IslamIc fInance perspectIves | malaysia international islamic financial centre

Dispelling the myths about Islamic fund management
Islamic financial products are targeted at the global investment community as the market continues to mature. writer James Gavin
islamic funds have evolved into staple components of the sharia-compliant investing universe over the past couple of decades, allowing fund managers to offer an array of products and instruments to clients wishing to invest according to islamic principles. the broadening of the offering sparked a wave of product innovation that complements the evolution of the conventional fund universe. for example, sharia-compliant exchange-traded funds (etfs) are targeting investors seeking low-cost, easyto-manage exposure to market indices. the industry is growing strongly. islamic assets under management are estimated at $52bn, according to ernst & young’s islamic funds and investment report 2010. Global hubs are now competing for islamic investment’s dollar. malaysia has 184 islamic funds, while the next-biggest centre, saudi arabia, has 174 islamic funds, according to the report. investor. many fund managers are making malaysia a hub for their islamic business activities, taking advantage of a strong legal and regulatory framework as well as attractive incentives offered by the malaysia international islamic financial centre (mifc) initiative. muslim world. in the Us, saturna capital has been operating a sharia-compliant fund, the amanah income fund, since 1986. “over the years we have grown our investment base. our primary focus is still the Us muslim investor, however because of our ethical screens we have some socially responsible investors and over the past three to four years we have had a tremendous influx of conventional money managers and investors who are looking for good returns,” says monem salam, director of islamic investing at saturna, the 13th ifmc-licensed institution under the mifc initiative. another common view among conventional fund managers is that the sharia screening process is too complicated; a confusion that mistakes rigour for complexity. in fact, the screening is simple. the first level of screening generally removes any companies involved in non-shariacompliant industries and businesses. a second level removes companies with financial ratios that exceed acceptable levels. screening also has its distinct advantages, as it generally results in a portfolio that will be more stable and less volatile. fund managers are challenging the widely held view that there is a performance drag in investing according to islamic principles. “the truth is the performance of a sharia-compliant portfolio is comparable to that of a corresponding conventional portfolio in terms of risk return over a period of five years,” says ms noripah. “Because of the screening process, companies with high leverage and unproductive cash are taken out.” the question of a limited islamic fund universe can be quickly dispelled by a quick glance at the Dow Jones islamic market World index, whose 2300-plus stocks represent a market capitalisation in excess of $15,600bn.

aDDressInG mIscOnceptIOns
malaysia and other islamic financial hubs have attracted an impressive list of fund managers over a relatively short timeframe. Unlike conventional products, islamic funds are encumbered by a series of myths and misconceptions. many investors believe erroneously that products are only relevant to muslims; that these funds are overly complicated, and that they suffer a performance drag compared to conventional funds. there is still a widespread belief that the islamic fund space is by nature a restricted universe. “the key to addressing the misconceptions surrounding islamic funds is to educate the wider investing public,” says noripah Kamso, ceo of malaysia-based cimB-Principal islamic asset management, an islamic fund management company (ifmc)-licensed institution under the mifc initiative. islamic fund management targets all investors, irrespective of their religion. “since the features of the islamic products grant social justice to mankind, it actually appeals to both muslims and non-muslims. We have an investment fund in asia-Pacific excluding Japan that we have sold in indonesia and 70% of the investors are non-muslims,” says ms noripah. this message is underlined by the experience of fund managers outside the

malaysIa: a GlObal hub
“malaysia is already at the forefront in terms of progressive development as a hub for islamic capital market and asset management,” says angelia chin-sharpe, head of south and south-east asia institutional Business Development at BnP Paribas investment Partners. “malaysia has a robust regulatory and legal framework which has helped institutions like ourselves to develop islamic products. such steps help malaysia to attract foreign financial institutions like ourselves to use it as a hub to develop more islamic products.” as the islamic fund space grows, malaysia plays a major role in creating more diverse products for the islamic fund

“the past few years has seen a focus on InnovatIon wIthIn the IslamIc fInance space through the development of etfs”

weIGhInG up the evIDence
empirical evidence suggests islamic funds are as competitive as their conventional counterparts. saturna’s amanah income

international Islamic banking.000 conventional mutual fund products globally. international takaful and human capital development. it will look to capture the institutional investors. etfs have made a smooth transition to the islamic fund space. consumer goods and utilities.” says ms noripah. Ucits [the Undertakings for collective investment in transferable securities] iii-compliant and Us dollar denominated. Through the “Shaping Islamic Finance Together” brand proposition. extending the visibility of islamic funds is key to capturing this opportunity. visit www. including Bank Negara Malaysia (Central Bank of Malaysia). we will offer an opportunity for investors to invest in instruments that can be used for strategic asset allocation. The MIFC initiative is supported by global legal. oil and gas. Government ministries and agencies together with industry participation from the banking. most index providers have put into place sharia stocks screening methodologies. in an environment of innovation and thought leadership. The MIFC initiative comprises a community network of the country’s financial and market regulators. Securities Commission Malaysia. takaful.com .mifc. human capital development institutions and professional services companies which are participating and working collaboratively in the field of Islamic finance. With a track record and a transparent way of displaying islamic funds’ success. according to ernst & young.mifc. *To read the full Q&A article. ms chin-sharpe says: “By bringing new etfs to the market. these index funds have the advantage of offering cheaper access to the market with exposure to a basket of underlying assets at relatively lower cost. islamic fund managers are now developing products that better reflect the shifting nature of investor needs.malaysia international islamic financial centre | IslamIc fInance perspectIves DJIM World Index versus Dow Jones World Index Dow Jones World Index Dow Jones Islamic Market World Index 150 showcase the track record of islamic asset management. Islamic fund and wealth management. “the s&P was down by about 39% that year and the amanah income fund was only down about 23%. and is preparing to list a second islamic etf in malaysia.” says ms chin-sharpe. islamic fund managers will have the ammunition to confound the sceptics and underline the investment potential of a sector that is now reaching its full potential. 60 Aug 05 Aug 06 Aug 07 Aug 08 Aug 09 Aug 10 Source: Dow Jones fund significantly outperformed its benchmark in 2008 when the market was going down quite rapidly. islamic fund managers are now diversifying into new asset classes to improve performance and better match investors’ needs. it just looks small compared to the 63. the existing product range itself is not small – there are 600 sharia-compliant products globally already in the market. to ensure that we extend the range of products. regulatory and sharia best practices that enable industry practitioners to conduct international business in Islamic finance in the areas of Islamic capital market. as the islamic fund space matures. to Log onto www. BnP Paribas investment Partners has listed its first sharia-compliant etf in 2007 in switzerland and france.” Supported by market revOlutIOn the past few years has seen a focus on innovation within the islamic fund space. approved by their sharia boards and these are mostly recognised by investors. We have doubled every year for the past three years. through the development of etfs.” says mr salam. the Malaysia International Islamic Financial Centre (MIFC) initiative was launched to position Malaysia as a hub for international Islamic finance. and we have seen a lot of money flow into the funds. “such methodologies allows us as fund managers – to develop shariacompliant instruments or portfolio such as etfs. this etf is domiciled in france. issuers and investors to shape the future of Islamic finance together through the MIFC initiative. it will help investors to access markets which may be costly to invest into or where they may not have resources to do so for their own asset allocation or diversification strategy. our in-house sharia advisory council also ensures that the management of these funds is compliant with sharia guidelines. Labuan Financial Services Authority and Bursa Malaysia (Kuala Lumpur Stock Exchange). the sovereign wealth funds and pension funds. capital market institutions. leveraging on and benefiting from Malaysia’s more than 30 years of experience in Islamic finance. the prize is an estimated $360bn to $480bn of individual and institutional savings that are potentially available to the islamic fund management industry. leading players. giving a global showcasing of our track record to the extent that institutional investors will be keen to come in. com/viewpointsShapingIslmcF 120 90 In August 2006. ms noripah says: “We are exploring the creation of globally acceptable products as well as a strong marketing and distribution platform by working with global offshore fund platforms like Dublin or luxembourg. this would ensure that we are in the lipper database. while enjoying attractive incentives.” BnP Paribas investment Partners’ new etf will track some of the largest shariacompliant chinese companies listed on the Hong Kong stock exchange and will cover sectors such as telecommunications. Malaysia welcomes global talents. “We need to undertake a global education with all investors.

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