Portfolio Construction
What this domain tests
This domain tests how you build a portfolio when the opportunity set is restricted - choosing asset allocation, substituting sukuk for bonds, selecting a benchmark and handling rebalancing without breaching contract rules.
Constraints that shape allocation
- No conventional bonds, no interest-bearing margin or leverage, no short selling, and no sale of assets not owned (bay' ma la yamlik).
- Trading of debt at a discount (bay' al-dayn) is restricted, which limits secondary liquidity in some sukuk.
- Fixed income is built from sukuk: ijarah for lease-type cash flows, wakalah or mudarabah for variable returns.
- Liquidity is managed through commodity murabahah or short-dated sukuk.
Benchmark and diversification
Use a Shariah benchmark such as the Dow Jones Islamic Market, FTSE Shariah or MSCI Islamic index. These have different sector weights from conventional indices - typically less financials, more technology - so relative performance and tracking error must be read against the Shariah index, not the conventional one.
Worked example
A client needs 40% defensive allocation with a five-year horizon. You build a ladder of ijarah sukuk with an average duration of 4.5 years and investment-grade originators. If suitable five-year sukuk are unavailable, you do not substitute a conventional bond; you may hold shorter sukuk or cash, accept reinvestment risk and disclose it. The equity sleeve is diversified across permitted sectors, with no single sector above the mandate limit, because exclusions already concentrate the remaining universe.
Traps that cost marks
- Assuming a conventional bond can be swapped one-for-one for a sukuk of the same credit rating; structures and liquidity differ.
- Ignoring concentration created by exclusions.
- Measuring performance against a conventional benchmark.
- Overlooking purification and zakat when calculating the client's net outcome.