The Rules That Shape Your Portfolio Before You Do

Last week, we established the core thesis: your halal portfolio is not a filtered version of the conventional market. It is a structurally different system.

This week, we go one level deeper. Because the structural differences you see in your portfolio — the tech overweight, the missing financials, the quality tilt — don't just happen. They are produced by specific rules. And those rules are not as stable, consistent, or straightforward as most investors assume.

If the first issue was about what your halal portfolio looks like, this one is about why it looks that way — and what happens when the rules change.

There Is No Single "Shariah-Compliant" Standard

Most investors assume there's one universal rulebook for what counts as halal. There isn't.

There are four major organisations that screen stocks for Shariah compliance. Each one uses different rules, different tests, and different numbers. And because they measure things differently, they often reach different conclusions about the same company.

Here's a simple way to understand the core difference. All four methodologies agree on one basic principle: a company should not carry too much debt. But they disagree on how to measure it.

Two of them — DJIM (the Dow Jones Islamic Market Index) and AAOIFI (the global Islamic finance standard-setter) — measure debt relative to the company's market value. That's the price investors are currently willing to pay for the company on the stock market.

The other two — FTSE and MSCI — measure debt relative to the company's total assets. That's everything the company owns: its factories, equipment, cash, and property, as reported in its accounts.

Same company. Same debt. Two completely different ratios — and potentially two completely different verdicts.

Why the Measuring Stick Matters Enormously

Here's a concrete example to make this real.

Imagine a company worth $1 billion on the stock market. It owns $3 billion in total assets and carries $900 million in debt.

•         Under DJIM (market value): $900m debt ÷ $1bn market value = 90% — fails.

•         Under FTSE (total assets): $900m debt ÷ $3bn total assets = 30% — passes.

Same company. Same debt. One methodology rejects it, the other approves it.

This isn't a hypothetical edge case. It happens regularly across global markets — especially for companies in capital-intensive industries like real estate, utilities, and manufacturing, where assets are large and stock prices can be volatile.

The halal ETF you own does not hold "all Shariah-compliant stocks." It holds stocks that are compliant under one specific methodology. Switch the methodology, and you get a different portfolio.

What Happened in September 2023

This became very visible in September 2023, when DJIM made a significant change to its rules.

Until that point, DJIM was checking three things: how much debt a company carries, how much cash it holds in interest-bearing accounts, and how large its accounts receivable are (money owed to it by customers). All three had to stay below certain limits.

In September 2023, DJIM dropped the second and third tests entirely. From then on, only the debt ratio mattered.

The immediate effect: companies that had previously been excluded — because they held too much cash in banks, or had customers who owed them a lot of money — suddenly became eligible.

Here's why this matters for you. If you owned a halal ETF that tracked a DJIM-based index in August 2023, your portfolio held one set of companies. By October 2023, without you making a single decision, your portfolio held a different set of companies — because the rules changed, not because the companies changed.

This is one of the most important and least-discussed facts about halal investing: your portfolio can be reshaped by rule changes you never knew were coming.

The Denominator Problem: Why Your Portfolio Gets Riskier in a Crash

Here is the most counterintuitive consequence of using market value as the measuring stick — and it's one that almost no retail investor is aware of.

When stock markets fall sharply, market-cap-based screening becomes more restrictive — not less. Here's why.

If a company's stock price drops 40%, its market value shrinks by 40%. But its debt doesn't change — the company still owes whatever it borrowed. So the ratio of debt-to-market-value automatically increases, even though the company hasn't taken on a single new dollar of debt.

Push that ratio high enough, and the company breaches the 33% threshold — and gets screened out of the index. Which means the index sells the stock. Right at the bottom.

To make it concrete: imagine a company with $100m in debt and a market value of $400m. The debt ratio is 25% — comfortably within limits. Now the stock falls 40%, taking the market value to $240m. The debt ratio is now 42% — it fails the screen. The company gets removed from the index.

Nothing changed about the company's business. Its debt is exactly the same. But the screening rule, by using market value as its denominator, created an automatic trigger to sell into a falling market.

The FTSE and MSCI approach — using total assets instead of market value — is more stable, because a company's total assets don't swing wildly with the stock price. The trade-off is that it's slower to react to real changes in a company's financial health.

Neither approach is perfect. But if your halal ETF uses market-value screening, your portfolio has a built-in mechanism that pushes it to sell during crashes. That's worth knowing.

The Purification Obligation: What It Is and What It Costs You

There's one more practical consequence of screening rules that affects your actual returns: purification.

Every methodology allows companies to earn a small amount of income from impermissible sources — typically up to 5% of total revenue. A tech company that earns 3% of its revenue from interest on its cash deposits can still be included in the halal index. But you, as the investor, are required to donate that 3% of any income you receive from that company to charity.

This is called purification, and different methodologies handle it differently.

•         Under DJIM and S&P: you only need to purify dividends. Straightforward.

•         Under AAOIFI: you need to purify all income — including capital gains. If the stock went up and you sold it, a portion of that gain may need to be purified too.

Practical check: your fund's fact sheet should list the purification ratio. If it doesn't, or if it doesn't explain what it covers, that's worth following up on.

Three Things You Should Know About Your Own Fund

You don't need to memorise every threshold from every methodology. But three questions will give you a far clearer picture of what you actually own.

•         Which screening methodology does your fund follow? SPUS uses a methodology aligned with S&P's approach. HLAL uses its own Shariah board's methodology. These are not the same. The answer is in the fund's prospectus or fact sheet.

•         Does your fund use market-value or total-assets screening? Market-value screening is more volatile — your fund may sell positions during downturns even when the underlying companies haven't changed.

•         What does your purification obligation cover? Dividends only, or total returns? For most passive investors, this is a small amount. But it's your obligation, and it's worth knowing exactly what it includes.

The architecture is different. The rules are specific. And they matter more than most investors realise.

MizanMacro is a Shariah-aligned capital research platform. MizanMacro Intelligence publishes every Tuesday.

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