either property or halal loans to small businesses.

Oasis Crescent Income Fund is the only sukuk I’m aware of a retail investor can get. Have bought it myself on Hargreaves Lansdown. Also possible to buy at YouInvest/AJBell if one person puts £85k in (which means AJBell add it to their list of stocks).

Efficient frontier doesn’t sound right at that ratio of stocks to bonds. I’m guessing they have used historical data going back the last past 30 years or so to come up with that. Which therefore only covers one real type of economic situation.

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OCF of 0.75% for a running yield of 2.26%!