Islamic asset management goes cross-border

Asian Investor, April 2012

When CIMB-Principal Islamic Asset Management announced a new UCITS platform in Dublin for its Shariah funds in January, it tapped into what should be the next trend for Islamic fund managers: a shift from building new products for domestic markets, to selling what they already have internationally. As CEO Datuk Noripah Kamso puts it: “We have evolved from playing in the domestic sandbox to internationalizing our Islamic investment products.”

Islamic asset management is, by and large, a domestic industry. According to research group EurekaHedge, Malaysia and Saudi Arabia account for just under half of the total Islamic fund management industry by number of funds (29% and 20% respectively, as of September 2011); in both cases, the main players in these industries have sought to sell to individual home-grown investors who want to invest in a way consistent with their faith. Industry-wide, 90% of public fund structures are mutual funds, catering to local retail, according to Eurekahedge.

The same researcher says there are 717 funds worth US$77 billion between them. Yet Noripah says there are only 26 UCITs funds. “Most players are still focused on domestic Islamic funds, ringgit in Malaysia or riyal in Saudi Arabia,” she says. “That will limit the passporting of funds for international investors to come in.”

But she believes things may be about to change, because most of those UCITS funds were launched in 2008 and will soon achieve a five year track record. To her mind, this is crucial. “We have a conscious strategic intention to target international institutional investors: sovereign wealth funds, pension funds, government-linked,” she says. “But for us to tap that tier of the world, we have to show a track record, and while we currently have US$870 million under management, it’s all opaque: one-to-one, discretionary, direct mandates.” One of the central reasons CIMB has launched UCITS funds in Dublin is to give a clearly demonstrable track record, tracked through Lipper, Morningstar and other providers, “to use it as a shop window so institutional investors can track us.”

In fact, these funds don’t need to attract any money to serve their purpose, if their transparency allows them to secure discretionary mandates from sovereign funds and others. That said, CIMB-Principal does have ambition for the sales of the funds themselves: it has a team of global sales and marketing professionals who will offer them in seven jurisdictions. (Interestingly, though three of those countries are the UK, Switzerland, and Germany, it’s not in any expectation of attracting European investors but the petrodollars that have accumulated in those countries.)

For Noripah to be right, institutions will need to show more of an interest in Islamic finance than they have to date. Even those institutions in the most strictly religious Muslim states, such as the Saudi Arabian Monetary Agency, do not generally invest in a Shariah-compliant way, since as a central bank they feel obliged to hold interest-bearing Treasuries.

“I expect that to change gradually from 2013 onwards,” Noripah says. She believes that, with a demonstrable track record, it will be easier to show that Islamic strategies have outperformed conventional ones with less volatility – which in recent years, helped by the absence of conventional banks from Shariah portfolios, has been largely true – and that institutions will therefore start putting some of their money towards Islamic managers. Once this starts to happen, she says she “would expect a huge trajectory of Islamic UCITS funds by 2013.” Malaysia’s AmInvestments is also believed to be moving towards UCITS launches.

Still, despite widespread expectations, not many of the bigger Islamic managers have taken the UCITS route. The largest of them all, Saudi Arabia’s NCB Capital, which is behind the Al Ahli series of mutual funds, was expected to develop a UCITs platform several years ago under the leadership of former Deutsche man Rehan Pathan, but he has since left to start his own business, putting NCB’s progress towards the platform in further doubt.

Some in the Middle East do clearly see the need to take this route. “If you want to sell to Swiss banks or Scandinavian pension funds, in Saudi Arabia the problem is that the fund manager is also the custodian and the administrator,” says one fund manager, who believes three Saudi managers have started the process to develop UCITS platforms but that none have quite got there yet. “If Arabian managers don’t reform their industry, and demand transparent, well-regulated systems [like UCITS], then they will see assets under management go down.”

Another adds: “The missing link is cross-border. It’s easy for a Saudi Arabian fund to raise $20 million from Saudi Arabia. How do you take the same fund and get $20 million from Switzerland?”

After all, the demand for new product domestically is clearly flagging. Morningstar logged 27 new Islamic fund launches worldwide in 2011, mostly in Saudi Arabia and Malaysia as usual; that’s a far cry from 2007, when 180 were launched, according to EurekaHedge. There is a feeling that the necessary diversity in product already exists, and that the focus should instead shift to drawing assets into those products, particularly from overseas. That said, at least one international manager in Malaysia is planning to launch pooled funds in the near future.

Outside the fund space, though, there is renewed interest in non-traditional mandates. “We are getting a lot of RFPs for absolute return mandates,” reports one international manager in Malaysia, who also says demand from the Middle East is particularly strong on property investments in Asia.

CIMB-Principal’s first new funds on the UCITs platform in Dublin will be Islamic global emerging markets, Islamic Asia-Pacific ex-Japan, and Islamic Asean equity; all are expected to be operational in the second quarter.