Asset management in the GCC - Euromoney

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Shariah-compliant markettests perceptionsOpinions are divided on quantifying the vastly important market for Shariah-compliant investmentproducts, leaving institutions about how what resources to devote to themSome remarkable numbers are thrown around about the global Islamicfinance industry, though debate rages as to how reliable they are; commonlycited figures are $500 billion in managed assets, and a growth rateof 15–20%, underpinned by almost 300 institutions.So if that’s the case, why isn’t every international fund manager trying tosell Shariah-compliant versions of their global equity products to highnet-worthpeople in the Gulf?It’s one of the complications of this fascinating area. Shariah-compliantinvestment is clearly of immense importance, but opinion is enormouslydivided on how to quantify it. At a regional level, it is clearly wellentrenched; in Saudi Arabia, 53% of funds, and 72% per cent of assets,are Shariah-compliant. That country alone accounted for 103 Shariahcompliantfunds at the end Source: of 2007, EIU, according QFC, Cerulli to Associates Tadawul, Saudi Arabia’sForeign managers' views on Shariah offerings, 2007stock exchange. In most other markets Shariah funds are a minority, butare still a highly important chunk of the market: 87 funds running $1.3billion in Bahrain; 33% of the Qatar market, and 30% in each of Kuwaitand the UAE. So where are the foreigners?One easy conclusion is that foreign managers chiefly service institutions,and particularly sovereign wealth funds, who appear to have littleinterest in Shariah-compliant mandates. Take a look at the stakes takenby groups like ADIA, or by Saudi Arabia’s Prince Alwaleed, in internationalinvestments banks like Citigroup and UBS. There’s nothing Shariah-compliantabout an American or Swiss investment bank, clearly. “KIA will notfor the heck of it invest in a Shariah-compliant company, but if the bankshave a good local fund which invests in good local companies [and happensto be Shariah-compliant] that may tickle their interest,” says oneKuwaiti fund manager.Consequently some fund managers show little enthusiasm for puttingheavy resources into this area. “We see Islamic product as an area wherethe local banks have more interest at the moment,” says Nick Tolchardat Invesco. “We are able to run portfolios against an Islamic screen, butwe are not necessarily going to go into the market with a full set ofIslamic retail products. There’s plenty of business to be had in our moreconventional product areas.” Another major western fund managerexpresses a similar view. “If they [clients] ask us for Shariah compliantproducts we can certainly cater for them. But at the sovereign wealth orpension fund level the need for Shariah-compliant funds is not strong.It’s growing much more within the core affluent, high-net-worth area ofprivate individuals.”But some fund managers do report increasing interest on the part ofMiddle Eastern institutions in Shariah-compliant products. “I believe it’s astrong institutional story,” says Scott Callander at Axa, although he doesadd the caveat that the enthusiasm relates to particular asset classes.“We’ve seen an almost exponential rise in the number of real estatetransactions under Shariah compliance,” he says. “From the nature ofthe assets through the tenants to the structure, they are all compliant.”Private equity is another area of interest, as is sukuk, which Callander says“will probably be one of the fundamental building blocks for the capitalmarkets in the region.” Infrastructure is another area of growth in Islamicfinance. “There’s increasing appetite to attract external capital into theregion and I don’t think that’s going to go away, it’s a key future trend inthe development of the region.”“It’s a retail product, it’s a high-net-worth private client product, and it’sa corporate product,” says Douglas Hansen-Luke at Robeco in Bahrain.“Any Muslim who is offered an Islamic alternative and is offered a conventionalalternative, they are virtually duty bound to accept the Islamicone if it doesn’t leave them worse off.” That accounts for the growingretail presence, which may in turn drive institutional interest as well.Sami Abdo at NCB Capital in Saudi Arabia, one of the leaders in Shariahcompliant mutual funds, says “the majority [of demand] is from individuals”but adds: “One feeds into the other. The more individuals demandIslamic, the more they put pressure on companies to become Islamic.Shareholders will have an influence.”One fund manager believes the time is not far away when shareholderactivism becomes prominent in the Gulf, “and good corporate govern-Foreign managers’ views on Shariah offerings, 2007Significant decrease2%Slight decrease5%Don’t know/ Not applicable17%No change25%Source: EIU, QFC AuthoritySignificant increase20%Slight increase31%GUIDE TO ASSET MANAGEMENT IN THE GCC19
Number of Shariah vs non Shariah funds in the region 2007 estimatesNumber of Shariah-Compliant vs non Shariah -compliant funds in the region 2007 estimates1008060%40200Saudi Arabia Bahrain Qatar Kuwait UAE OmanShariah compliantNon Shariah compliantSource: Saudi Arabian Monetary Agency, Central Bank of Kuwait, Central Bank of Bahrain, Cerulli AssociatesSource: Saudi Stock Exchange (Tadawul), Central Bank of Bahrain, Zawya, Gulfbase, Cairo and Alexandria Stock Exchanges, Cerulli Associatesance, to them, will mean financing themselves and investing in an Islamic product line. We are working towards the second scenario. So to say weway. Shareholder activists will look at the accounts of, say, Sabic, and say: want to do a fund therefore we need 50 or 100 or 200 million, it’s nothave you borrowed your money in a way that is Islamic?” He also expects what we’re trying to achieve.”that when a pension fund industry really takes root, pensions are likely tohave to offer a choice of conventional and Islamic options, and that the For local managers, though, Shariah funds are bread and better. “ThereIslamic ones will be the ones that thrive.is huge demand, in Kuwait and the GCC region, for all types of Shariahcompliant funds and products, from retail and from institutional investors,”says Joel D’Souza. “Many new Islamic investment companies areBesides, there are signs that this could be the year when foreign institutionsfinally see enough interest in Shariah products to launch their own. coming up now in the region and these entities cannot invest in or offerAt Franklin Templeton, Harshendu Bindal says he is “evaluating that offeringquite seriously. We feel that this is something we are going to add to,” world’s biggest Islamic financial institutions, Kuwait Finance House. Innon-Shariah-compliant funds and products.” Kuwait hosts one of thethough he stresses it is a “work in progress”.Saudi Arabia, there are already three entirely Islamic banks (Al Rajhi, BankAlbilad and Bank Al-Jazira) which obviously only sell Islamic product;On the face of it it seems the simplest thing for a foreign manager to launch many of the bigger conventional managers like NCB Capital and SABBa Shariah version of its global funds. In equities, surely all one has to do is are focusing almost entirely on Shariah products for new launches,put a screen through it to keep out stocks in un-Islamic sectors like alcohol, particularly in equities.and to remove inappropriate levels of interest and gearing? Bindal challengesthis. “You’re building a whole infrastructure,” he says. “It sounds very And even when internationals do finally bite the bullet and launch asimple, but when you want to do it in a globally portable manner – so not Shariah range, that’s not going to impede on local managers: locals willfor one or two markets, but for every distribution channel – it’s not easy. If offer GCC or single-country funds, and multinationals will offer Shariahwe believe we can get economies of scale and can come out with a product compliant versions of their existing global products.that is available for global consumption, we will take the next step.”One interesting area of Islamic finance is the sukuk market. A sukuk is anDaniel Smaller at Algebra Capital takes a similar view. “Larger asset managementgroups are maybe not set up to distribute to that client base. The pay an attractive yield. Everyone would like to hold them, and that’s theIslamic bond, and they represent a sophisticated market for issuance andwhole marketing approach, setting up a Shariah board; they don’t have experiencein that. And it’s not just running a screen. When a fund managerproblem: they almost never trade.has been running a global equity portfolio and all of a sudden you take That’s the biggest reason sukuk funds have been slow to appear,away 30% of his stocks, it causes a rethink in his investment process.” although a few are now under way. The first two came from newlyestablished fund managers in Saudi Arabia, Falcom Investments andThose multinationals who have tried to launch Shariah products are in Jadwa Investments. Jadwa gets around the liquidity issues by buying upsomething of a minority: DWS, for Deutsche Bank, has done so, and HSBC sukuk at a proprietary level whenever they become available, and thenAmanah. Most other Shariah products from multinationals don’t actually selling them on to the fund as demand requires. Next off the rank will become from the fund management part of the business, but the investmentbanking arm, and are structured products rather than funds; UBS for these funds is that views on Shariah compliance vary across theAlgebra Capital, with its own sukuk fund due in May. Another challengeis an example. Others in the market feel that the Shariah funds “haven’t world: Malaysia has a vibrant sukuk fund but because of the underlyingraised significant assets.”assets, they are often not considered compliant by Middle Eastern Shariahscholars. It is understood Saudi Arabia’s Al Rajhi Bank would haveBut where do those economies of scale lie? How much demand islaunched such a fund years ago if it could get enough securities past itsenough to make it worth the while of a Fidelity or a Prudential or an Invescoto make a Shariah product line? “We have a technical number thatShariah advisory panel.is very small – every fund class has a certain minimum – but what we Instead, the bulk of Islamic debt securities use a structure called murabaha,and their closest equivalent in conventional finance is money market.look at is: is this really economically viable from a longer term perspective?”Bindal says. “If my strategy is to come out with one fund and say These funds are particularly popular in Saudi Arabia, and some of thecan this be made viable, the math is very different to coming up with a largest individual funds in the whole Middle East fall into this category.GUIDE TO ASSET MANAGEMENT IN THE GCC20
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Asset management in the GCC - Euromoney

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