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Issues & Suggestions for OIC Shari’ah Compliant Indexes

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Presentation on theme: "Issues & Suggestions for OIC Shari’ah Compliant Indexes"— Presentation transcript:

1 Issues & Suggestions for OIC Shari’ah Compliant Indexes
Rushdi Siddiqui Global Director Dow Jones Islamic Market Index Group

2 Presentation Overview
Are the various Islamic Funds assisting and promoting OIC Countries economic and capital market development at: Member Country Level Intra-OIC Portfolio Investments Liquidity on Stock Exchanges Transparency & Governance Listed Firms Deyaar, Tamweel, Nakheel, etc. Regional/OIC Level Viewed as a common market OIC Global Level Foundational, not Transactional, Infrastructure Paradigm

3 Dow Jones Indexes Timeline: Key Dates
10/6/97-Cash options on DJIA begin trading on CBOE 2/26/98-Dow Jones STOXX Indexes launch 2/5/99-Dow Jones-AIG Commodity Index launch 2/9/99-Dow Jones Islamic Market Indexes launch 7/14/99-Dow Jones Global Titans Index launch 9/7/99-Dow Jones Sustainability Group Indexes launch 2/14/00-Dow Jones U.S. Total Market Index launch 2/18/03-Dow Jones Indexes Islamic Blue-Chip Indexes launch 11/3/03-Dow Jones Select Dividend Index launch 11/30/05-Dow Jones Wilshire U.S. Industry Indexes launch 1/23/06-Dow Jones Islamic Market Sustainability Index launch 3/6/06-Announced launch of Dow Jones Citigroup Sukuk Index 5/31/06-Dow Jones Islamic market China Offshore Index launch 6/7/06-Dow Jones BRIC 50 Index launch

4 Dow Jones Islamic Market Index Awards
Best Shariah Compliant Index Provider (Global Finance Magazine, US, 2008) Global Recognition in Islamic Finance for a Finance Institution (Dubai, IIFF 2008) Best Islamic Index Provider (Euromoney, London, 2008) Best Islamic Index Provider (Islamic Finance News, Malaysia, 2007) Best Islamic Index Provider (Terrapin, Singapore)- 2007 Best Individual Contribution to Islamic Finance (Kuala Lumpur Islamic Finance Forum (KLIFF), Malaysia, 2007) American Muslim Achievement Award, Islamic Center of Southern California, USA (2006) Sh. Mohmmad Rashid Bin Makhtoum Award for Contribution by Western Institution to Islamic Finance (2006) Contribution to Islamic Capital Market Development, International Islamic Finance Forum, Singapore, 2006. Failka Award for Contribution & Development to Islamic Funds (2006) Deloitte/KLIFF Award for Special Contribution to Islamic Finance (2005) CERT (Malaysia) Award for Excellence in Islamic Finance (2004) Sh. Mohmmad Rashid Bin Makhtoum Award for Innovation in Islamic Finance (2003)

5 Where are we coming from?
Structured Sukuk Mega Project Finance Mega Commercial Banks Hard Asset Private Equity Fund Management Islamic Indexes Market Exposure: 250m Conversions, Islamic Windows & Subsidiaries of Mega Banks, Establishment of significant Islamic Banks in Non-Muslim states Muslim populated states getting interested Syria, Libya, Soviet bloc Commercial Banking Syndications Islamic Conglomerates Market exposure: 100m Concentrations of Islamic Banks growing in GCC, Malaysia, Pakistan and Bangladesh Market exposure: 20m Onset of Islamic Banks (Malaysia, UAE, etc.) Inefficient Command SOEs in Iran and Sudan, and Pakistan Source: S. Farooq, BIBF Timeline 5 5 5 5

6 We are moving forward in IF
VC PE E Activities Risk Reward S -Petro-liquidity & HNWs -Diversification -Shariah Scholars/research -Stress Tested/Time -Cross Sell R L M IFPs CFPs IFI CFIs IF CF 300 plus years Timeline/Products/Returns

7 Hypothetical “Islamic Investor & Asset Manager” Dilemma?
Increased Volatility: Exclusion of prohibited industries that may be the current high-fliers Exclusion of financial sector Exclusion of highly leveraged firms Exclusion of companies with high non-operating interest income Bias: Technology, Healthcare & Energy Quarterly Reviews (turnover) 7

8 First Islamic Funds Inception Location Fund Manager Fund Name Jan-93
Saudi Arabia National Commercial Bank AlAhli US Trading Equity Jul-92 Al Rajhi Banking & Invest. Al Rajhi Local Share Jun-92 South Africa Futuregrowth AlBaraka May-91 Singapore Mendaki Holdings Pte. Ltd. Mendaki Growth Fund Jun-86 USA Saturna Capital Amana Income Fund May-71 Malaysia Tabung Amanah Bakti May-68 Mara Unit Trust Dana Al-Aiman Inception Location Fund Manager Fund Name Source: Failaka 8

9 Growth in Assets in Equity Funds
Plain vanilla to more sophisticated: structured, ETF, Sukuk, project finance Source:Failaka

10 Growth in the Number of Islamic Equity Funds (excluding Asia)
Source:Failaka 10

11 As regards Equity Funds
Total Number of Islamic Equity Funds: 306 Source: Failaka 11

12 Nearly Full Range of Products
Hedge Fund 6-7 nearly there; 2 operational Balanced Easy to duplicate and 17 available Sector Funds 9 available Regional Funds (45 funds dealing in GCC Equities)‏ Small Company (Al-Rajhi Global Small Cap Equity) Single Country (SABB Amanah Saudi Equity) Emerging Market 19 available (BRIC, South Africa, Turkey)‏ European Equity 7 available US Equity 12 available Asian Equity 7 by non-Asian based managers Global Equity 27 available Fund categories Source:Failaka 12

13 Total Mutual Funds in the World: 56,863
Its all Relative Total Mutual Funds in the World: 56,863 Total Islamic: 550 Total Islamic Equity: 320 (including balanced)‏ Total Socially Responsible (SRI): 201 Source:Failaka 13

14 Assets Under Management: In Perspective
Total Assets invested in Mutual Funds: US$ 17.8 Trillion Total Assets in SRI Mutual Funds: US$ 179 Billion Total Assets in Islamic Equity Funds: US $ 17.3 Billion (est.)‏ Source:Failaka 14

15 DJIM Screens DJIM Shariah Supervisory Board v Outsourcing Shariah
Primary Business Negative Screens ~ Socially Responsible Investing Positive Screens: DJIM Sustainability Index Revenue Accountability Financial Screens Debt/MC <33% Cash + IBS/MC <33% Acc Rec/MC <33% Debt Screen Impact: Enron (Deleted: 3Q’01), Worldcom (2Q’01), Tyco (1Q’02) & Global Crossings (2Q’01) AAOIFI Standard (21): Product  Standard DJ CitiGroup Sukuk Index: Standard  Product Price Only, Market Cap & Free Float Weighted Indexes Price, Equal, MC and Fundamental Indexes Low Debt/Non-Financial Social-Ethical Index  Alpha Strategy

16 Screening Process 95% D/MC C+IB/MC AR/MC

17 DJIM Screening

18 DJIM Regional Breakdown (2007)
UK Cana Indonesia

19 DJIM Sector Breakdown (2007)
Credit & Impact on Financial Tech Indust Financial

20 DJIM Performance (2007)

21 Compliant Sector Based Investing
Islamic Equity Indexes Benchmark Indexes: Dow Jones Islamic Market Index ($17T) Sector Indexes: Industries (Broadest-Based) Telecom Industrials Oil & Gas Financials Cons Svcs Basic Matls Utilities Technology Cons Goods Health Care

22 Theme Based Investing Strategy and Theme Based Indexes
Dow Jones Sustainability Indexes Based on the cooperation of Dow Jones Indexes and Zurich-based SAM, Dow Jones and Dow Jones STOXX Sustainability Indexes track the performance of the leading sustainability-driven companies. The family includes global and regional indexes, and subindexes excluding alcohol, gambling, tobacco and/or armaments and firearms. Dow Jones Islamic Market Sustainability Index First indexes from major provider; widely accepted as the standard. Measure companies that have been screened for compliance with Islamic principles based on financial ratios and industry. Family includes 70+ indexes for countries, regions, sectors and cap ranges.

23 Islamic Asset Class Expansion
Screening Pricing Data Education & Awareness Commodities REITs Hedge Funds Portfolio Indexes

24 Islamic Investing in OIC Countries
Location Source of Funds GCC Location of Underlying Assets Invested LME Murabaha Palm Oil (Malaysia) Equity Real Estate Commodities PE/VC (ArCapita, etc.) Absorption of Liquidity without Asset Inflation Capital flight: How does it benefit Muslim Country?

25 Sector Weighting Breakdown (Q2 2008)  What does this mean?
Sctrs DJIM Malsia T-25 DJ Malsia DJIM Turk DJW Turk DJIM PK DJW PK DJIM Ind DJ Ind Arbia 50 DJ Bah DJ Kw T-50 DJIM Kw Oil/ Gas .6% 1% 19% 9% 31% 4% 2% 0% BM 2 3 30 11 38 47 37 10 8 40 24 9 15 17 31 CG 35 20 4 5 14 1 -- .28 HCR .51 .91 CS .72 .49 Tele 16 6 21 13 UTI 7 FIN 27 44 49 45 85 69 51 TECH .4 .37 .13 .21 .69

26 What does Sector breakdown mean for an Islamic OIC Index?
Largest sector Eliminated Conventional Financial 2-3 Sectors more than 70% of Weighting One Company Sector Lack of Technology sector implies: VC Industry/Angel Investing? Innovation? Equity Culture? Knowledge Based Economies?

27 Muslim Country Islamic & Conventional Index Top 5 Components & Weightings (Q1 2008)
DJIM Turkey DJW Turkey DJIM Pakistan DJW Pakistan Egreg DeMir Ve Celik (24%) Turkcell 9% Dawood Hercules Chem (10%) MCB (15%) Turkeye Petrol (22) Turkiye Garanti (9) Pakistan oilfields (10) Pak State Oil (5) BIM Birlesik (8) Akbank (8) Pakistan Petroleum (10) Oil/Gas Dev (4) Asya Katlim (6) Turkiye Is Bankasi (6) Oil/Gas Dev (10) J&S Co (4) Turcas Petrol (4) Egreg DeMir Ve Celik (5) Engro Chem Pk (10) Natl bank of Pk (4) 37% 50% 32% 64%

28 Muslim Country Islamic & Conventional Index Top 5 Components & Weightings (Q1 2008)
DJIM Malaysia Titans 25 DJ Malaysia DJIM Indonesia DJ Indonesia IOI Corp (19%) SimeDarby (7%) Bumi Resources (25%) Bumi Resources (16%) SimeDarby (19) IOI Corp (6) Telekomunikasi (23) Telekomunikasi (14) (9) Bumiputra Comm Ltd (6) Astra Intl (12) Astra Intl (7) KL Kepong (8) Public Bank (5) Perusahaan Gas (6) Bakrie Bros (7) MISC (7) Malayan Banking (5) Indosat (4) Bank central Asia (6) 29% 70% 50% 60%

29 Muslim Country Islamic & Conventional Index Top 5 Components & Weightings (Q1 2008)
DJIM Kuwait DJ Kuwait Titans 50 DJ Arabia Titans 50 DJ Bahrain Stock Exchange DJ MSM Investment Dar (10%) NBK (10%) Maroc Telecom (10%) Ahli United Bank (22%) NBO (10%) MTC (9) KFH (9) Orascom Const (7) Batelco (12) Raysut Cement (10) Agility (9) Orascom Telecom (7) GFH (11) BM (9) Gulf Cble/Elec (6) NIG (6) MTC (6) NBB (6) Oman Telecom (9) Boubyan Petro (5) Comm Bank of Kuwait (6) Arab Bank (6) Ithmaar Bank (6) Ren Services (7) 39% 40% 36% 55% 45%

30 What does this sampling of top 5 weighting mean?
Conventional components from OIC Comparable to non-OIC EM Capping weightings Financial sector available Trading in top 20 companies Shari’ah compliant components from OIC Largest/liquid sector eliminated Free Float Illiquid Mid-Small caps available No equity culture (debt screen) Volatility Established OIC v Emerging OIC Malaysia, Turkey, Pakistan, Egypt, Saudi, UAE, Kuwait, etc. Bangladesh, Nigeria, Jordan, etc.

31 Suggestions OIC Countries Risk Mindset: Debt v. Equity Culture? Habit Mindset: Depositors v. Investors? Fraud on the Unsuspecting (Returns advertised) Understanding Mindset: Real estate v. Other asset class comprehension? Shariah Screening Muslim owned companies One methodology does not fit all geographies or asset classes Consensus on Primary Business

32 Suggestion Number 1 (Sukuk):
Financial Screens Conventional Debt Reduction over a given time frame Islamic Indexes v Funds: Selling no longer compliant companies Conversions FIs to IFIs (Sharjah Islamic Bank) Acquisitions (ADIB acquires Natl Bank of Development (Egypt)) Equitization of Balance Sheet via Sukuks & Equity Recapitalization PLUS (Malaysia)  WIDER SHAREHOLDERS Sukuks [financial incentive within time, Ex: IDB Incentive Fund]: Primary & secondary mkt development Sukuk Market Development Yield curves for corporate tenors Sukuk Trading & Investing vehicles Expansion to other issuers Cross Issuers & Buyers

33 Billion Dollar Watermark Cross-Over
Eurobond Market* Sukuk profile * Source: Frank J. Fabozzi, Handbook of Fixed Income Securities, 1991 Malaysia

34 Suggestion Number 2: Index for investable and tradable OIC countries
DJ OIC Index DJ OIC Islamic Index [Profile Indexes: DJIA, S&P 500, DJIM, MSCI EAFE, FTSE 100, Russell 2000, etc.) Sub-Indexes Transparency & Governance Investable Products off of the Index Intra-OIC Investments  Liquidity Liquidity Encourages Listings (BB v FPI)

35 Suggestion Number 3 (Complimenting COMCEC: OIC Exchange Cooperation OIC VTP)
Arab Stock Exchange? Islamic Stock Exchange: Location? Deciding Compliance? Listing of companies/products? OIC VTP: Neutrality Gatekeeper of compliance? Trading of companies & products Funds Supermarket Supported by financial information, news, analysis, PLUS: Obligatory Information Liquidity to traded company  Home country exchange Proprietary Trading Global Secondary Sukuk Trading Platform Cross sell

36 Conclusion Suggesting a Path for Shariah compliance for OIC publicly listed Companies & Encourage Listings Add Depth & Breadth Encouraging Use of Sukuks Developing an Equity/risk taking culture in OIC Establishing an informed Global Portal for Intra-OIC Investment Opportunities for ALL investors Win  Country OIC Level Win  Regional OIC level Win  Global OIC Level

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