Major Islamic funds conference on way

Gulf Daily News: Bahrain will host the Fifth Annual World Islamic Funds and Capital Markets Conference later this year. Tharawat Investment House, the latest innovative investment company in the kingdom, has said it will sponsor the conference, which will be held on May 25 and 26...Read More

Islamic funds

Investors Chronicle:Islamic finance is finally breaking into the mainstream. The driver for much of the growth in demand comes from Muslims who are looking for financial services that observe core Shariah ethical principles. However, another key factor has been growing oil wealth, with demand for ethical investments soaring in the Gulf region. Local stock markets have struggled to cope with this wall of money, forcing many Gulf-based investors to look overseas - and to London in particular with its many Islamic-compliant services. The UK also boasts a number of Islamic-compliant banks (five in total), including London-listed The Islamic Bank of Britain, which opened for business in 2004. This wave of new products and Islamic institutions has touched the debt markets, too – in April this year, the London Stock Exchange listed Sukuk, a Sharia-compliant bond.

The fastest growth, though, has been in the funds space: Islamic assets already total around $1 trillion (£560bn) globally, estimates the Asian Development Bank, with annual growth of 10 to 15 percent a year.

This huge wall of money has sparked a frenzy of new financial structures and ever more complex interpretations of religious guidelines and rules. Crucially, this innovation has been centred on working out ways that allow believers to invest in the developed world's stock markets, alongside markets in Islamic countries, knowing that they're not buying an asset of which their scriptures would disapprove.

Equitable distribution

The fact that Islamic laws prohibit paying and receiving interest doesn't mean that that they frown on making money or encourage reverting to an all-cash or barter economy. At its core, Islamic finance is about linking the return to productivity and the quality of the project, thereby ensuring a more equitable distribution of wealth, based around a contract that manages risk.

In practice this means that in the funds space pretty much any structure can work if its ethically designed with expert opinion and approval – funds targeted at private Islamic private investors range from a Shariah-compliant baby bond from the Children's Mutual through to Islamic hedge funds. Commodity funds specialist ETF Securities has even launched a Shariah-compliant commodity funds platform, based on spot prices via physical ownership of key precious metals.

Last month saw London's first specialist Islamic closed-end fund list on stock market. Called the Family Shari'ah Fund, this Cayman Islands-registered but Bahrain-based fund is the UK's first actively-managed listed investment vehicle dedicated to Islamic finance. Its stated objective is to generate "stable long-term capital appreciation across a market cycle through a diversified pool of investments" including money-market instruments, leasing and fixed-income sukuks – real estate, private equity and structures replicating hedge funds returns – plus equities.

Exchange-traded funds

The biggest growth has been seen in the index tracking or exchange-traded funds (ETFs), in part because the idea of an Islamic stock market index is far from new. The first Shariah-compliant indices from a major provider were launched by Dow Jones Indexes in 1999, and FTSE followed suit with its own family in 2000. Later entrants include S&P (tracked by a new family of Deutsche DBX funds) and indices from MSCI. It's important that investors understand that not all Islamic indices are created in the same way – the S&P index, for example, screens out those companies that engage in the trading of gold and silver as cash on a deferred basis, while the MSCI indexes screens out companies involved in the music industry (including radio broadcasting), hotels and the film and television industry (including television broadcasters, cable providers and theatres).

Over in the ETF fund provider space, the key innovator has been Barclays' iShares unit. Traditionally, it is very good at spotting new and alternative investment ideas – iShares' range of alternative asset and property funds is still the most comprehensive by a considerable margin and it's constantly churning out new ideas like its emerging markets infrastructure ETF. Not surprisingly, then, it was also the first to launch Islamic index funds using the MSCI index – there are three funds on the market allowing Islamic investors to invest in the US, Emerging Markets and a wide World Developed Markets index. But iShares is not alone – it's now facing stiff competition from its arch rival Deutsche DBX, which has just launched its own range of three ETFs that are (bar one fund) considerably cheaper than the iShares' funds.

Looking at the funds in detail, you need to be aware that the key decision to exclude financials (traditional banks) does have two major effects. First, these indices have avoided some of the credit-crunch panic, but at the risk of increased exposure to energy and resource stocks. Holdings of these kind of resource stocks in the iShares ETFs range from 34 per cent (US fund) through to 48 per cent for the emerging markets fund. Second, healthcare becomes an important sector – although, in bear markets, that may be something of a plus as most healthcare stocks are fairly defensive by nature.

Still, with all sorts of ethically 'challenged' companies deliberately screened out, it comes as no surprise to learn that some non-Muslim socially-responsible (SRI) investors have started taking these funds seriously. Many Christian investors, for example, would probably share many, if not most, of the same ethical views as Islamic investors – the only key difference seems to be that some Islamic funds do not exclude weapons manufacturers but they do exclude banks, which tend to past most SRI tests. Apart from these inconsistencies, investors might also want to question whether they're entirely comfortable with the idea of the advisory committees setting the ethical screens – these tend to be comprised of a small number of supposedly religious/business experts who set the standards based on their interpretation or reading of the key religious texts. Investors also need to be aware that these ETF funds are all still very small – they might be closed if not successful – and still very much focused on mainstream equities with no exposure yet to bonds or alternative asset classes.



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WHAT IS ISLAMIC FINANCE?
The Islamic Bank of Britain gives one of the best definitions of the principles behind Islamic finance: "Central to Islamic finance is the fact that money itself has no intrinsic value. As a matter of faith, a Muslim cannot lend money to, or receive money from someone and expect to benefit - interest is not allowed. To make money from money is forbidden - wealth can only be generated through legitimate trade and investment in assets. Money must be used in a productive way."

When applied to an Islamic fund these principles imply a joint pooling of funds where the investor contributes their money for the purpose of its investment to earn halal profits.

A number of ideas are crucial. Instead of a fixed return tied up with their face value, Islamic investments must carry a 'proportionate profit' actually earned by the fund, and that means that neither the principal nor a rate of profit can be guaranteed.

But how do index and fund providers translate these ethical ideas into practical investments? The MSCI Islamic Series, for example, is based on a normal MSCI index of shares but with equity screens applied to weed out all the non-compliant shares. They exclude securities using two types of criteria: business activity and financial ratios. The screens involve excluding any company that derives more than 5 per cent of its revenue (cumulatively) from, the activities like gambling, alcohol and pork processing.

Islamic funds begin to take hold

Investment Executive:The Shariah-based investment industry is flourishing and expected to double in assets in less than two years, said experts in Islamic finance during a presentation at the Investment Funds Institute of Canada’s annual conference in Toronto on Thursday.

Currently with assets of US $700 billion worldwide — and growing at a 22%-a-year pace — Shariah-compliant funds are expected to double to US$1.4 trillion in assets by 2010, said Rehan Saeed, a Shariah liaison with the Mississauga, Ont.-based Islamic Finance Advisory Board.

Shariah, otherwise known as Islamic religious law, governs all Islamic banking and investing practices. To comply with Shariah, stocks and bonds within a portfolio need to be screened for the types of businesses they are associated with.

For instance, investments related to alcohol, tobacco, gambling, banking and pornography are not allowed, said Imtiyaz Ahmed, representative for Shariah capital markets at frontierAlt.

“Think of it as a socially responsible fund,” Ahmed added. “There are a just a few extra controls.”

Besides business screens, Shariah-compliant funds also restrict investments in companies with excessive debt. Ahmed explained that “excessive” is a debt to equity ratio above the 30% range.

However, Shariah regulators recognize it’s not a perfect world. Inevitably, regardless of how hard fund managers try to create products in line with the framework, some companies may have a small income stream coming from interest or from a black-listed activity.

To solve this problem, funds can be “purged of their sins” by donating a company’s income stream from non-Shariah compliant activities to charity, said Habib Meghjee, associate partner at Deloitte & Touche LLP. For example, if a fund invests in a company that earns $10 a share, but has 10% of its revenue coming from interest income, the fund managers would donate $1 a share to charity in order to be 100% Shariah compliant, Meghjee said.

A growing Muslim population demanding more Shariah-compliant funds in Canada has driven the demands for these investments in North America, said Ricky Pinto, also a partner with Deloitte & Touche.

“There’s only a sprinkling of funds in Canada,” said Pinto. “Around the world, people are seeing these opportunities.”

Currently, the $3 million frontierAlt Oasis Canada Fund is the only Shariah-compliant fund in Canada. The fund’s assets under management have tripled from $1 million since launching in November 2006, according to Les Young, vice president of frontierAlt.

And with the Muslim community expected to grow to 4.9% from 3.7% of the Canadian population by 2017, Saeed said, the Shariah-compliant based fund industry is still largely untapped.

Islamic finance began in the 1960s, staring with two funds in Egypt and Malaysia. Today, the industry has grown to include a number of funds and governing bodies around the world. The organizations include the Accounting and Auditing Organization for Islamic Financial Institutions, the Islamic Financial Services Board and the International Islamic Rating Agency.

Islamic funds zone in on Malaysia

Financial Standard -- Australian investors monitoring the boom of Islamic funds management should look across the seas to Malaysia, which recently approved three international financial firms to set up shop in the country.

The Securities Commission (SC) has approved the applications of Kuwait Finance House (Malaysia) Berhad, DBS Asset Management Ltd and CIMB-Principal Islamic Asset Management Sdn Bhd to open operations in Malaysia.

“The approval of these three companies will play a catalytic role in the internationalisation of our Islamic capital market," said SC chairman Dato' Zarinah Anwar.

Dato' K. Salman Younis, managing director of Kuwait Finance House (Malaysia) is optimistic about the growth prospects of the Malaysian capital market.

“The KFH Group's fund management activities in the region will be consolidated through this platform," said Younis.

“The new entity will structure and distribute Islamic asset management products across Asia via synergies with DBS and DBS' Islamic Bank of Asia," said DBS Asset Management chief executive, Deborah Ho.

The SC is currently evaluating proposals from other fund management companies to establish Islamic fund management operations in Malaysia.

DBS Asset Management and its associate companies currently manage $20.8 billion in assets with distribution channels in South East Asia, Middle East, Greater China and the Indian sub-continent.

CIMB-Principal Islamic Asset Management is a joint venture between the CIMB Group and the Principal Financial Group. CIMB Principal will focus its Shariah fund management activities at CIMB-Principal Islamic Asset Management.

Kuwait Finance House (Malaysia)is a wholly owned subsidiary of Kuwait Finance House.

Dubai Islamic, Global set up $500m Islamic fund

DUBAI — Dubai Islamic Bank and Kuwait's Global Investment House have set up a $500 million Islamic buyout fund, the firms said in a joint statement on Wednesday.

"The Islamic buyout fund that both our institutions have created aims to become the leading Sharia-compliant investment fund in the region," Global's co-founder Maha Al Ghunaim said in a statement. The statement had no further details

Dubai Taps Fund Talent

By JOANNA SLATER

In the latest effort to meld Wall Street with Islamic law, an arm of the Dubai government is investing in five well-known U.S. hedge-fund managers that will employ trading strategies conforming to religious strictures.

The five managers will evenly split $250 million to make investments that comply with shariah, or Islamic law. They will invest in commodity-related stock strategies ranging from gold to agriculture.

The announcement underscores the race to tap the burgeoning oil wealth of the Persian Gulf, and in particular, that of observant Muslim investors. Globally, the Islamic finance industry has more than $700 billion in assets, and is estimated to be growing at 15% a year, according to Moody's Investors Service.

The hedge-fund investment is being made by the Dubai Multi Commodities Centre, which is part of Dubai World, the government-controlled holding company credited with turning the city from a sleepy port into today's boom town.

The investments are part of a plan by the Dubai unit to create a "fund of funds," which is an investment vehicle that spreads money across several hedge funds.

The $250 million will be seed capital for this fund of funds, which will take money from other investors interested in shariah-compliant activity.

"I see this as a toehold for us to build our business in that part of the world, which is obviously attractive," says John Hathaway of Tocqueville Asset Management, one of the five hedge-fund managers involved in the project. The others are BlackRock Inc., Zweig-DiMenna International Managers, Ospraie Management, and Lucas Capital Management.

Marrying the strictures of Islamic law with hedge-fund tactics has proven an enormous challenge. In Islamic finance, investors aren't permitted to invest in companies involved in alcohol, for example, or that carry high levels of debt. Short selling -- or betting on a stock's decline by selling borrowed shares -- is equally problematic, since Islamic investors aren't allowed to sell what they don't own.

The five hedge funds will operate using a trading system developed by Shariah Capital, a Connecticut-based firm, and Barclays Capital, a unit of Barclays PLC that will act as the prime broker to clear and finance trades.

Dubbed "Al Safi," or "the pure," the platform screens out companies considered unacceptable. It also permits managers to replicate short sales of stocks by using what is known in Islamic law as an "arboon" structure, which operates much like a down payment.

In a short sale, investors borrow shares and sell them, hoping to buy an equal number of shares at a lower price and return them to the lender, pocketing the difference as profit. An arboon structure allows investors to avoid formal borrowing.

Such methods still spark controversy among Muslim investors. Eric Meyer, chief executive of Shariah Capital, likens the situation to the one that prevailed several years ago for Islamic bonds, then highly contentious but now widely accepted.

"There's always a healthy degree of skepticism" of new products, he says. He adds that all the shariah scholars who approved the hedge fund platform are part of an association in Bahrain that serves as the informal authority for Islamic financial institutions.

There are ambitious plans to expand the venture from here.

"Not only are we prepared to say we have confidence, but we are prepared to demonstrate" by having the Dubai Multi Commodities Centre invest its own money, says David Rutledge, the group's chief executive.

Newedge, a joint venture between Société Générale SA and Crédit Agricole SA's Calyon unit, also has a shariah-compliant trading system that hedge funds can use, which employs a somewhat different approach.

Five hedge funds currently use it to manage just less than $100 million, according to Philippe Teilhard de Chardin of Newedge.

KASB Funds launches Islamic Income Fund

LAHORE: KASB Funds Limited (KFL) launched its first Shariah compliant fund. KASB Islamic Income Fund (KIIF). The IPO of the Fund commenced from May 30, 2008 and will end on June 7, 2008. During this period the Fund will be sold at par at a price of PKR 100.

"We are delighted to offer our first of the series Islamic investment products based strictly on Shariah compliant framework to our investors. We aim to continually expand the offering into further asset classes and investment styles, delivering a range of Islamic products with the same breadth and depth as our conventional mutual fund.

KIIF's primary objective is to provide Halal income, and is geared towards investors who are kicking to get a consistent stream of income from their surplus liquidity, whilst keeping risk al low levels. Initially, the range will be offered to retail and institutional investors in Pakistan with plans to expand the offering to the Middle East," said Naz, Khan, CEO KASB Funds.

ADIH launches two Islamic funds

MANAMA: Two new funds are being launched by Abu Dhabi Investment House (ADIH) in co-operation with its Geneva-based subsidiary.

ADIH Islamic Helvetic Fund and Global Islamic Equity will invest in shares of companies worldwide in accordance with the principles of Sharia investment.

Based on a multi-management approach which has been rarely available among Sharia-compliant equity funds up to now, the fund will gradually allocate its assets between complementary investment strategies, combining sector and regional allocation as well as fundamental and quantitative models.

The fund's launch is timed to exploit robust growth rates in emerging markets and possible recovery of the equity markets globally during the second half of this year. The ADIH Islamic Helvetic Fund will invest in high-income structured investment products offering potential for capital gains, such as barrier reverse convertibles, equity yield notes and callable return notes. The fund positions will be monitored in an active risk management approach.

UNB Islamic fund to invest mainly in UAE

By Wam
Union National Bank (UNB) announced the launch of the Al Samaha Islamic Fund, a Shariah compliant fund investing mainly in the UAE and with the flexibility to seek opportunities in other GCC countries, Mena and other emerging equity markets. The fund aims at investing in a balanced portfolio compliant with the Shariah creating a growth in the capital both in the short and long term.

It will focus on Islamic equities in addition to other Shariah investment instruments that are compliant with the Shariah methodology. The fund is an open-ended fund with weekly liquidity. The minimum subscription is Dh10,000 and thereafter in multiples of Dh1,000. Investment in units is open to all individuals without restrictions.

Subscription open today and will continue till June 11. The fund will have liquidity and its Net Asset Value (NAV) will be calculated and posted on a weekly basis. "The idea of the fund emerged from the high liquidity in the local market and the low interest rates.

"In addition to the promising quarter results of the listed companies which led to the substantial increase in the stock market deals. All reflect the return of trust to the local market," said Galal Khadr, Head of Private Banking & Wealth Management Division at UNB.

"At UNB we are always keen to offer our clients distinguished services that meet their various requirements and we expect the Fund to be met with enthusiasm from a wide range of investors and for it to be our flagship entering into the Islamic products arena."

Khadr added: "We also see new opportunities every day and are confident that the market can yield much higher returns in the near and long term."

The fund is approved by the UAE Central Bank and will be managed by a highly qualified team that will serve clients and offer them the latest investment solutions to address all their investment needs.

Khadr continued: "The region continues to attract new funds and the UAE in particular has enjoyed continuous improvement in the investment environment which creates ideal opportunities for investment.

"On the macro-economic level, the region is being driven by a continuous surge in oil prices with the real estate and banking sector leading the economy.

"The stock market, too, is expected to grow very positively in the future."

Islamic funds make their presence felt

ByGulf News-It was a busy period for asset managers in the first quarter. Volatile markets meant that many were trying to keep their heads above water - many of them couldn't - as the markets caught a bit of the global sub-prime fever.

Still, the asset managers found time to launch no less than 21 funds during the first quarter, nearly half of them focused on the region, while the rest had an international outlook.

Crucially, two-thirds of all the funds launched in the first quarter were Sharia-compliant.

Jadwa Investment alone was responsible for four such funds, suggesting that the appetite of Saudi investors for Islamic investments is on the rise.

"If you take a look at the overall Saudi market, you realise that mutual funds comprise only 3 per cent of total investor base," said Fadi Tabbara, Head of Asset Management and Chief Investment Officer of Jadwa Investment.

Different appetites

"In the US, it is a lot larger - up to 40 to 50 per cent. We are trying to educate investors and focusing on investors with different appetites such as the risk-averse investor, moderate investor, and the risk-taking investor."

Tabbara is planning to launch another five to six funds this year focused internationally and on the region, with some country-specific funds as well, adding that there is tremendous demand for such products.

"Jadwa wants to mirror the products available in the conventional space, as Islamic finance is still new and we need benchmarks," says Tabbara. "We want to be the leading provider of Sharia-compliant funds both locally, regionally and internationally."

Islamic funds already have $20 billion in assets under management, according to research consultants Failaka Advisors, a figure that is set to rise.

There are more than 300 Islamic equity funds globally with around 125 based in Asia and 120 in the Gulf. Of the 120 funds in the Gulf, 75 are based in Saudi Arabia, according to Failaka.

"There is a lot more interest in Islamic funds and it has become much more acceptable to investors," says Craig Roberts, Chief Executive Officer of Apex Fund Service Dubai. "You are beginning to find that Islamic funds are producing the alpha returns that regional investors expect."

And there is more on the way. Dubai Multi Commodities Centre (DMCC) is set to launch as much as five commodity-linked Islamic funds this year, while other investment houses are gearing up for a number of Islamic fund launches this year, as the Sharia fever grips the regional financial services industry.

And innovation in the Islamic financial services industry will only spur investors and institutions alike.

Performance

"Islamic funds are not trying to replicate the conventional model and this is the best part of the industry's development," says Robert. "They are becoming mature enough to develop their own products."

At the moment though, the performance of Islamic funds is not much different from that of their conventional counterparts. Six Islamic funds featured in the top 20 performing mutual funds in the region at the end of first quarter, with Commercial Bank of Kuwait's Tijari Islamic Fund emerging as the region's second best performer in the first quarter at 14.71 per cent, just a notch below the conventional Shuaa Capital's Oman Gateway Fund - the standout performer for the first three months of the year, at 14.87 per cent.