Islamic Investor: Islamic Investor: - Islamic Finance News

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FEATURE or country-focused ETFs, when that sector or country is doing badly you will have a lot of money sat on the sidelines. State pension funds or sovereign wealth needs to support this. Having a basket of ETFs with US$100-200 million behind it will make the global markets sit up and take notice.” What makes an ETF Islamic? In terms of features, Islamic ETFs are similar to their conventional counterparts; what is different is that all the component stocks of an Islamic ETF must be Shariah compliant. In terms of Shariah screening, the methodology is heavily dependent on the index provider linked to the ETF. The diversity provided by an Islamic ETF is perhaps its most attractive feature, due to the fact that an investor buys into a basket of underlying equities. However, in some cases, there are stocks which do not comply with the binding Islamic requirements. The largest Islamic ETF in the world is currently the New Gold ETF from South African bank Absa, with a net asset value (NAV) of US$1.97 billion In this case, Islamic ETF fund managers can either rebalance their stocks to proportionately take on the percentage of the non-approved stock; look for an approved stock with similar characteristics and correlations as the non-compliant stock as a replacement in the portfolio; or maintain the portion of the non-approved counter in cash. Islamic ETFs also undergo a process of income purifi cation, where a component stock held in an ETF will receive dividends from its stocks, accommodating a 5% room for non-compliance. The non-compliant portion is then placed in a separate holding account which is then channeled for education or charitable purposes. growth in the creation of ETFs, we have yet to witness much enthusiasm for the Islamic ETF products. One of the problems I see for ETFs is that the user/investor is often either using them as a trading vehicle or a wealth manager using them as an asset allocation tool. The problem with the former is that a trading vehicle needs a lot of liquidity to be useful, and the relatively small target market for Islamic ETFs has limited this. The problem with the latter is that many wealth management relationships for Muslim investors involve directing clients to purchase commission-based vehicles like unit trusts, and therefore the low-cost appeal of the ETF is less relevant. If and when the Islamic wealth management community moves to more of an asset-based fee arrangement, Islamic ETFs may become more popular.” “Islamic ETFs will have a better chance as wealth management relationships transition from commission-based to fee-based arrangements,” Fegley added. Industry players believe that more education and a level playing fi eld in terms of tax and regulatory infrastructure are imperative in growing the Islamic ETF market and resurrecting investor interest in the product. A market player revealed: “Most equity markets need to revive their laws, regulations and trading practices. A lot of these revolve around tax because this is the normal transaction. There is a need for creation of redemption to create liquidity in ETFs. I think the market needs those regulatory changes and needs to educate retail investors and fund managers on ETFs such as Shariah investment proposition. This will probably see demand and interest level going up. If you talk about a learning curve, we could be at a learning stage. A lot needs to be done to help investors.” Popularity contest The largest Islamic ETF in the world is currently the New Gold ETF from South African bank Absa, with a net asset value (NAV) of US$1.97 billion — which amounts to only 2% of the largest conventional ETF, the Spider S&P 500, which currently holds a NAV of US$93.33 billion. The main cause of this disparity according to Bryce Fegley, the president and chief investment offi cer at Saturna Capital in Malaysia, is due to the relatively small target market for Islamic ETFs; which limits their liquidity. “Despite the rapid 12 September embe 2011
FEATURE 2011 Key Trends in Islamic Funds Over the last 10 years Shariah compliant funds have posted significant growth, both in terms of number of funds as well as assets under management. Rapid developments in the Islamic finance industry, especially over the last decade, have led to an increasing number of Shariah compliant funds employing different strategies and investing across new asset classes. In this report, FARHAN AHMAD MUMTAZ discusses the key trends observed in the Islamic fund industry since 2000. The rapid development of the Islamic fund industry over the last decade represents the progress made in the Islamic finance sector. The primary goal of Islamic funds is to engage in ‘ethical investing’ into products and companies that are compliant with Islamic guidelines. As such, Islamic funds are wealth management vehicles that cater to investors who want exposure to capital markets inside a Shariah framework, which is their key distinguishing factor compared to conventional funds. Currently, the total number of Shariah compliant investment vehicles is estimated to be 717, with assets standing just over US$77 billion. The graph below (Figure 1) shows the growth in the total number of Islamic funds since 2000. The Islamic fund sector underwent strong growth in 2007, which saw the launch of 180 funds. However, subsequent years have seen a decline in launch activity though it should be noted that despite a slow growth rate, the number of funds did not decrease as Islamic funds mostly invest in asset-backed securities and do not apply leverage, thus limiting performancebased losses. Additionally, existing funds further consolidated their positions in 2009 and 2010 – and as the end of June 2011 the Eurekahedge Islamic Funds Index was up 39.8% from February 2009. The new launches in the 2009 — 2011 period, although comparatively small in number, represent increasing diversity in the industry in terms of asset classes and industry segments as well as geographies and investors. The sector has adjusted to the changed landscape post-fi nancial crisis and has attracted attention from various quarters including western banks and investors. Sukuk issuances have picked up substantially, even from companies such as General Electric, while new Islamic funds have launched in places like Australia. Head office locations Malaysia and Saudi Arabia remain the most popular Islamic fund centers as they boast the most dynamic Islamic fi nance industries as well as the greatest number of investors. Saudi Arabia has recently increased its share as a fund center of choice due to the growing popularity of retail funds among consumers as well as the further strengthening of the Sukuk market in the country. Malaysia was one of the early movers in the industry, with Islamic funds launched as early as the 1970s, and further cemented its place as a leading fund center throughout the 2000s. A liberalized Islamic banking sector with a strong Shariah framework established in the 1980s has proven to be a Source: Eurekahedge Source: Eurekahedge September 2011 13
Page 1 and 2: September 2011 Islamic Investor: Eq
Page 3 and 4: EDITOR’S NOTE Supplements Editor
Page 6 and 7: COVER STORY Equities Vs. Commoditie
Page 8 and 9: COVER STORY futures market to estab
Page 10 and 11: FEATURE investments in Islamic REIT
Page 12 and 13: Global industry One publication Est
Page 16 and 17: FEATURE Source: Eurekahedge conduci
Page 18 and 19: CHAPTER Islamic Hedging & Risk Mana
Page 20 and 21: CASE STUDY Executive chairman of AP
Page 23 and 24: STATEMENT Beyond Banking Global Isl
Page 25 and 26: CHAPTER World Islamic Index’s out
Page 27 and 28: RESULTS Crème de la Crèmé The in
Page 29 and 30: RESULTS Best Asset Management Compa
Page 31 and 32: RESULTS Best Real Estate Investment

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