Malaysia’s Shariah expertise on course to pay dividends
Category: Asia, Malaysia
By Weilyn Loo
Size isn’t everything when it comes to Islamic fund management
Asia Asset Management, in conjunction with BNP Paribas Securities Services, held the second in a regional series of six Quintessence CEO Roundtable events at the Mandarin Oriental in Kuala Lumpur on November 22. Topic of the day was ‘Growth of the Islamic fund sector and opportunities ahead’.
The four participants were Abdul Jalil Abdul Rasheed, chief executive officer of Aberdeen Islamic Asset Management; Maznah Mahbob, CEO for the funds management division of AmInvestment Bank Group; Noripah Kamso, CEO of CIMB-Principal Islamic Asset Management; and Zulkifli Ishak, CEO of Prudential Al-Wara’ Asset Management.
Saudi Arabia and Malaysia are currently the two largest Islamic funds markets in the world. Malaysia is second to Saudi Arabia in terms of both the number of funds and Shariah assets under management (AUM).
In 2010, the global Islamic fund AUM grew 7.6% year on year to US$58 billion, driven largely by market performance and partially on account of new money inflows, according to the 2011 annual Islamic Funds & Investments Report released by Ernst & Young in September.
Of the $58 billion global Islamic fund AUM, Malaysia currently contributes about $5 billion compared to Saudi’s $19.9 billion, the report said. Roundtable moderator and Asia Asset Management publisher, Tan Lee Hock, asked participants whether or not they would be disappointed if the Malaysian number did not triple in the next five years.
“Obviously,” said Ms. Noripah, of CIMB-Principal Islamic Asset Management, “this is how I look at it – our focus is currently to create awareness, educate investors on the benefits of Shariah investing and building a performance track record. I believe most of the investment managers would be able to build a credible three- to five-year track record on equity and sukuk (Islamic financial certificate or bond) asset classes by the end of 2014. This is because a Shariah portfolio does not include financial institutions which are impacted by the current eurozone financial crisis. Once proven, we are positive that the AUM traction will grow exponentially from there,” she said.
Ms. Noripah said industry estimates put the market segment’s desirability to invest in the Shariah space at $400 billion. These are the takafuls (a type of Islamic insurance), wakafs (charitable trusts/endowments), high net worth individuals, mass market and retail investors. This potential is probable and likely by 2015, she added.
Shariah compliant investing filters out businesses which engage in activities deemed unacceptable. These include alcohol, tobacco, armaments and pork; those that have a high debt-to-equity ratio must also be excluded from the investment universe.
This view of building up a performance track record is shared by Mr. Abdul Jalil of Aberdeen Islamic Asset Management. “Most of the funds started in 2008. So you would need to have a five-year track record before you can actually go out to clients and say that. So that will be 2013-2014. Only once that period has ended – when you have built your track record – would you then see the growth coming. That would be the growth that will come because the fund can stand alone as a proper fund, rather than it was as a seed fund. So that first five years is very delicate and I think we need to manage expectations and need to be sensible about how you market the fund,” he asserted.
“I will give you an example. We want to market this fund in Malaysia first and build the track record before offering it to clients globally. If we market this fund outside Malaysia without a track record, it will cannibalise our existing conventional funds and destroy our own brand name, which we don’t want to do,” said Mr. Abdul Jalil.
“We are patient business builders as we are patient investors. Clients in Malaysia understand Islamic fund management better than the rest and Malaysia benefits from having good service providers (Islamic trustees, clearing settlement, Shariah advisers) and have been supportive with seed funding to get the industry moving.”
Currently, more than 70% of fund managers fall below the estimated break-even assets under management (AUM) level of $100 million, while the top ten have an 80% market share, according to the Ernst & Young report, which notes that scale remains a key issue for the Islamic fund industry worldwide. Mr. Zulkifli of Prudential Al-Wara’, however, pointed out that that report might not reflect a true picture of the Islamic fund management industry as a whole because some of the information from asset management companies is kept confidential and is not available publicly.
Concerning the outlook for Malaysia’s fund industry in the next five years, AmInvestment’s Ms. Maznah noted that companies which are nimble and quick to adapt will be able to do a lot better than others. “The approach will be different from traditional. Traditional globalisation is very much McDonald’s, Coca Cola – you build one thing, very efficient and one size fits all – but that will fail in this market. So this is very much about smaller firms, nimble firms, strategic partnerships, people who can be flexible enough not only in terms of strategy, but operationally,” she said.
“In that sense, even though we may be huge in our own respective country, or even as a global fund management business, each one of us here in terms of specialised Islamic fund management, is a boutique. In that sense, we may have the chance to get a share of this growing potential,” said Ms. Maznah.
Malaysia currently allows 100% foreign ownership of Islamic fund management companies, in tandem with its goal to attract more key fund participants to the country. Mr. Zulkifli of Prudential Al-Wara’ shared his opinion that there has been a lot of support given by the Malaysian government.
“The Islamic finance agenda has been pushed very hard by the government. So naturally, they supported it with a lot of seed funding. In 2005, the Malaysian government gave out five licences and 5 billion ringgit (US$1.59 billion) to set up the conventional asset management industry. Anyway, Malaysia would understand that it is difficult to compete with Singapore and Hong Kong for the conventional finance. So the natural thing for us is to have Malaysia as a global Shariah hub,” he said.
“Malaysia has the complete Shariah infrastructure which started way back in 1962 when Malaysia launched the Tabung Haji (pilgrimage fund). When they came up with new incentives for the Islamic fund companies, they did not have a cap for licences. Right now, they make it very simple and easy for new Islamic fund management applicants (though this may change in future),” he added.
Islamic fund management houses are allowed to invest all their assets overseas and will be given income tax exemption on fees received until 2016. They will also be able to tap into seed money from the Employees Provident Fund, the national retirement fund for the private sector in Malaysia.
Specific challenges amid an evolving regulatory environment
“The challenges would be more for those in Islamic banking, Islamic capital markets because those are the areas that are faced with regulatory challenges in terms of the structuring of their products and licensing of their entities in different countries,” said Ms. Maznah.
Mr. Abdul Jalil of Aberdeen IAM also noted that there is not much at issue on the regulatory side of things. “When we chose to domicile our Islamic fund management here in Kuala Lumpur, the regulations were quite clear. If we had chosen to have our Islamic headquarters somewhere else, it would have been a bit more difficult to navigate because there is not much [in the way of] guidelines on what Islamic fund management is,” he said.
“But when we talk about regulation in general, moving away from Malaysia, too much regulation would, in a way, stifle the growth because it is a growing nascent industry. So if you put in too many restrictions, you can’t do this, you can’t do that, there is no room to grow . . . (Say, if) the prime minister announces seed funding, it is to get you started, not to hold onto that forever; to have some sort of a commercial justification to start the business. Having too many regulations is not the right way. Also, I don’t think there are many assets within Islamic fund management that deserve to be closely watched or regulated. For example, toxic assets such as collateralised debt obligations (CDOs), collateralised loan obligations (CLOs) in Islamic fund management,” added Mr. Abdul Jalil.
Institutional market development
The general view is that asset gathering outside Malaysia is challenging because of the limited involvement of institutional players.
“That is a big challenge. I know you mentioned Asia-Pacific, but take the largest sovereign wealth fund based in Abu Dhabi, an Islamic country, as an example. That is one classic case demonstrating the low conviction on Shariah investing from both top down and bottom up despite it being in an Islamic-based country. It will take another two to three years from now to convince, influence and exhibit the empirical evidence that Shariah investing is granting comparable risk return with the conventional on a long-term basis,” said Ms. Noripah.
“On top of that, it is for a social cause. With the global volatility shown in the past six years plus the expected volatility in 2012 due to the eurozone crisis, the Shariah investment process has been tested to deliver stable yet the same returns as conventional methods. So, yes, institutional asset gathering is still quite a challenge outside of Malaysia for the short-term, but we have a strong case for the long-term,” she added.
Mr. Abdul Jalil commented: “From our experience, the Middle Eastern investors are more into conventional and ethical funds because they are tried and tested. That is a client-driven decision. In Malaysia, it is growing because the largest government linked funds have taken the lead in farming out Shariah mandates. It is heartening that large funds like them have been supportive of the Islamic agenda that Malaysia is pushing and it has also generated greater confidence in the Shariah products. That’s why Malaysia has been successful there. Other countries in ASEAN struggle with limits and foreign ownership, and on how many percent of their assets can be invested outside their home country.”
Recruitment issues
Mr. Zulkifli of Prudential Al-Wara’ said: “For fund managers, it is quite tough. The reason is because we are very close to Singapore. With the tremendous growth in the Singapore fund management industry, Malaysia… is facing the problem of an exodus of fund managers to Singapore due to higher compensation and wider experience. A few of our fund managers have migrated to Singapore as the packages offered there are more lucrative. Some of our fund managers were pinched to fill higher positions, say, from senior manager to become chief investment officer.”
Ms. Maznah said: “For portfolios managers, we have had quite a stable team. We have turnover but that is more at the junior level. We have a performance-based incentive scheme. If they have been performing, we ensure that we price them out of the market… so it’s relatively hard for the senior level to move. We are open to hiring not just Malaysians, but foreigners with the right mindset and attitude.”
Ms. Noripah of CIMB-Principal said Islamic asset management “can be a challenge, but it’s manageable. Islamic asset management is not ‘rocket science’. Its Shariah principles, which exhibit transparency, certainty, fair distribution of wealth and the sharing of profit and loss in contracts makes it easy for anyone to understand.”
Mr. Abdul Jalil noted: “On the funds management side, we don’t hire experienced people. We hire from the bottom at graduate level and train them to move their way up. I agree with Zulkifli – because we are too close to Singapore, it’s easy to lose people to Singapore, which is a bigger financial hub than Malaysia. But we have been expanding. We started here with six staff six years ago and we are going to end the year with 16. It’s been hard to find young people to work for us. For us, it’s not about technical skills – that we can find in abundance – it’s about fit. These graduates come in with a very mismatched or idealistic approach to what they really think fund management is. So we have to lower their expectations and see, somewhat, if they are still keen after hearing the less glamorous things we need to do, like report writing, etc. The problem with talent is not just on the Islamic fund management side; it is an industry thing, be it conventional or Islamic.”
One big wish for Islamic funds
For Aberdeen, it would be to enter the retail space. “It is always something that we wanted to do since we established the business in Malaysia, and being here the past six years, the time is about right. We are currently exploring to see what we can do. I guess our big wish is that over the longer term, not the short-term, the way distribution is done in the retail market could be improved to accommodate non-bank backed fund managers like us, such as online purchase of unit trusts rather than relying on banks,” said Mr. Abdul Jalil.
“We want to create brand awareness and a track record, create that critical mass before finding an optimal and economical route to distribute the products. If the distribution platform is efficient, more players will be tempted to enter the retail space and, with that, offer a greater range of products from what is now available in the market, which is largely dominated by bank-backed fund managers,” he added.
Prudential is rebranding its Asia asset management business as EastSpring Investments in the first quarter of next year as the company plans to expand in Asia and enter new markets in the US. On this note, Mr. Zulkifli hopes the name change will be a springboard to even better business for the company.
“Next year, we are going to change our name to EastSpring Al-Wara’ Investments. I hope it will develop nicely. Also, we face the same challenges as Aberdeen – because we are not bank-backed, we are insurance-backed; with this name change, I hope we will be better able to promote EastSpring Al-Wara’ Investments as a very solid asset management business,” he said.
Ms. Maznah opined: “Many institutions have been supportive in seeding the initial funds for fund managers to achieve the track record. My wish list is that they will be open to, instead of just seeding institutional mandates where the performances are not visible, allowing these institutional mandates to be wrapped into funds which can be scalable and placed on a global platform. At the moment, since they are seeding anyway, it’s not visible… so (if) the regulations could allow seeding not just an institutional mandate, but in a fund, the track record would be more visible with much greater commercialisation potential worldwide.”
To conclude, Ms. Noripah added: “I wish the European pension houses of the world, which are largely sensitive to ethical and socially responsible investing (SRI), would invest and carve out their pension portfolios to be invested in Islamic capabilities. This complements their existing SRI investments.”
Discuss: Malaysia’s Shariah expertise on course to pay dividends