Practical analysis for investment professionals
21 August 2013

Insights into Islamic Investment Management from a Charterholder in Saudi Arabia

To gather insights into Islamic investment management from experienced CFA charterholders from different countries, we will be conducting a series of interviews. In the third interview of this series, we discuss Islamic investment management with Zaheeruddin Khalid, CFA.

Zaheeruddin Khalid, CFA, is director of portfolio management at Jadwa Investment, Riyadh, Saudi Arabia. Jadwa manages US$ 3.6bn in Shariah-compliant assets for institutional and high-net-worth clients. Zaheeruddin earned his CFA charter in 2006. He also holds an MBA from Institute of Business Administration (IBA), Karachi, Pakistan. He has more than 12 years of investment work experience, more than seven of which have been spent in Islamic investment management.

CFA Institute: Tell us about your market and how it has evolved over the years.

Zaheeruddin: Saudi Arabian mutual fund industry dates back to 1992, when industry AUMs stood at US$3.3bn. By 2004 AUMs had grown to US$16.1bn. Stock market euphoria then took AUMs to as high as US$36.5bn in one year. Since then mutual fund AUMs have come down to US$26bn currently.

Having said that, the total investment pool of Saudi Arabia is much larger. Most high-net-worth and institutional investors do not invest through mutual funds and generally take the route of professionally managed segregated accounts. No official numbers are available for this investment pool. However, it can safely assumed to be much larger than the mutual fund market.

Shariah-compliant investment vehicles dominate the investment scene in Saudi Arabia, especially on the retail side. The following table shows the current split of mutual fund AUMs between Shariah-compliant and conventional funds.


Current Split of Mutual Fund AUMs between Shariah-Compliant and Conventional Funds

Source: Zawya.


While split between Shariah-compliant and conventional professionally managed segregated accounts is not available, anecdotal evidence suggests a roughly 50/50 split.

The mutual funds market is dominated by asset managers backed by commercial banks, as these were the early entrants to the markets. The top five players account for over 80% of the market share in the mutual funds space. These top five are NCB Capital, SAMA Capital, Riyad Capital, Al Rajhi Capital, and HSBC Saudi Arabia. In the segregated accounts market, Jadwa Investment is one of the major players along with the big five.

Consistency of performance, quality of service and strong relationship management are the key success factors for asset managers in Saudi Arabia.

How has the market for Islamic investment management grown relative to that of conventional investment management? What has been the key success factor in gathering sufficient assets under management?

Shariah-compliant investment products have done well in Saudi Arabia in terms of raising assets. Almost all retail products are exclusively Shariah compliant. The conventional investment products are mostly targeted towards institutional investors, some of which also prefer Shariah-compliant products. Consequently, fundraising in Shariah investment products has been more attractive for asset managers. With the underperformance of listed financial institutions in recent years, Shariah-compliant investment products have also done better than the conventional counterparts. That has also contributed to the dominance of Shariah compliant products.

How do fees charged on Islamic funds compare with conventional counterparts?

There isn’t any meaningful difference in fees of Shariah-compliant and conventional products.

Describe the screening process employed in your market? What are the effects on the investable universe and portfolio turnover?

In most cases, the methodology is similar to the one employed by S&P for its Shariah indices. Managers in the Saudi market follow the standard debt/market cap, noncompliant investment/market cap, noncompliant income/total income screens to arrive at the shariah compliant investable universe. Some managers/investors use total assets instead of market cap in the above mentioned screening ratios. The Shariah universe in the public equity space in Saudi Arabia is very similar (more than 95% overlap) to the conventional universe, excluding conventional banks. The reason for this high overlap is the general preference of investors to have Shariah-compliant investments, forcing companies to comply with Shariah guidelines, wherever possible. Consequently, managers usually do not face the prospect of selling an investment because it turned noncompliant at the announcement of one of its quarterly results.

However, companies do have conventional finance income from deposits with conventional banks, especially when they have subsidiaries operating outside Saudi Arabia. In such cases, dividend income from such companies is purified by giving out the percentage of income coming from noncompliant sources to approved charities.

How have Islamic investments performed in your market?

Given the high overlap of the Shariah and conventional investment universe, Shariah-compliant products investing in Saudi Arabia have generally had performance similar to the conventional products. The difference in performance during a particular period would mainly arise from the performance of conventional banks versus the performance of Shariah-compliant banks. Historically, given the preference of the investing public, Shariah-compliant banks have traded at a premium to conventional banks in terms of earnings multiples. This, coupled with the negative effects of 2008 crisis on conventional banks, has resulted in recent outperformance of shariah universe over the conventional universe.


Comparison of the Performance of Shariah vs. Conventional Indices in the Saudi Stock Market
Shariah Compliant Public Equities Compared to the Broader Market

Note: Data for S&P Saudi Shariah Index is available from April 2007 onwards.


The table above shows that Shariah-compliant public equities have consistently outperformed the broader market in recent periods.

What have been some of the recent innovations in Islamic investment management in your market?

Shariah-compliant versions of most conventional products are available in the Saudi market. Most innovations are taking place in the private investment product side instead of the public products (mutual funds) because of higher demand for the former. One such has been the structuring of Shariah-compliant mezzanine financing.

How does the CFA charter help investment professionals in Islamic investment management? What are your preferred sources of continuing professional development (CPD) in Islamic investment management?

The CFA charter is becoming more and more recognized in the investment industry in Saudi Arabia. Employers are recognizing the rigors of the CFA program and how it covers robust financial concepts and high ethical standards for investment management practitioners. Employers in both Shariah-compliant and conventional financial institutions prefer CFA charterholders while screening potential candidates for positions related to investment management. The CFA charter or progress towards acquiring one is regularly mentioned in job postings from leading financial institutions of the country.

Over the years, the job market for investment professionals in Saudi Arabia has become increasingly competitive. As the investment industry improves in terms of sophistication, employers require employees to not just have the internationally recognized degrees and certifications but also to keep abreast of latest developments and advancements in the field of finance and investments. Therefore, CPD programs are essential for long term success of individuals. CPD for Islamic investment management actually can be divided into two areas: (1) investment management, and (2) Shariah rulings and developments related to investment structures. For the former, CFA Institute’s continuing education program is a great source. The latter is more applicable to structured products and to the fixed-income space. Understanding of this area is best acquired through specialized courses conducted by Shariah scholars and seasoned Islamic finance professionals.

If you are interested in Islamic investment management, please consider joining the CFA Institute Islamic Investment Management subgroup on LinkedIn. If you are an experienced professional investor working in Islamic Investment Management and you would like to share your insights with us, please contact the manager of the Islamic Investment Management group on LinkedIn.


Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Usman Hayat, CFA

Usman Hayat writes about sustainable, responsible, and impact investing and Islamic finance. He is the lead author of "Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals," and the literature review, "Islamic Finance: Ethics, Concepts, Practice." He is interested in online learning and has directed three e-courses for CFA Institute: "ESG-100," "Islamic Finance Quiz," and "Residual Income Equity Valuation." The other topics he writes about are macroeconomics and behavioral finance. Previously, he was a content director at CFA Institute. He is a former executive director at the Securities and Exchange Commission of Pakistan (SECP). He has experience working in securities regulation and as an independent consultant. His qualifications include the CFA charter, the FRM designation, an MBA, and an MA in Development Economics. His personal interests are reading and hiking.

1 thought on “Insights into Islamic Investment Management from a Charterholder in Saudi Arabia”

  1. Abdul Salisu says:

    An absolutely fantastic n comprehensive Islamic investment n finance explanation.Well done.

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