Islamic Fund Management
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3. Reclassification of Securities
Many stocks which form part of a fund manager’s Shariah-compliant portfolio in a year may
become non-compliant with time. There are reasons for this change in status. For instance, a
company may discontinue a Shariah-compliant business, thus excluding it from the Shariah-
compliant list. Similarly, a hotel and residential services provider may stop bar services―with
alcoholic drinks―which may then qualify it for inclusion in the list of Shariah-compliant
securities. From the perspective of quantitative screening, there may be a rise or decline in
market capitalisation due to certain external/internal factors, or merger and acquisition
(M&A) activity that may render a stock non-compliant. In all these and similar cases, it is the
responsibility of the internal compliance department of the AMC to keep a close eye on the
changing situation so that they can inform the fund manager, who can then make the necessary
adjustments to his portfolio and plan for any future adjustments, as and when required, to
align with Shariah needs as well as the fund’s objectives. It is also important to keep the
Shariah board/advisor informed of such changes so that they can analyse the situation and
issue a new fatwa if required (Cognizant 20-20 insights, 2012).
In view of the above, continuous monitoring of a stock’s compliance with Shariah is a challenge
for Islamic fund managers. This may also increase costs if it is undertaken continuously.
Additionally, the adjustments needed after the reclassification of the Shariah-compliant
securities may not be easy as stocks that are reclassified usually underperform over a certain
period.