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ISLAMIC ASSET ALLOCATION Myth or Reality? Islamic Wealth Management Geneva, 24 April 2007 John A. Sandwick Encore Management S.A. 40, rue du Marche CH 1204 Geneva 50 years of institutional investing z U.S. pension fund assets well above $15 trillion z Pension funds provide grants for research z Portfolio allocation research led to common conclusions z Allocation models vary little as a result Classic portfolio allocation models The 3 Basics: z z z Income Balanced Growth Risk Profile: z z z Conservative Moderate Aggressive Allocation has no religion z Allocations all meet same tests for longterm profit and risk z Allocations don’t violate the basic rules of investing z Allocations by western institutional investors have met the tests of tough market conditions z Allocations are made according to logical principals of Modern Portfolio Theory Allocation steps for Muslims & Non-Muslims Non-Muslims 1. Identify starting point 2. Identify end point 3. Measure client risk profile 4. Map long-term goals 5. Develop global allocation model 6. Select securities 7. Time asset purchases Muslims 1. Identify starting point 2. Identify end point 3. Measure client risk profile 4. Map long-term goals 5. Develop global allocation model 6. Select securities 7. Time asset purchases NO DIFFERENCES BETWEEN MUSLIMS & NON-MUSLIMS! Standard Balanced Allocation, Non-Islamic Balanced Investment Strategy: z Cash allows for opportunistic purchases & pays fees z Bonds provide stable, guaranteed returns z Stocks provide extra yield, but with added volatility z Alternative Investments provide above-market, uncorrelated returns ASSET ALLOCATION Cash 5% Bonds 45% Stocks 35% A.I. 15% Standard Balanced Allocation, Islamic Islamic Balanced Investment Strategy: z Cash allows for opportunistic purchases & pays fees z Bonds provide stable, guaranteed returns z Stocks provide extra yield, but with added volatility z Alternative Investments provide above-market, uncorrelated returns ASSET ALLOCATION Murabaha 5% Sukuk 45% Stocks 35% A.I. 15% Paradox of Islamic allocation z All steps for investing are identical, Islamic and NonIslamic, up to security selection z Murabaha and equity funds well enough represented in the Islamic space z Alternative investments are few, but can work around this with structured products z Fixed income is the sole major block for true Islamic Wealth Management ASSET ALLOCATION Murabaha 5% EMPTY! NOTHING AVAILABLE! Stocks 35% A.I. 15% Solution for Islamic allocation z z At risk of selling my own product, I do have to mention Sanad Sukuk Fund It is the only product in the world that can fill this major gap in Islamic portfolio allocations ASSET ALLOCATION Murabaha 5% Sanad Sukuk Fund 45% Stocks 35% A.I. 15% History of Islamic allocations z z z z No history Until today there has been no disciplined, scientifically based Islamic Wealth Management. It did not exist as a profession Without an asset class to fill in where fixed income fits in traditional allocations, no one can manage Islamic assets While Sanad is the first sukuk fund, the world will see many more in the coming years What is available? z z z Muslims have been seduced into the private equity investment trap The Islamic world does not have deep & broad security universes The result as been an over reliance on stocks, real estate z z z Goofy structured products are also far-too popular None of the major money-center banks are focusing on the major allocation gap Same with nearly all the regional banks Long-term solutions to Islamic Wealth Management z Keep focused on the basics z Don’t deviate from the standard allocation model z Avoid fads and short-term trends z Track CALPERS and you’ll do just fine z Push the big banks to do their jobs, don’t accept suspension of the rules