Institutional Investor's Alpha Magazine - November 2008 - (Page 47)

based commodity funds, including a BlackRock metalsand-minerals fund, a Lucas Capital Management energy/ oil and gas fund, an Ospraie Management agriculture fund, a Tocqueville Asset Management gold portfolio and a Zweig-DiMenna Associates natural resources fund. Though it is based in Connecticut, Al Saﬁ has direct and ofﬁcial support from the Middle East: Each portfolio was seeded with $50 million from the Dubai Multi Commodities Centre, which is sponsored by the Dubai government. Second are ﬁrms, like HSBC, that offer plain-vanilla global-equity mutual funds. These funds avoid bank stocks, breweries, casinos and tobacco companies. The third group includes those — like Deutsche Bank — involved in the creation of structured products, strategies meant to offer a guaranteed return on principal that are linked to a shari’a-compliant investable index. Traditionally, most Islam-friendly investment products have been retail — bank accounts, mortgages and insurance. Then in the 1980s bondlike instruments called sukuk were introduced. These are medium- to long-term Islamically compatible trust certiﬁcates backed by shari’acompliant assets, say those tied to real assets like property or commodities and that rely on rental income or appreciation for returns rather than on interest. Such products are meant to duplicate conventional ﬁxed-income debt securities, and most have been issued by governments, though the private sector has shown interest in issuing them too. This year, Japan’s Toyota Corp. announced that it was considering issuing a shari’a-compliant bond for the ﬁrst time (in a bid to expand its business in Malaysia), and Thailand said it would issue $600 million in shari’ageared government bonds. It’s easy to see why there is an interest in this market. Sukuk issues totaled $47.1 billion in 2007, up from $800 million in 2002, according to the Islamic Finance Information Service, a product of ISI Emerging Markets, which is owned by Alpha parent Euromoney Institutional Investor. This so-called Islamic bond market has led to the creation of investable indexes that are tracked by Dow Jones & Co. and Citigroup, seeking to offer exposure to the performance of global sukuk. Sukuk aside, Muslim wealth is tied in large part to oil, which can see sharp price swings — witness the spike from $90 a barrel year ago to almost $150 in June and the subsequent drop to less than $60 in November — but whose worth is unmistakable and long term. This fact assures the potential for shari’a-sensitive investing. “The trend of growth in Islamic ﬁnancial products is still very much there,” Amin says. “The fall in oil has been big, but it does not change the big picture. It still leaves a situation where many of these countries are sitting on signiﬁcant ﬁnancial surpluses.” HSBC’s Masoon is of the same mind. He says bankers and investment ﬁrms were already turning toward the markets of the Middle East before oil prices surged to record highs this year and notes that parts of the Middle East — like Dubai — have diversiﬁed and have rich real estate bases in particular. Though global market turbulence in recent months seems to have dampened demand among most investors for alternative investments, Islamic ones included, conditions have forced adaptation. “It is very murky and muddy out there still, so a lot of asset managers are now focusing on products that are more ‘all weather,’” Masoon explains. To that end he expects an uptick in interest for ﬁxedincome products or simple equity-based funds that are shari’a-compliant. In fact, he predicts that shari’a-designed funds may ﬁnd themselves with a broader audience than ever because their performance has held up better than “The growth in Islamic financial products is still very much there. The fall in oil has been big, but it does not change the big picture.” — MOHAMMED AMIN, PRICEWATERHOUSECOOPERS that of more-conventional funds — thanks to their avoidance of lending-related holdings like the mortgage-backed securities at the root of the credit crisis. Of course, other, more social than economic questions persist, like whether and how well investment vehicles that are promoted as shari’a-compliant will even be accepted in the Muslim world. Dean Naumowicz, a London-based Islamic-finance partner at law ﬁrm Norton Rose, says the shari’a-tailored investment industry would be taking a big step toward more professionalism and perhaps a broader audience if it were to adopt uniform standards, especially for whatever derivative products are being offered. Naumowicz notes that in the conventional derivatives markets, the International Swaps and Derivatives Association offers commonly accepted standards and works to advance the understanding and acceptance of derivatives. The Islamicﬁnance world has yet to sanction any such group. DeLorenzo calls for more clarity in every respect. He says he believes that a viable and practical balance can be found, and that religious tenets and investment returns can coexist. “The industry must demonstrate its ability to regulate itself and insist on the Islamic authenticity of all that it does or allows to be done in its name,” he asserts. “In the past few years, modern Islamic ﬁnance has proved itself to be credible and, at the same time, both innovative and adaptable. The question it faces now is whether it can prove that it is moral and responsible.” NOVEMBER 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 47

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - November 2008

Institutional Investor's Alpha Magazine - November 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Risk Rewarded The Good Guys: In the Here and Now Interview: Minister of Finance Cover Story: The Agony of Dan Zwirn Strategies: The Early Birds Are Awake Strategies: The Call of Shari’a Profile: Sweet Home Chicago Research Center: What Stampede? Alpha Bytes: Centralize the Data Unhedged: Commentary: Learning from the Wreckage

Institutional Investor's Alpha Magazine - November 2008

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