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KembaraXtra–Islamic Finance–Islamic Capital Market-
Investment Process of Islamic Mutual Funds
Overall Objective of the Investment Process
• Focuses on achieving sustainable, Shari’ah-compliant, risk-adjusted returns
• Emphasises strategic asset allocation, portfolio development, and forward-looking investment thinking
• Aims to identify Islamic mutual fund strategies that add value to the overall portfolio’s risk–return profile
Importance of Selecting the Right Fund Manager
• Choosing the right Islamic mutual fund manager is critical
• The manager is responsible for:
– Applying robust selection methods
– Ensuring Shari’ah compliance
– Delivering consistent performance
• Fund selection depends on how each strategy contributes uniquely to portfolio diversification and stability
Initial Screening Stage (Qualitative and Quantitative)
• Investment process begins with extensive screening of a large investible universe
• Purpose is to narrow down funds with potential for strong risk-adjusted returns
Quantitative Screening Factors
• Tracking error – how closely a fund follows its benchmark
• Win/loss ratio – frequency of outperforming vs underperforming
• Historical alpha – excess returns generated by the manager
• Information ratio – consistency of excess returns relative to risk
• Sharpe ratio – return earned per unit of total risk
Qualitative Screening Factors
• Concentration levels – how diversified the fund holdings are
• Ownership structure – alignment of interests between managers and investors
• Style bias – growth, value, or other investment styles
• Liquidity – ease of buying and selling fund assets
• Funds under management – size and scalability of the fund
Balanced and Flexible Screening Approach
• Caution is required to avoid excluding large market segments too early
• Screening process remains flexible to capture hidden or emerging opportunities
• Continuous interaction with the market is maintained through:
– Direct referrals
– Engagement with fund managers
– Ongoing market observation
Review and Desktop Research Phase
• After narrowing the universe, in-depth reviews are conducted
• Focuses on identifying competitive advantages
• Uses historical performance attribution to assess:
– Breadth of stock selection
– Strength of investment decisions
– Consistency of returns over time
Qualitative Assessment During Review
• Evaluation of the investment team’s experience and stability
• Review of available resources and infrastructure
• Assessment of investment process, strategy, and risk management practices
Due Diligence and Shari’ah Compliance Assessment
• Strategies passing initial review undergo detailed due diligence
• Ensures full compliance with Shari’ah principles
• Confirms sustainability of both qualitative and quantitative strengths
On-Site and Operational Evaluation
• Includes direct interaction with investment teams
• Review of financial models and assumptions
• Assessment of back-office operations and compliance systems
Ongoing Monitoring and Reassessment
• Investment process is dynamic, not static
• Selected strategies are continuously monitored using quantitative measures
• Regular reassessment ensures continued relevance and performance
Creation of Buy List / Preferred Strategy List
• Final output is a “buy list” or list of preferred strategies
• Forms the core universe for portfolio construction by consultants
• Each asset class typically includes:
– 3–4 preferred managers
– Strong risk-adjusted return potential
– Robust qualitative and quantitative characteristics
Backup and Research Discipline
• “Strong” rated strategies act as backup options
• Used when preferred managers are unavailable, downgraded, or fully allocated
• Research agenda remains proactive and forward-looking
• Continuous challenge of existing views ensures adaptability and long-term effectiveness
One-Line Summary
👉 The investment process of Islamic mutual funds is a structured, dynamic, and Shari’ah-driven approach that combines rigorous screening, deep analysis, continuous monitoring, and strategic manager selection to deliver sustainable risk-adjusted returns.
Investment Process of Islamic Mutual Funds
Overall Objective of the Investment Process
• Focuses on achieving sustainable, Shari’ah-compliant, risk-adjusted returns
• Emphasises strategic asset allocation, portfolio development, and forward-looking investment thinking
• Aims to identify Islamic mutual fund strategies that add value to the overall portfolio’s risk–return profile
Importance of Selecting the Right Fund Manager
• Choosing the right Islamic mutual fund manager is critical
• The manager is responsible for:
– Applying robust selection methods
– Ensuring Shari’ah compliance
– Delivering consistent performance
• Fund selection depends on how each strategy contributes uniquely to portfolio diversification and stability
Initial Screening Stage (Qualitative and Quantitative)
• Investment process begins with extensive screening of a large investible universe
• Purpose is to narrow down funds with potential for strong risk-adjusted returns
Quantitative Screening Factors
• Tracking error – how closely a fund follows its benchmark
• Win/loss ratio – frequency of outperforming vs underperforming
• Historical alpha – excess returns generated by the manager
• Information ratio – consistency of excess returns relative to risk
• Sharpe ratio – return earned per unit of total risk
Qualitative Screening Factors
• Concentration levels – how diversified the fund holdings are
• Ownership structure – alignment of interests between managers and investors
• Style bias – growth, value, or other investment styles
• Liquidity – ease of buying and selling fund assets
• Funds under management – size and scalability of the fund
Balanced and Flexible Screening Approach
• Caution is required to avoid excluding large market segments too early
• Screening process remains flexible to capture hidden or emerging opportunities
• Continuous interaction with the market is maintained through:
– Direct referrals
– Engagement with fund managers
– Ongoing market observation
Review and Desktop Research Phase
• After narrowing the universe, in-depth reviews are conducted
• Focuses on identifying competitive advantages
• Uses historical performance attribution to assess:
– Breadth of stock selection
– Strength of investment decisions
– Consistency of returns over time
Qualitative Assessment During Review
• Evaluation of the investment team’s experience and stability
• Review of available resources and infrastructure
• Assessment of investment process, strategy, and risk management practices
Due Diligence and Shari’ah Compliance Assessment
• Strategies passing initial review undergo detailed due diligence
• Ensures full compliance with Shari’ah principles
• Confirms sustainability of both qualitative and quantitative strengths
On-Site and Operational Evaluation
• Includes direct interaction with investment teams
• Review of financial models and assumptions
• Assessment of back-office operations and compliance systems
Ongoing Monitoring and Reassessment
• Investment process is dynamic, not static
• Selected strategies are continuously monitored using quantitative measures
• Regular reassessment ensures continued relevance and performance
Creation of Buy List / Preferred Strategy List
• Final output is a “buy list” or list of preferred strategies
• Forms the core universe for portfolio construction by consultants
• Each asset class typically includes:
– 3–4 preferred managers
– Strong risk-adjusted return potential
– Robust qualitative and quantitative characteristics
Backup and Research Discipline
• “Strong” rated strategies act as backup options
• Used when preferred managers are unavailable, downgraded, or fully allocated
• Research agenda remains proactive and forward-looking
• Continuous challenge of existing views ensures adaptability and long-term effectiveness
One-Line Summary
👉 The investment process of Islamic mutual funds is a structured, dynamic, and Shari’ah-driven approach that combines rigorous screening, deep analysis, continuous monitoring, and strategic manager selection to deliver sustainable risk-adjusted returns.
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