Halal Portfolios: All You Need to Know about Sarwa’s Update.

Tell us about your Halal Portfolios.

We believe that everyone should have a simple low-cost way to achieve investment goals aligned with their values. Halal Investment portfolios are portfolios made up of companies that follow Islamic laws and principles of investing. In other words, these companies don’t profit from alcohol, gambling, tobacco, pork, interest, and others. 

So, how did you choose the assets that are currently in your Halal portfolios and which ETFs are included?

In order to construct our investment portfolios, we first needed to identify the Sharia-compliant ETFs that matched the investment categories found in our non-Halal portfolios: fixed income, real estate, US equities, global developed world equity, and global emerging markets equity.

Within each category, we identified ETFs that satisfied the following criteria:

• lower fees compared to their peers
• solid performance compared to their benchmark
• enough assets under management and volume to indicate a level of liquidity that can accommodate the size of our client base
• Offered by reputable ETF providers.

 In cases where multiple candidate ETFs were identified, our Portfolio Construction Methodology (see next section below) was applied to assess which of the two  ETF candidates delivered  the best result. Based on this, the class assets we have settled on are: the Franklin Templeton Sukuk for our fixed income category, iShares MSCI USA Islamic ETF (ISDU) for our US equities category, iShares MSCI World Islamic ETF (ISDW) for our global developed world equity, and iShares MSCI Emerging Markets Islamic ETF (ISDE) for our global emerging markets equity.

Currently, no Sharia-compliant real estate offering is available. As a result, we substitute this category with a commodity category – notably, gold. Like real estate, gold is viewed as a useful way to protect yourself from inflation risk. More generally, due to gold’s extremely low correlation with both fixed income and equities, gold ETFs have the potential to deliver particularly strong diversification benefits.

Combined, this portfolio of candidate ETFs covers almost 1,000 individual investment holdings (e.g., in underlying stocks) spanning all industries and a large number of countries.

Which ETFs are included in a Halal Investment Portfolio?

The ETFs and class assets we use are: 

What is the methodology you follow to construct the portfolios?

Once these class assets were selected, we proceeded to construct our client portfolios. These portfolios are optimised using a procedure that builds on the Modern Portfolio Theory (MPT). Developed in a Nobel Prize winning research, MPT is a tried-and-true tool of modern finance and is used by portfolio and wealth managers across the world. This technique seeks to maximize the diversification benefits you gain from your investments. However, MPT can be difficult to implement in practice because it relies on: knowing something that isn’t directly observed in the real-world: the joint distribution of returns (i.e., what are the expected returns of the different ETFs and what are their correlations with each other. (alternatively known as a joint distribution). At Sarwa, we strive for the best possible implementation of MPT by augmenting the approach with rigorous statistics, cutting edge models from a field of finance called “Asset Pricing”, and adapting a technique that delivers robust, less vulnerable portfolios to what we cannot observe…

This procedure parallels our approach to constructing non-Halal portfolios and it delivers similar performance and risk characteristics. This may not be obvious at first glance because the weights on some ETF types look very different across the two sets of portfolios. For instance, for our Balanced portfolio, the holding of the US-only ETF (ISDU) in our Halal portfolio equals 15% whereas the holding of the US-only ETF (VTI or VUSD) in our non-Halal portfolios equals 34%. This might suggest very different geographic distributions of global investments across the Halal and non-Halal offerings, but this is a misconception. In fact, the Halal portfolio has a US equity exposure of over 32%. What explains this? In the Halal offering, our global ETF (ISDW) invests in US equities while the corresponding ETF in our non-Halal offering (IEFA) does not. So our Halal portfolio gets equity exposure from both ISDU and ISDW. Once these nuances are considered, the Halal and non-Halal portfolios have similar geographic distributions of holdings – with differences mostly driven by differential management fees across ETFs (we seek to maximise the performance of your portfolio net of all fees). The overall result: our equivalent Halal and non-Halal portfolios track each other well with a historical correlation that’s generally between 94.5% – 96%, but for Very Conservative portfolios the number drops a little (around 74%) because these portfolios hold a large amount of money in Sukuk which does not track as closely the conventional bonds. 

Over time, numerous things in your portfolio will change. Some holdings will outperform others, the composition of ETFs might change, the relationship between different industries or countries will evolve. Consequently, smart investment is not of the “set it and forget it” variety. Your portfolio must be rebalanced overtime when it starts to deviate from its optimal mix. We pay close attention to this. Whenever you make new deposits into your Sarwa account, we always make new investments on your behalf in a manner that brings you back towards your optimal portfolio. When your portfolio deviates too much from this mix, we make the necessary sales and purchases of ETFs to bring you back to your optimum. Finally, we periodically revisit our MPT implementation from the ground up to determine whether market or economic conditions have changed sufficiently to justify updates to our portfolios.

We believe our approach to investing keeps your best interests in our sightline. Rigorous, robust, and global diversification followed by careful rebalancing is an important driver of our value proposition. As documented in research by Harvard economist John Campbell, most investors lose substantial value because of two reasons. I have spoken about it in detail in the webinar we had on the topic. To summarise: 

• First, they fail to participate in equity markets at all – mistake 1.
• Second, they fail to properly diversify and rebalance – mistake 2.

The total cost of these mistakes? Campbell’s research estimates that this reduces the expected returns on investments by over 4% per year with the source of this loss being split equally between both mistakes 1 and 2. Given that you’re considering partnering with Sarwa on your investment journey, you’re clearly thinking about investing in financial markets and are on the path to avoiding mistake 1. Let us help you avoid Mistake 2! 

Great, thank you Dr. Jiro! Sarwa team, I have a few general questions. What are the different Halal portfolio options based on the risk level I can invest in?

Our Halal portfolios consist of seven different risk levels, from very conservative to aggressive investing strategies. You can see all of the different levels here.

The asset allocation changes based on your own personal risk appetite. So, you will find that more risk-averse portfolios are heavy on the Sukuk front, but have fewer investments in US or Global Stocks. As your risk level rises, your investments become more stock heavy.

Choosing an optimal portfolio based on your risk appetite can be challenging, everyone wants to get higher returns but sometimes we don’t see the risk undertaken with it. 

We have developed a survey that will give you our optimal recommendation based on your personal situation. If you have not done so yet, try it out to get your free portfolio recommendation.

Tell me more about Sukuk!

Sukuk is a smart asset class that comes, like all of our Sarwa chosen assets, without speculative hazards, high volatility, but also without any exposure to non-Islamic industries. Sukuk is another tool to diversify an investment portfolio with a low-risk, low-volatility asset class.

To get you the detailed information right from the source, we went ahead and interviewed the Chief Investment Officer of Global Sukuk at Franklin Templeton, Mohieddine Kronfol. A Sarwa scoop. We had an in-depth chat on the history behind the Sukuk fund and how it is evolving. 

What are the fees for the Halal Portfolios?

As with all of our processes, our fee structure is transparent, of course! Our management fees remain the same, it ranges from zero for one year for starter accounts, and goes from 0.85% to 0.5% for portfolio values $2,500 and above.

Who certifies and ensures that investments are halal?

We exclusively use BlackRock iShares Islamic funds that invest in hundreds of companies that are fully compliant with Shariah investment principles. Each has been approved by MSCI’s Shariah advisors’ committee of Shariah scholars. Click here to view an outline of MSCI’s Islamic Index Methodology. BlackRock also provides a purification report for each ETF, also available on their website.

Got it. I want to invest. What is the minimum requirement? And what do I need to be eligible?

Sarwa is currently available across the MENA region and beyond! In order to set up an account with us, the minimum requirement you need to invest is only $500.

Your eligibility depends on a few things: You need to be at least 18 years old and not be a US citizen or a tax resident. There are a few additional restrictions based on global regulatory measures that will determine whether or not you can invest with us. You can check here for more information.

It looks very appealing. Tell me, why are you different?

We have a team dedicated to ensuring that you have access to data-driven investment strategies – and ones that are aligned with your values. Our Halal portfolios provide the right balance between low-cost and quality assets that diversify your investments in the most efficient way.