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Saturday, 29 December 2012

Filling the gaps [Islamic Business & Finance]

The Investor for Securities Company launched Safa Investment Services, billed as the world's first global Islamic asset manager in the GCC, in October this year. Muslims currently make up 25 per cent of the world's population, and with 450,000 Muslim millionaires in the Middle East, Islamic investment options are becoming increasingly important on the world stage. However, their asset management needs seem to have been sadly neglected by the industry. John Sandwick explained to Islamic Business & Finance how Safa Investment Services has stepped in to fill the void.

What was the rationale behind the launch of Safa Investment Services?

Globally, there are about $80 trillion in professionally managed assets. Muslims must own at least $3 trillion or more of this, of which virtually zero is Shari'ah- compliant. In my nearly 20 years as a Swiss banker I've opened hundreds of private client and institutional managed accounts, mostly for Saudis. Nearly all those clients asked me to avoid Haram investing, or investing that is against their basic spiritual principles. Unfortunately most asset management is Haram. Hedge funds, derivatives, junk bonds, and the like are certainly not acceptable. I realised over five years ago that there is an enormous latent demand for Islamic asset management, but when I looked around there was absolutely no supply. Safa Investment Services fills that gap.
What differentiates Safa Investment Services from other Islamic asset management firms?
There are no other Islamic asset management firms. If you or your readers know of one then please tell me. I'm quite intimate with the domestic banking systems in Malaysia, and I've been of course throughout Saudi Arabia, Dubai, London and Switzerland. There is not one firm or entity doing Islamic asset management. There are many who create and manage Shari'ah- compliant products. But none assemble the best of those products in a disciplined, rigorous, professional fashion that results in robust portfolio allocations, which is the definition of asset management. In that sense Safa is the world's first and only Islamic asset manager. It does not produce investment products, it manages them.
What types of services are you offering?
We are not offering any products. There are other firms that produce and manage many products, about 850 of them by last count. Safa provides the same service you'd find at JPMorgan Asset Management, or Credit Suisse Asset Management. However, the difference is only in that we perform professional asset management of Shari'ah-compliant assets. We construct income, balanced and growth portfolios (low, medium and high risk) comprising cash, fixed income, equity and alternative investment allocations that include "best of class" assets in each category. Our allocations are back tested, benchmarked and then subjected to highly advanced technical analysis, just as you'd expect at BlackRock or Merrill Lynch. The funny thing is, when we compare our allocations to their conventional peers we see enormous outperformance and much lower risk metrics. In other words, Islamic asset management is proving superior to conventional when you make apple- to-apple comparisons.
What makes these products more ethical?
I like to tell people that Islamic asset management is the ultimate in socially responsible investing. It's true. Automatically you get allocations in underlying assets that
'do no harm.' That's what Shari'ah is all about. A Fatwa doesn't tell you if an investment is good or bad, it only tells you that the investment doesn't violate the principles of Shari'ah. Those principles ref lect nearly the identical value systems common among Christians, Jews and really just about everyone. So, to invest according to Shari'ah is essentially the same as ethical investing people are trying to achieve in conventional, Western markets.
What is your target market?
Our target market is multi-layered and will take time to cover. First and foremost we're going to Takaful companies, Islamic endowments, or Awqaf, and family offices throughout Saudi Arabia and the Gulf region. We are showing them how large, sophisticated professionals are doing asset allocation, like big insurers such as Allianz, big private foundations such as the Bill & Melinda Gates Foundation, and big endowments such as Harvard University Endowment.
Presumably these global, professional investors have learned a thing or two about asset allocation. Typically they are very light on real estate and private equity. Unfortunately those two niche, marginal asset classes are predominant in the portfolios of Saudi and Gulf region investors. Teaching people how to properly allocate their assets is our first job, and then showing them how to do so using only Shari'ah-compliant assets is our second job. We think we can capture a good deal of the $200 billion or more portfolio market in Saudi Arabia and the Gulf. Over time we'd like to take Safa to South Africa, Malaysia, Kazakhstan, and even here in Europe. Muslims won't give up their savings for bad investments, but they will always prefer professional investing with Shari'ah compliance over anything else.
What can clients expect from Islamic investing, in terms of levels of risk and length of investment? How does Islamic investing produce superior returns to conventional?
As mentioned, we are seeing that Shari'ah-compliant investing is superior to its conventional peers. Why? The answer is easy. If you
What is missing is a reliable public database of all Shari'ah-compliant assets, like a Bloomberg or a Reuters
follow the Shari'ah you also follow basic prudent investment management, meaning your fixed income (Sukuk and trade finance) must be truly asset-backed, not asset-based. Your equities have to be in companies that have very low debt levels, are not in financial services, and which utilise their cash. Of course one must avoid derivatives completely, meaning no hedge funds at all. By following these simple rules one eliminates much of the risk of conventional investing. Our portfolio optimisation software gives us 115 different risk measurements. In every one of them our Safa portfolios outperform conventional allocations. It really is superior.
Islamic asset management is said to be underserved; was this through a lack of demand, expertise, education or anything else?
It is certainly not demand. If you visit any Muslim who has managed wealth and tell him you can do the same thing, with more profits and less risk, but fully Shari'ah-compliant, is he going to say no? The reality is this: Islamic asset management is here, it is tangible and it is a service available now. There is no lack of expertise in asset management. What is missing is a reliable public database of all Shari'ah-compliant assets, like a Bloomberg or a Reuters. Also missing is recognition and credibility, which all new services lack. And, of course, people need to be educated not only on the availability of Islamic asset management, but on the basics of prudent asset allocation.
For example, we're looking at the Takaful industry. From 2003 to 2008 most Takaful treasuries were ploughed into local shares, real estate projects and private equity. The results were predictable. While Takaful underwriting is growing at double-digit rates, nearly all Takaful companies are suffering massive losses in their treasuries. Teaching Takaful asset managers on prudent asset allocation is timely and, given they cannot buy anything that's not Islamic, the billions available from Takaful are there for any manager willing to properly organise professional Islamic asset management. Look at Islamic endowments to see an even greater opportunity, where traditionally real estate comprised nearly 100 per cent of assets. There are at least $270 billion in Awqaf assets in Saudi Arabia that urgently need proper professional asset management, and again they can only own Shari'ah-compliant assets.
Is it challenging to have a global asset management firm when there is little standardisation across the Islamic finance world?
There is more to be done in terms of standardisation, but we are at the point where the industry is standardised enough to offer professional Islamic asset management. Groups like AAOIFI, which acts as a standards body, have made enormous progress in the past five years. For example, everyone now knows that Sukuk must be asset-backed, not asset- based. Any Sukuk issued after the famous AAOIFI ruling in February 2008 will likely be asset-backed, and therefore eligible for investing. Even the gap between Malaysian and Saudi and Gulf interpretations of Shari'ah is narrowing to the point of being negligible. We are seeing several large Malaysian asset managers packaging their mutual funds with an additional Fatwa from respected Saudi and Gulf scholars, meaning they are perfectly acceptable to investors in that region. A few years ago you couldn't sell Malaysian funds in Arabia because of the lack of standardisation. That's pretty much behind us now.
What are the myths about Islamic asset management that ought to be dispelled?
The myths exist on two levels. One, Arabs themselves have often thought of Shari'ah-compliant investing as inferior. They are genuinely surprised to see a highly professional team approaching them with a technically advanced investment methodology that is proving superior in terms of risk and reward. The negative image of Shari'ah-compliant investing was for the most part the result of groups like Gulf Finance House (GFH) selling private equity and real estate with gigantic up-front commissions, and then witnessing catastrophic losses in those investments. GFH and its sister and cousin firms were selling widely throughout Arabia, thus a negative perception among some who still remember the hype.
Fortunately liquid portfolio investing is a far cry from those illiquid offerings of years past, and the data doesn't have an agenda. If it shows superior performance then it is because performance is superior.
At another level there are still Western misperceptions of what exactly Muslims want and what exactly is Islamic asset management. I toured nearly every bank in Switzerland for over two years, talking about Islamic asset management. The concept was universally rejected. I think it's because asset managers in Switzerland are stuck in hedge funds, derivatives and other high-commission products that guarantee outsized revenue for an industry that has lost a lot of customers. The ability to see beyond tomorrow is difficult in times of crisis. One head of Middle East sales at a famous Swiss private bank told me, "We don't believe Muslims want Islamic investing." Another said, "We believe the Islamic banking craze will blow out along with the first scandal." Clearly these guys are out of touch with their own markets.
Islamic institutions have been criticised for an overreliance on real estate; surely there must be other suitable assets, or is diversification a challenge in Islamic finance?
In nearly all cultures worldwide there is a foolishness attached to real estate that requires a massive shock to dislodge. It is not only Arabs who fall for the real estate trap. Everyone at some point hears themselves say, "Real estate gets sick but never dies." Or the other favourite, "Real estate, God is not making any more." Real estate lulls investors into a sense of complacency. Look, however, at the tens of billions of dollars lost in Dubai real estate, or Bahrain real estate. For that matter, look at the tens of trillions that were lost worldwide, in particular from the American subprime debacle.
Anyone who had a portfolio of well-balanced, liquid assets would have been vastly better off from 2007 through today, including and in particular Muslims who owned Shari'ah-compliant liquid assets. The crash of real estate in historic proportions is a good lesson for investors in our markets. We are teaching them diversification across all asset categories. Thankfully they are listening.
What are the main challenges in Islamic asset management?
Fortunately the Islamic mutual funds industry is now nearly $100 billion strong and spread across well over 800 funds. Our "buy list" among these- the result of careful filtering, sorting and analysis-comprises nearly 400 mutual funds with over $50 billion in total assets. From this investible universe we can responsibly construct high-performance portfolios. But, compare this to conventional mutual funds, which number around 70,000 worldwide and with over $25 trillion in assets. In comparison the Islamic funds industry is barely visible. Clearly it must grow, and grow substantially. But, which comes first, the chicken or the egg? If there are no Islamic asset managers then the industry will always have few funds. But, with few funds how do you expect to grow the number of managers? The biggest challenge facing Islamic asset management is the parallel and related question: how do you get more investment products, and how do you stimulate the growth of more managers?
What is missing is a reliable public database of all Shari'ah-compliant assets, like a Bloomberg or a Reuters
I realised over five years ago that there is an enormous latent demand for Islamic asset management, but when I looked around there was absolutely no supply. Safa Investment Services fills that gap
In Saudi Arabia, the Investor for Securities will be offering this service. The Investor is a regulated investment company based in Riyadh with SAR 200 million paid-in capital.

(Equities.Com/28 Dec 2012)

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