islamic asset management myth or reality?

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  • 1. ISLAMIC ASSET MANAGEMENT Myth or Reality? John A. Sandwick Managing Director Encore Management S.A. Geneva, Switzerland Islamic Asset Management 31 May 2008 Almaty, Kazakhstan
  • 2. How investing began
    • Stock and bond debut at the Amsterdam Bourse in 1602 ( the Dutch East India Company )
    Until the mid-20th century stocks and bonds were essentially the only investable asset classes. Then financial market innovation transformed the world of asset management
  • 3. The birth of the first mutual find
    • New York Stock Exchange as a birthplace of the first mutual fund in 1924
    The first mutual fund was Massachusetts Investors Trust , founded 21 March 1924 . A fter one year it had 200 shareholders and $392,000 in assets
  • 4. Explosive growth of mutual funds in the United States
    • The U.S. stock market crash of 1929: slow-down in the growth of mutual funds
    • Securities Act of 1933 and the Securities Exchange Act of 1934, creation of the Securities Exchange Commission: registration requirements
    • First bond fund appears, 1930
    • 1950s-1960s: Renewed confidence and growth of the stock market. John Bogle creates Vanguard 500 Index Fund, 1976
    • 1970s-1980s: IRAs and Roth IRAs as contributors to the mutual fund growth
    As of April 2006 there are 8,606 mutual funds that belong to the Investment Company Institute, with combined assets of $9.207 trillion
  • 5. Bond funds multiply. Bond funds allowed investors of all kinds - both retail and institutional - to achieve diversification and professional management in any style and kind of bond investing
    • :::: Today more than 2,000
      • bond funds
    :::: Bond universe is huge: - Corporate bonds - Treasury bonds - Emerging-market bonds - High-yield bonds - Convertible bonds - Mortgage-backed bonds - Asset-backed bonds
  • 6. Human creativity in creating complex securities
    • :::: For the last 25 years bonds have been stripped, separated, and otherwise shred into pieces to create an enormous universe of hybrid securities:treasury zeros, mortgage strips, interest swaps, and the never-ending line of collateralized debt obligations
    Financial professionals are in constant search for yet another way to create a unique investment product that fits some niche in professional portfolio allocation
  • 7. Asset managers drive financial market innovation
    • Asset managers aim is to seek a combination of securities that achieve rational objectives according to Modern Portfolio Theory
    Asset managers have no choice but to constantly seek the highest order of efficiency in investing client funds
  • 8. Asset allocation in traditional portfolios
    • Deposits allow for opportunistic purchases
    • Bonds provide stable, guaranteed returns
    • Stocks provide extra yield, but with added volatility
    • Alternative Investments provide uncorrelated returns
    Traditional Balanced Investment Strategy 15% A.I. 35% Stocks 45% Bonds 5% Deposits ALLOCATION ASSET
  • 9. Islamic asset management and Modern Portfolio Theory
    • A common form of investing has evolved after nearly 6 decades of research, statistical evaluation and professional practice
    • MPTs applies to everyone regardless of nationality, religious affiliation, or geographic location
    • There is no difference between asset allocation for Muslims, Christians, Jews, or Hindus except when one arrives at the final step: security selection
    Income, Balanced and Growth strategies: identical, but with different weightings to achieve lower or higher levels of volatility, risk and reward
  • 10. Asset allocation in Islamic portfolios
    • Murabaha allows for opportunistic purchases
    • Sukuk provide stable, (but not guaranteed) returns
    • Stocks provide extra yield, but with added volatility
    • Alternative Investments provide uncorrelated returns
    Islamic Balanced Investment Strategy 15% A.I. 35% Stocks 45% Sukuk 5% Murabaha ALLOCATION ASSET
  • 11. The universe of Islamic funds Today Islamic funds are predominantly concentrated on equities. There is so far only one sukuk fund in the market Sanad Sukuk Fund
  • 12. The universe of Islamic funds: lack of fixed income (sukuk) funds Ernst & Young: The supply of Islamic funds is concentrated on equities with substantial gaps across other asset classes
  • 13. Islamic asset management before the Sanad Sukuk Fund
    • Murabaha and equity funds well enough represented in the Islamic space
    • Alternative investments are few, but can work around this with structured or specialized products
    • Fixed income was the major block for true Islamic Asset Management
    Islamic asset management did not exist until the creation of the Sanad Sukuk Fund 15% A.I. 35% Stocks Nothing available! Empty! 5% Murabaha ALLOCATION ASSET
  • 14. Sukuk & AI are Achilles heel in asset allocation process
    • True professional Islamic asset management is impossible without products to fill all asset categories
    • Biggest gap: lack of meaningful way to allocate investments into Islamic bonds (sukuk) and Alternative Investments
    • Problems have been large minimum trading size, short supply in the Sukuk market, structuring and fatwa problems (sukuk as simply a bond dressed in a dishdasha)
    • Similar problems with Alternative Investments, but there is a solution
    • Result was extreme frustration for professional managers
    The most challenging opportunity for asset managers is the growing desire for sharia-compliant assets in the Muslim world
  • 15. Main barriers to sukuk investing Despite growth in sukuk issuances, there are still major barriers to investing
  • 16. Solution for Islamic asset management 15% A.I. 35% Stocks 45% Sukuk Fund 5% Murabaha ALLOCATION ASSET
  • 17. Choosing Islamic securities
    • Avoiding complications and following the same criteria as for traditional securities:
      • Liquidity
      • Transparency
      • Clearing & settlement
      • Risk-adjusted return probability
      • High levels of confidence
  • 18. Wide variety of Islamic assets
    • Today there are more than 500 Islamic mutual funds. We seek a universe of funds in each category:
      • Murabaha (more numerous than required)
      • Sukuk (non-Malaysian sukuk funds)
      • Equities (over 300 Islamic equity funds, over 2,700 stocks in DJIM Index, $17 trillion market capitalization)
      • Alternative Investments: Number growing, now even 4 hedge funds with acceptable fatawa
    • Result: A near-optimal portfolio (non-Malaysian) can be constructed
  • 19. The key benefits of investing in Islamic bond (sukuk) instruments
    • Sukuk are priced competitively in line with conventional bond issues
    • Sukuk are sharia-compliant investments
    • Sukuk are rated by international ratings agencies
    • Sukuk are listed on established international exchanges
    • Sukuk are tradable
    • Sukuk perfectly fulfil need for fixed-income allocations
    The most challenging opportunity for asset managers is the growing desire for sharia-compliant assets in the Muslim world
  • 20. Reef and rocks in Islamic asset management The yield is too low. Our bank only wants LIBOR + 3.00% fixed-income assets Our clients are nave.They only want private equity and real estate Our treasury is already too big. We can simply buy Sukuk ourselves Common answers from potential sukuk fund buyers (Islamic bank asset management departments): meaning junk? what is the meaning of financial advisor? meaning a static portfolio, always fully allocated?