Does the choice of stock selection criteria affect the performance of Shariah-compliant equity portfolios?

Shariah-compliant equity investments make implicit bets and do not invest in firms with noncompliant core operations. The negative screens are implemented in two steps, qualitative screens and quantitative screens. There exist significant discrepancies among the existing Shariah screening guidelines. When an investment universe is reduced with these restrictions it results in heterogeneous size and sector allocation and thus yields in different financial performance. The main purpose of this study is to highlight the effect of alternative choice of stock selection on the portfolio level outcomes of Shariah-compliant equity portfolios. This study constructs seven Shariah-compliant equity portfolios with monthly rebalancing based on seven different screening guidelines from a reference investment universe (S&P 500 active constituents). The portfolios are evaluated for the period 1984-2017. In addition to raw performance, style analysis is performed to attribute the difference in financial performance to different risk factors. The resulting restricted portfolios vary significantly in terms of size and sector allocation. The heterogeneous sectoral bets lead to difference in financial performance. This study also shows that the choice of stock selection matters for a Shariah-compliant investor. Market capitalization based screens result in superior financial performance as compare to assets based screens. Finally, investors should consider seriously the relatively higher turnover associated with such restricted portfolio.


Introduction
The social responsible investments incorporate non-financial criteria in the construction of financial portfolios. Their investment decisions can be categorized into primary and secondary objectives. The primary objective is to invest in firms that have positive impact on social, ethical, and environment values Adam and Bakar (2014). The profit maximization on the other hand is secondary objective of these investors. A special case of social responsible investor is the Shariah-compliant investor (SCI). These investors follow Shariah law which governs all aspects of life of Muslims. These investors are more demanding because they implement additional constrains on the investment universe. These constrains stem from Shariah investment principles.
These principles prohibit investment in non-compliant activities i.e., interest (Riba), gambling (Maisir), excessive risk under uncertainty (Gharar). 1 The complex nature of financial markets makes it very difficult for firms to keep their operations free from the effect of non-compliant operations, such as interest revenue. Therefore, in its ideal form, the SCI will always be left with none or very few investment opportunities. This confronts SCI to more demanding situation to choose stocks among the assets universe that provide attractive economic benefits and adherence to their social, religious or ethical beliefs. Following the needs of SCI and the complexities in financial markets the Shariah scholars have relaxed the ideal form of Shariah-compliant investments. They formulated a relatively more balance investment criteria which is known as Shariah-compliant equity investment guidelines (Derigs and Marzban, 2008).
The objective of these guidelines is to ensure that the SCI always invest in a portfolio which is consistent with the Shariah rulings (Arslan-Ayaydin et al., 2018). This is achieved with the help of a two steps negative screening process, qualitative (sectoral) and quantitative (financial) screens. The former investigates the core operations of firms while the later evaluate the level of financial leverage, liquidity and interest income in a firm's financial statements. These screens are not explicitly stated in the religious scriptures but are the result of analogical reasoning of Shariah scholars (Nisar and Khatkhatey, 2007). The liberty in analogical approaches and the absence of single decision making authority in Islam leads Shariah scholars to formulate diverse investment guidelines. For example, world leading index providers i.e., S&P, Dow Jones Islamic Market Index (DJIM), FTSE and financial institutions i.e., HSBC Amanah, Amiri, Dubai Islamic Bank and Azzad Investment have formulated their own screening guidelines for equity investments.
The diversity in Shariah screening guidelines extends the choices of selection for SCI. In practice the SCI is always confronted to numerous issues. First, the diversity in screening criteria itself is a problem and SCI always has to opt for specific criteria with an opportunity cost. Second, there is lack of mutual agreement on the use of proxies and threshold level. For example, DJIM follows a threshold level of 33% for liquidity screen while MSCI is more liberal and considers threshold level of 70% for the same screen. Third, the different interpretations of firm's value results in different divisors in the financial ratios which then affects the overall screening process (Obaidullah, 2005;Derigs and Marzban, 2009).
The heterogeneity in Shariah screens is a serious issue for SCI because the differences in existing screening guidelines affect the diversification opportunities and leads to different sector allocation. The difference in sectoral bets results in different representation of each sector and effects the performance of the Shariah-compliant equity portfolios (SCEPs). The effect of Shariah restrictions on the performance of conventional portfolios has been addressed by numerous studies (see for example: Derigs and Marzban (2008); Derigs and Marzban (2009); Ashraf and Mohammad (2014); Ashraf (2016); ). This study differentiates itself from previous efforts in number of ways. First, most of the previous studies are based on a single screening criteria or fund level data and focus is given to performance comparison with conventional portfolios. This study does not compare SCEPs with conventional portfolios but answers an important question, that is, whether the choice of selection methodology (different screening guidelines) matters for Shariah-compliant investors?
In order to answer the above question it is important to restrict a unified investment universe with different Shariah screens and create different SCEPs. The SCEPs are created from seven different Shariah screens with monthly rebalancing. All the SCEPs are fully invested and are not allowed for short selling. The selection bias is addressed by adopting more advance portfolio construction methodology. All the seven SCEPs are constructed with stock level data extracted from the active constituents of a unified investment universe (all stocks listed on S&P 500) for extended time period .
Another important aspect that is ignored by most of the performance evaluation centered studies is the effect of transaction cost on the overall performance of SCEP's. In practice the SCEP's result in higher turnover as compare to conventional portfolios . This is because in addition to routine rebalancing of weights, a SCI has to monitor the SCEPs frequently and exclude all firms immediately if their interest income exceeds the maximum allowed threshold. This study also addresses the question that whether SCEP's are able to compensate the additional transaction cost?
The empirical findings of this study show that the discrepancies in the selection guidelines have serious consequences for SCI in terms of diversification opportunities and sector allocation. The performance of SCEP's depends on the choice of stock selection and the intensity of screens. A switch from a more liberal strategy to more strict guidelines has negative effect on diversification but such a tilt positively affects the financial performance. It is also interesting to note that SCEP's show strong exposure to information technology stocks and energy sector and these sectoral bets shape the performance of SCEPs in market turmoil's. Future studies are required to further highlight the effect of stock selection guidelines in Shariah with different asset universe from different geographical locations.
Section 2 presents the discrepancies in current Shariah screenings. Section 3 summarizes few studies on SCEPs. Sector 4 discusses data composition, sector allocation and methodology used for performance evaluation. The major empirical results are displayed in section 5. The difference in performance of SCEPs is attributed to different risk factors in Section 6. The robustness analysis based on choice of sample period is presented in Section 7 while Section 8 summarizes the whole study.

The need for Shariah screens
Shariah in its ideal form does not allow investing in a firm with even a minor portion of income from non-compliant sources Nisar and Khatkhatay (2007). In practice the nature of operations in the financial markets and the presence of complex financially engineered products make it almost impossible for firms to operate at zero level of interest. Following the ideal structure, initially Shariah scholars always opted to rule out investment in equities. However, in order to represent the Shariah-compliant investors and to provide them an investment opportunity in stock market the Shariah scholars associated with world leading index providers such as, S&P Shariah indices The qualitative guidelines focus on sectoral screens and exclude all those firms whose core operations are non-compliant. Although there are minor differences but Shariah scholars mostly agree on the general theme of qualitative screens. For example, S&P 500 Shariah index and DJIM are stricter and exclude a firms even if minor portion of its revenue is generated from noncompliant operations. On the other hand more liberal guidelines such as FTSE is only concerned with major operations of firms and tolerate non-compliant revenue from minor operations Derigs and Marzban (2008).
Fluctuations in working capital i.e., draining of liquidity, short term trade cost, and the ready availability of short term finances are key factors for a firm's dependence on banks and other financial institutions. Thus there is always a possibility that the revenues of Shariah-compliant firm are affected by interest. The concerns related to participation in non-permissible activities and the maximum allowable tolerance level is key motivation for designing quantitative screens.
However, the absence of single decision making authority and the leniency in the approach of analogical reasoning results in diverse quantitative guidelines. The remarkable differences in the quantitative screens as shown in Table 1 are the key motivation for this study. Shariah screens use both balance sheet and income statement information. TI and TR refers to total interest income and total revenue respectively. While C, CSI, AR, TD, TA are balance sheet items and represents cash, cash and short term investments, account receivables, total debt and total assets. MC stands for market capitalization.

Discrepancies in quantitative Screens
The quantitative screens assess the level of a firm's interest income, liquid assets and financial leverage relative to the firm size and compare it to a pre-specified threshold level. Though the Shariah boards associated with financial institutions agreed to use three types of financial screens, however disagreement exists in the use of proxies to measure financial leverage, liquid assets, interest revenues and divisor in the financial ratio. Shariah screens also show variation in the maximum allowable threshold level.
The issue of interest (Riba) is always a priority concern for Shariah-compliant investors. In Islamic economic system money is considered as a medium of exchange rather than a commodity and the unjust incremental gains associated with the use of money either in the form of loans or on spot trading is strictly prohibited. Even in the presence of very strict parameters in Quran and Hadith regarding interest, the Shariah scholars show disagreement on a mutually agreed measure of interest. It can be observed in the first panel of Table 1 that FTSE and HSBC are using the ratio of total interest to revenue of a firm with maximum tolerance level up to 5%. On the contrary, DJIM and S&P Shariah index considers a firm as Shariah-compliant if its interest revenue is less than 33% of its market capitalization. Another noticeable discrepancy is that instead of emphasizing directly on interest, DJIM and S&P Shariah index focus on the potential sources of interest and use cash and short term investments (CSI) as proxy to measure interest revenues.
The strict rules for interest extend the circle of restrictions from pure use of interest to all potential sources that can generate interest revenue or interest liabilities, i.e., financial leverage and current assets. Therefore, in addition to interest screens, Shariah scholars use two more screens. The liquidity screen is used to monitor interest income generated from current assets and financial leverage screens is used to keep an eye on interest payments. Apart from potential source of interest, Shariah preference for fixed assets as source of income generation is key motivation for liquidity screens. In terms of proxies the financial leverage screen shows consistency, however our observations regarding variation in the proxies and threshold level hold true for liquidity screens.
Another major discrepancy is the use of divisor in the financial ratios. The existing Shariah screens measure the replacement value of a firm in two ways. Table 1 shows that DJIM, S&P Shariah and AZZAD use market capitalization as divisor in quantitative screens. In this study portfolios constructed with these screening guidelines are referred as market capitalization based SCEPs. On the other hand FTSE, HSBC, MSCI and Amiri prefer to use total assets as the true measure of firm replacement value. This study refers to the portfolios construed with these screening guidelines as total assets based SCEPs. Such an intergroup classification is also considered by Derigs and Marzban (2009).
Market capitalization reflects the market value of a firm. However, this proxy is highly exposed to volatility caused by mispriced securities, market cycles and speculations .
In practice the short term variations in market capitalization is smoothened by using 24-36 months trailing average. On the contrary the second group argues that the total assets of firm is trusted accounting figure and is independent of market volatilities. However, this proxy also has shortcomings as it depends on the accounting practices (for example, LIFO or FIFO) (Derigs and Marzban, 2008). Furthermore, the consideration of goodwill as assets in a balance sheet is also a debatable issue in Shariah but such issues are out of scope of this study.
The threshold level used in financial screens is also debatable as it varies between 5% to 70%.
The one-third rule 33% followed in most of the cases is based on Hadith and Fiqhi rules (Levy and Hennessy, 2007). However, this measure is arbitrary and subject to criticism i.e., it's out of context use (Obaidullah, 2005). On the contrary, the 5% threshold is based on the opinion of Shariah boards and no such arguments can be found in Quran and Hadith. The discussion concludes that the use of threshold levels is arbitrary and can be alter in the light of Maslaha (for betterment of mankind) and Maqasad al Shariah (objective of Shariah law) but of course with the consensus of Shariah scholars.
The lack of mutual consensus on single selection criteria and the apparent discrepancies in Shariah guidelines makes it very difficult to choose an equally acceptable alternative. It is important to mention that the acceptability stated is reflected purely from the perspective of faith.
The extent of individual acceptability in terms of portfolio outcomes may vary significantly depending on the risk and returns preferences.

Review of literature on Shariah compliant equity investments
Although the Islamic mutual fund industry is relatively new, there is tremendous growth in the size of market share of Islamic investment vehicles. Despite rapid growth, the literature on Shariah-compliant equity investment is scarce . Right from the time when first Islamic index "Dow Jones Islamic Index (DJIM)" was introduced by Dow Jones in February 1999, numerous studies have highlighted two major aspects of Shariah-compliant equity investments.
The first group of studies discusses the differences in current screening guidelines and provides analogical reasoning behind the derivation of these screens (see, e.g., Obaidullah, 2005;Nisar and Khatkhatay, 2007;Derigs and Marzban, 2008). The sole purpose of these studies is to highlight the theoretical justification of Shariah-compliant investment guidelines and ignore the effect of such discrepancies on the financial performance of SCEPs. On the other hand number of studies address this limitation and focus on the performance evaluation of SCEPs with its conventional counterparts.
In terms of difference in performance, evidence is provided either from mutual funds industry or

Data and methodology
We restrict the investment universe to the month end constituents of S&P 500. In order to implement the Shariah screens on the investment universe we use the fundamental data for cash, account receivables, short term securities, total assets, total debt, number of common shares outstanding. The time period of analysis ranges from January 1984 to December 2017.
In order to assess the different dimensions of Shariah-compliant portfolio I use seven different screening guidelines formulated by S&P, DJIM, Azzad, FTSE, HSBC, MSCI and Amiri. This study implements the qualitative screen by following Global Industrial Classification Standards (GICS). It is important to note that this study uses the 24 months trailing average of market capitalization in the financial screens.
Each Shariah-compliant equity portfolio is rebalanced at times t = 1,…, T. To construct the portfolios with seven different Shariah screening guidelines, This study starts from a reference investment universe of S&P 500 stocks. This study denote , as the dummy variable indicating whether stock belongs to the reference investment universe at time and = 1,…, N, with the number of stocks in the investment universe. In a second step, I determine whether the stock is Shariah compliant. Therefore, I denote , as the dummy variable which is one if stock at time is Shariah-compliant. This process is repeated for each set of Shariah investment guidelines. This study thus constructs seven Shariah-compliant equity portfolios. This study assumes that the portfolio is fully invested and do not allow for short selling since this is prohibited by Shariah.
The US market is composed of ten major sectors. In order to test the hypothesis related to sector allocation I introduce sectoral dummies to each Shariah portfolio. The average sector allocation is then estimated for the time period 1984-2017.
This study evaluates the raw performance by using the annualized average return (measured with mean). I evaluate risk as the volatility (calculated as standard deviation in returns on monthly basis and then annualized with the square root of time rule. I also report the risk of monthly losses at 95% through value at risk (VaR), computed as the 5% quantile of monthly returns. The Shariah portfolios are also investigated for maximum loss in the given time period by reporting the value of maximum drawdown, measured as the percentage loss from peak to trough. In order to provide better insight on the effect of risk factors I also reported the risk adjusted performance of these portfolios. For this purpose this study reports the Sharpe ratio and the Jensen's alpha.
This study also uses the Carhart (1997) four factor model and report the intercept (alpha) and exposure to risk factors.
Both Shariah-compliant and the unrestricted portfolios are constructed with monthly rebalancing.
The initial Shariah screens and the constant monitoring always result in higher number of transactions for a Shariah-compliant portfolio resulting in higher turnover. The above mentioned statistics are based on raw performance. However, trading is not free and additional transactions affect the raw performance of Shariah-compliant portfolio. Therefore it is important to measure the turnover of all portfolios. This study estimates the turnover as, where , +1 is the new weight of security at rebalancing time + 1 and , + is the actual weight of security before rebalancing at + 1.

Results
This study starts the analysis by presenting the effect of stock selection criteria on the cardinality of Shariah-compliant portfolios. In order to guide the readers this study classifies all Shariah-compliant equity portfolios in to two groups. The Shariah screening guidelines of S&P 500 Shariah, DJIM and Azzad use market capitalization as divisor in the financial screens therefore this study refers to them as market capitalization based guidelines. The FTSE, MSCI, HSBC and Amiri use total assets as divisor therefore this study refers to them as total asset based guidelines. The variation in the size of compliant asset universe is interesting and we can notice that the market capitalization based strategies were more restrictive at the beginning of our analysis period i.e. around the black Monday. In comparison to total asset based strategies the market capitalization based strategies developed from conservative to liberalize and improve diversification opportunities over the time period 1984-2017. 2 The difference in screening guidelines results in heterogeneous weight allocation to different sectors. It can be notice in Table 2 that the choice of selection criteria in Shariah-compliant equity investment effects the sector allocation of Shariah-compliant equity portfolios. The total asset based screens are more titled toward value sector (materials industry and telecommunication sector) while the market capitalization based strategies invest more in growth sectors (for example, energy and information technology stocks). A very important finding is that Shariahcompliant screens exclude almost all the stocks that belongs to finance sector from the investment universe.

Performance evaluation
Shariah restrictions restrict the investment universe and results in different sectoral bets. This heterogeneity in sectoral bets result in different factor loading and thus shape the performance of restricted portfolio. In this section I first test the effect of Shariah restrictions on the performance of unrestricted portfolio. Then I address the main question that whether the choice of selection criteria matters for Shariah investors?

The effect of Shariah restrictions on the performance of unrestricted market portfolio
The effect of Shariah restriction on the performance of unconstrained market portfolio remains the central focus of many studies. The results in Table 3 are not redundant as the comparison is made with different Shariah restricted portfolio. The out-of-sample performance shows that the unrestricted market portfolio (S&P 500 all stocks) over the period 1984-2017 has a annualized 2 One of the possible reason for this behavior is the growth in all the fundamental variables that are used in financial screens. The growth rate estimation shows that all the fundamental variables have positive growth in the last three decade however average market capitalization of US equities experience more growth as compare to total assets. Such a high growth in market capitalization is intuitive and could better be explained in relation to the Tobin's Q explanation of market equilibrium. As expected, the intensity in screens of market capitalization group shows negative relationship with Tobin's Q and get relaxed as the Q ratio approach its peak level in tech bubble.  Note: The first asset universe is not restricted and is labeled as "Market portfolio" which represents all stocks of S&P 500. The remaining asset universes are restricted with Shariah screening guidelines of DJIM, S&P, AZZAD, FTSE, HSBC, MSCI and AMIRI. The weights are calculated with monthly rebalancing for the period . We adopt the Global Industrial Classification Standards System (GICS) for sector and sub-sector classification, where each company issuing equity has a unique sector code. In the above

Is the choice of Shariah stock selection criteria matters?
The discussion in Section 5.3 shows that Shariah restrictions improve the performance of unrestricted market portfolio. But we can see that there are seven Shariah-compliant equity portfolios. A Shariah-compliant investor primary objective (adherence to faith) is satisfied if she restricts the investment universe with any of the seven selection criteria. However, as shown in

Turnover analysis
The performance evaluation in above sections is carried out in the absence of transaction cost.
SCEP's by design result in higher turnover as compare to an unrestricted portfolio. The portfolio manager has to monitor the investment vehicle on regular basis for Shariah-compliance. Thus she has to liquidate stocks which have crossed the maximum allowed threshold level and buy new stocks to rebalance the portfolio. In practice transactions are not without cost. Thus it is very important to revisit the superior performance hypothesis of Shariah-compliant equity portfolios because higher turnover leads to performance drag. In order to see the effect of transaction cost it is important to compare the average turnover of Shariah restricted portfolio and an unrestricted portfolio. All portfolios are constructed with monthly rebalancing.
The results of turnover are presented in second last column of Table 3. The first major finding is that the unrestricted market portfolio has the advantage of lower turnover as compare to all SCEP's. The increase in turnover is due to the additional transactions that a Shariah-compliant investor has to perform for the supervision of Shariah-compliance of the SCEP. Note: This table reports the annualized mean (Mean (%)), annualized volatility (Vol (%)), Sharpe ratio (SR), drawdown (MDD (%)), VaR (95% confidence interval), skewness (Skew), kurtosis (Kurt),Turnover (TO) and break-even transaction costs (BETC, in cents per dollar traded) for Shariah restricted portfolios and S&P 500 all stocks. For the Sharpe ratio, the Table also shows the results of significance tests, where *, **, and ***, indicates that the Sharpe ratio differ significantly from the Sharpe ratio of the market capitalization portfolio on all S&P 500 stocks and the Sharpe ratio of SCEP constructed with DJIM screening guidelines respectively, at the 10%, 5%, and 1% levels based on the t-test with HAC standard errors. Since then, transaction costs have further diminished. Furthermore, when the application is on building Shariah equity portfolios, the replication strategy may be synthetic and thus leading to an even lower implementation cost. Therefore, this study penalizes each transaction with 10 basis point transaction cost. Such analysis enables us to see clearly the effect of rebalancing cost on the net returns. Figure 2 shows both gross returns (blue lines) and the net returns (red lines) of each SCEP and the unrestricted market portfolio on each rebalancing date. We can see that the high cost of rebalancing for SCEP's cause relatively larger drag in the net returns of SCEP's as compare to unrestricted market portfolio. Now we know that the higher Sharpe ratio Shariah-compliant strategies have higher turnover and this cause relatively larger drag in net returns. In the above Section this study assumes a specific transaction cost. In practice the transaction cast varies. Therefore, I follow Kritzman et al. (2012) and  and compute the break-even transaction cost in terms of cost per dollar traded. The Break-even transaction cost shows the equilibrium cost per dollar at which the Sharpe ratio of Shariah portfolios is equal to the Sharpe ratio of unrestricted market portfolio. The higher the break-even transaction costs (in cents per dollar traded), the more robust the outperformance is with respect to transaction costs.
Last column of Table 3 shows that the break-even transaction cost is always positive and greater than one cent per dollar traded for all SCEPs. More specifically, we can infer that the profitability of Shariah portfolios is robust to the presence of transaction cost. An alternative inference that we can draw is that the Sharpe ratio of SCEP's will always be positive even if these portfolios are penalized with transaction cost up to 13.4, 14.98 and 9.77 cent per dollar traded. Thus the main conclusion is that the SCEP's as a whole have higher turnover as compare to unrestricted portfolios but the SCEP's has the ability to compensate the additional cost.
The last column of Table 3 shows that the break-even transaction cost of total market capitalization based strategies is less than total asset based strategies. This means that the Shariah-compliant investors should consider the screening discrepancies seriously. This further suggests that there are higher economic benefits associated with market capitalization based screening strategy while the investor has to bear high cost if she screens the investment universe with total asset based screening guidelines.

Figure 2: Monthly turnover and the effect of transaction cost on commutative performance of SCEP's
Note: The black bars (secondary axis) shows monthly turnover of each SCEP. The blue line (primary axis) represent the cumulative returns when 1$ is invested in each SCEP in the absence of transaction cost. The red line (primary axis) in each graph represent the effect of transaction cost on the gross return of each SCEP. We penalize each transaction with 10 bases points transaction cost (TXN represents transaction cost). The upper panel of the graph represents market capitalization based Shariah guidelines while the lower part of the graph represents total assets based Shariah guidelines.

Performance attribution of Shariah portfolios
The analyses so far show that the market capitalization based SCEP's outperforms not only the unrestricted benchmark but also the total asset based SCEPs. However, we still don't know the reason for such a superior performance. One way to tackle this question is to analyze the cross sectional variation of the overall portfolio returns. In this section, I use the multi-factor model of Fama and French (1992) and Carhart (1997)  represents the risk free rate and market returns respectively. Table 4 show that the risk adjusted returns (Jensen's Alpha) increase when the unrestricted benchmark is restricted with Shariah guidelines. More specifically, the Shariah restriction of DJIM and S&P result in positive and significant alpha of 0.40 and 0.037.  Carhart (1997). This study regress the monthly returns of the considered portfolios (in excess of the risk free rate) on the constant, market excess returns (MKT), Small Minus Big returns (SMB), High Minus Low returns (HML) and Momentum Factor "Winners Minus Losers" (MOM), using monthly returns for the period 1984-2017 with monthly rebalancing. ***,** and * represents the significance levels at 1%, 5%, and 10% level, respectively, based on the t-test with HAC standard errors.

Results in
In terms of risk factor exposure, we see in Table 4 that the (Carhart, 1997) factors explain more than 92% of the return variation for the SCEPs. In terms of risk exposure the SCEPs show strong tilt toward Big stocks. This is intuitive because SCEPs invest in firms that have relatively high market capitalization or high total assets. A major difference is the tilt in Shariah portfolios toward growth stocks. By construction the Shariah portfolio shows almost no exposure to finance sector which shape the factor exposure and provide an explanation for growth tilt. The growth tilt is more prominent in market capitalization based SCEPs as compare to total assets based SCEPs. The growth tilt has two implications for SCEPs.
The absence of finance sector in a SCEP provide hedging benefits and thus the SCEP show resistance to overall market drawdowns caused by financial turmoil's. Second, the tilt toward growth stocks creates an inertia in Shariah portfolio to grow at a faster rate in bullish market (i.e., tech bubble). However the SCEPs can suffer significant losses when the market rallies end, for example at the burst of dot-com bubble in 2000. The growth tilt in Shariah-compliant portfolio is consistent with Hoepner et al. (2011), Walkshausl and Lobe (2012) and . It is also interesting to see that total asset based SCEPs are more exposed to market risk premium as compare to total market capitalization based SCEPs.

Robustness analysis
The Furthermore, we still cannot conclude that whether the performance of market capitalization based SCEP are significantly different from portfolios constructed with total asset based selection criteria? For this purpose I conduct the robustness test to see if the difference in performance is developing across time. The two group of SCEPs (market capitalization based and total assets based portfolios) result in different sectoral bets (see, Table 2) and their constituents are time dependent (see, Figure 1). Recall, SCEPs constructed with market capitalization based screens show high exposure to growth stocks. Therefore, this group of SCEPs outperforms the total asset based SCEP in market rally in (1988)(1989)(1990)(1991)(1992)(1993)(1994)(1995)(1996)(1997)(1998)(1999)(2000) but then suffers a visible performance drag at the burst of dot-com bubble (2000)(2001)(2002). In the same time period, total asset based SCEPs suffer relatively less losses. These findings are in contrast with the general perception that SCEPs provide hedging benefits in market crises. This is true only if the crisis is caused by fluctuations in the finance sector. See, for example the results in 6th column of Table 5, the financial performance of all SCEPs in the Global financial crises of 2008-09 is much better than that of market portfolio. The resistance to financial crises is due to the fact that SCEPs do not invest in interest based financial sector.

Development of performance gap through time
The under-performance in dot-com crises are consistent with the findings of Nainggolan et al. (2015). On the other hand the superior performance in global financial crises is also documented by (Alam and Rajjaque, 2010), (Ashraf and Mohammad, 2014) and . Note: This table shows the performance statistics of Shariah portfolios for different choice of sample period. We report all the major crises, the bullish markets, pre crises and post crises. The crises are those periods with the largest drawdown in terms of cumulative loss from the peak to trough. The results are presented in four panels each showing S&P 500 all stocks and Shariah restricted assets universe.
This time variation in the performance statistics can also be seen in a plot reporting the ratio of the cumulative value $1 invested in each Shariah portfolio compared with the cumulative value of $1 invested in benchmark strategy (i.e., the S&P 500). To interpret the time-variation in the relative performance, the slope of the line is important. In periods where the line is upward sloping, the Shariah strategies with alternative weighting outperform the benchmark strategy, and vice versa when it is downward sloping.
Our first observation as shown in Figure 3 is that the relative performance of Shariah indices is relatively

Conclusion
Shariah-compliant equity portfolios avoid investing in non-compliant business activities through a rigorous screening process. The negative screens are implemented in two steps i.e. qualitative (sectoral) screens and quantitative (financial) screens. The Shariah scholars show consensus on the sectoral screens.
However, there are number of discrepancies in financial screens. The basic objective of this study is to highlight the screening discrepancies among the existing Shariah investment guidelines and to evaluate the impact of these discrepancies on portfolio outcomes. For this purpose I constructed seven SCEPs from a unified investment universe i.e. S&P 500 all stocks by implementing the screening guidelines of S&P 500 Shariah, DJIM, AZZAD, FTSE Shariah index, HSBC Amanah, AMIRI capital and MSCI Shariah indices.
Then I classify all the portfolios in to two groups based on the divisor in the financial screens, market capitalization based portfolio (S&P Shariah, DJIM and AZZAD) and total asset based portfolios (FTSE, HSBC, MSCI and Amiri).
The analyses revealed that both group of portfolios result in different cardinality and sector allocation. All SCEPs by design show almost zero exposure to finance sector. The market capitalization based SCEPs are tilted toward growth stocks while total assets based SCEPs are invested more in value sector. The heterogeneous sectoral bets shape the performance of SCEPs and total market capitalization based SCEPs outperform total assets based SCEPs for the period 1984-2017. The performance of SCEPs in economic turmoil also depends on the choice of stock selection. For example the market capitalization based SCEPs experience relatively larger performance drag as compare to total assets based SCEPs.
We also found that the superior performance of SCEPs comes at relatively higher cost due to high turnover. Though the analyses based on break-even transaction cost show that SCEPs generate enough returns to compensate the high turnover cost, still I recommend that the Shariahcompliant investors should consider the choice of stock selection and the relatively high turnover of SCEPs seriously. ,