Building Life Plans, One Client at a Time

Putting Your Money Where Your Beliefs Are

We’re excited about our new strategic partnership with the Aperio Group, an alliance that allows us to offer customized Sharia-compliant portfolios to our clients. In the past, investors who wanted to reflect their Islamic values in their investments have had very limited options. To broaden those options, we turned to the Aperio Group, a pioneer in applying enhanced indexing techniques to socially responsive portfolios.

Aperio worked with us to design two new solutions—one is benchmarked to the MSCI All Country World Index (MSCI ACWI) and the other is benchmarked to the Russell 3000 Index. For any Accretive Wealth client who meets minimum requirements, Aperio will create a portfolio of individual stocks managed separately to track one of these index benchmarks.

Let’s take a look at how Aperio determines what investments can be included in an Islamic Values portfolio. By following the MSCI’s Islamic Index Methodology (approved by an independent board as adhering to generally accepted Sharia guidelines), Aperio puts together a universe of companies. These companies must first pass exclusionary screens to ensure they do not derive 5% or more of their cumulative revenue from the following products, services, and activities: alcohol, tobacco, pork-related products, financial services, defense/weapons, gambling/casino, music, hotels, cinema, and adult entertainment.

The next screen eliminates companies that derive significant income from interest or that have excessive leverage. Three financial ratios are used to further screen these companies: total debt over total assets; the sum of a company’s cash and interest-bearing securities over total assets; and the sum of a company’s accounts receivables and cash over total assets. None of the financial ratios may exceed 33.33%.

“We take a tailored, consultative approach, working with investors and their advisors to craft solutions that address their unique portfolio challenges,” said Liz Michaels, Aperio’s Chief of Staff. Liz refers to Aperio’s ability to overlay a wide variety of screens as “hyper-customization.” We think that’s a good description. Additional screens may be added to address other issues an investor may have, such as:

  • Other socially responsive values (for example, no companies whose activities or products worsen global warming)
  • A concentrated position in a particular stock or industry, or a need to harvest tax losses
  • A desire for high dividend yield, a preference for large-cap stocks, or an aversion to volatile market sectors

Here are a couple of hypothetical examples of how these screens could be put to work. Sam Jones, a very well-paid Google employee, has a large position in Google stock outside the Aperio portfolio that he wants to keep because he believes in his company, and he has more stock options that he hasn’t exercised yet. He really doesn’t want any more exposure to the tech sector, he would love to reduce his tax burden, and he wants his investments to be Sharia-compliant. Aperio puts together his portfolio by first applying the Sharia screens, then eliminating exposure to additional tech stocks, and then planning to actively harvest tax losses that can be used to offset income within the Aperio portfolio or from outside investments.

Sally Smith is also interested in conforming to Sharia law in her investments, but her situation is quite different. She has a good-sized portfolio, but she doesn’t earn very much and could use more income. Sally feels very strongly about the environment and wants to invest in companies involved in renewable energy but not in oil. Aperio would apply the Sharia screens, eliminate oil companies, overweight renewable energy companies, and then look for companies that pay high dividends to supplement her income.

To construct the portfolio, Aperio then takes a look at what investments are left. It considers what the market looks like. What would be the portfolio’s exposure across sectors? What would dividend yield be? Allowing for sectors in which the client chooses not to invest, how can Aperio best replicate the risk/return ratio of the index? The goal is to match the standard deviation from the mean (the index) and approximate the index’s beta.

This process, in combination with sophisticated risk models and trading overlays, allows Aperio to tailor each account, positioning it to reap innovative tax and portfolio customization benefits.

If you have any questions, please feel to call (925) 365-1533 or send an e-mail to lifeplan@accretivewealth.com.

To find out more about Aperio Group, please visit its website: www.aperiogroup.com.

You may also want to take a look at our press release detailing the Aperio/Accretive partnership.

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