The difference between an index and a custom index? 5% or more!

All the major index providers have a Shariah compliant offering, this started in the late nineties with Dow Jones debuting its Dow Jones Islamic Market Index℠ family, then FTSE Group developed the FTSE Shariah Global Equity Index Series, Standard & Poor’s introduced the S&P Shariah indices, MSCI Barra MSCI Islamic Index Series, and Russell Investments launched the Russell Jadwa Shariah indexes.
These are the global leaders of indexes, and IdealRatings provides the screening to most of these index providers, and their Shariah guidelines are diverse and have very respected and widely recognized Shariah scholars, so why would any portfolio manager need to create a custom index you may ask?
The answer is in the matching of an index’s geographic coverage focus, equity selection methodology, and Shariah guidelines with the manager’s strategy and Shariah board guidelines, in many cases these overlap perfectly, but in many other cases, managers look for an index with the closest fit of coverage and guidelines, and use it as a benchmark and a starting point for a portfolio’s investable universe, this creates an interesting situation where a manager is benchmarked a universe that is not perfectly aligned with his strategy, and so the performance could deviate due to the manager’s inability to invest in the highest performing components of the index and appear to be underperforming the benchmark.
With the markets being as tough as they are, investors’ appetite for underperforming managers is even less than what it used to be in the good old times, and every basis point counts for capital raising, differentiation, and churn reduction.
Managers with a strategy and a board not perfectly fitting an existing index now have the capability of creating a custom benchmark of their own, which could be based on one of the existing index providers’ universe and adapted to the manager specific requirements, or from scratch, resulting in a logical alignment of the benchmark’s methodology and the manager’s own.
The resulting outperformance numbers should be easily attainable, as the talent is focused on what matters:Making timely intelligent investment decisions that outperform the underlying benchmark.
Youssri Helmy