Presentation on theme: "Issues & Suggestions for OIC Shari’ah Compliant Indexes"— Presentation transcript:
1 Issues & Suggestions for OIC Shari’ah Compliant Indexes Rushdi SiddiquiGlobal DirectorDow 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 LevelIntra-OIC Portfolio InvestmentsLiquidity on Stock ExchangesTransparency & Governance Listed FirmsDeyaar, Tamweel, Nakheel, etc.Regional/OIC LevelViewed as a common marketOIC Global LevelFoundational, not Transactional, Infrastructure Paradigm
3 Dow Jones Indexes Timeline: Key Dates 10/6/97-Cash options on DJIA begin trading on CBOE2/26/98-Dow Jones STOXX Indexes launch2/5/99-Dow Jones-AIG Commodity Index launch2/9/99-Dow Jones Islamic Market Indexes launch7/14/99-Dow Jones Global Titans Index launch9/7/99-Dow Jones Sustainability Group Indexes launch2/14/00-Dow Jones U.S. Total Market Index launch2/18/03-Dow Jones Indexes Islamic Blue-Chip Indexes launch11/3/03-Dow Jones Select Dividend Index launch11/30/05-Dow Jones Wilshire U.S. Industry Indexes launch1/23/06-Dow Jones Islamic Market Sustainability Index launch3/6/06-Announced launch of Dow Jones Citigroup Sukuk Index5/31/06-Dow Jones Islamic market China Offshore Index launch6/7/06-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)- 2007Best 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 SukukMega Project FinanceMega Commercial BanksHard Asset Private EquityFund ManagementIslamic IndexesMarket Exposure: 250mConversions, Islamic Windows & Subsidiaries of Mega Banks,Establishment of significant Islamic Banks in Non-Muslim statesMuslim populated states getting interested Syria, Libya, Soviet blocCommercial BankingSyndicationsIslamic ConglomeratesMarket exposure: 100mConcentrations of Islamic Banks growing in GCC, Malaysia, Pakistan and BangladeshMarket exposure: 20mOnset of Islamic Banks (Malaysia, UAE, etc.)Inefficient Command SOEs in Iran and Sudan, and PakistanSource: S. Farooq, BIBFTimeline5555
6 We are moving forward in IF VCPEEActivitiesRiskRewardS-Petro-liquidity & HNWs-Diversification-Shariah Scholars/research-Stress Tested/Time-Cross SellRLMIFPsCFPsIFICFIsIFCF300 plus yearsTimeline/Products/Returns
7 Hypothetical “Islamic Investor & Asset Manager” Dilemma? Increased Volatility:Exclusion of prohibited industries that may be the current high-fliersExclusion of financial sectorExclusion of highly leveraged firmsExclusion of companies with high non-operating interest incomeBias: Technology, Healthcare & EnergyQuarterly Reviews (turnover)7
8 First Islamic Funds Inception Location Fund Manager Fund Name Jan-93 Saudi ArabiaNational Commercial BankAlAhli US Trading EquityJul-92Al Rajhi Banking & Invest.Al Rajhi Local ShareJun-92South AfricaFuturegrowth AlBarakaMay-91SingaporeMendaki Holdings Pte. Ltd.Mendaki Growth FundJun-86USASaturna CapitalAmana Income FundMay-71MalaysiaTabung Amanah BaktiMay-68Mara Unit TrustDana Al-AimanInceptionLocationFund ManagerFund NameSource: Failaka8
9 Growth in Assets in Equity Funds Plain vanilla to more sophisticated: structured, ETF, Sukuk, project financeSource:Failaka
10 Growth in the Number of Islamic Equity Funds (excluding Asia) Source:Failaka10
11 As regards Equity Funds Total Number of Islamic Equity Funds: 306Source: Failaka11
12 Nearly Full Range of Products Hedge Fund 6-7 nearly there; 2 operationalBalanced Easy to duplicate and 17 availableSector Funds 9 availableRegional 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 availableUS Equity 12 availableAsian Equity 7 by non-Asian based managersGlobal Equity 27 availableFund categoriesSource:Failaka12
13 Total Mutual Funds in the World: 56,863 Its all RelativeTotal Mutual Funds in the World: 56,863Total Islamic: 550Total Islamic Equity: 320 (including balanced)Total Socially Responsible (SRI): 201Source:Failaka13
14 Assets Under Management: In Perspective Total Assets invested in Mutual Funds: US$ 17.8 TrillionTotal Assets in SRI Mutual Funds: US$ 179 BillionTotal Assets in Islamic Equity Funds: US $ 17.3 Billion (est.)Source:Failaka14
15 DJIM Screens DJIM Shariah Supervisory Board v Outsourcing Shariah Primary BusinessNegative Screens ~ Socially Responsible InvestingPositive Screens: DJIM Sustainability IndexRevenue AccountabilityFinancial ScreensDebt/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 StandardDJ CitiGroup Sukuk Index: Standard ProductPrice Only, Market Cap & Free Float Weighted IndexesPrice, Equal, MC and Fundamental IndexesLow Debt/Non-Financial Social-Ethical Index Alpha Strategy
21 Compliant Sector Based Investing Islamic Equity IndexesBenchmark Indexes: Dow Jones Islamic Market Index ($17T)Sector Indexes:Industries (Broadest-Based)TelecomIndustrialsOil & GasFinancialsCons SvcsBasic MatlsUtilitiesTechnologyCons GoodsHealth Care
22 Theme Based Investing Strategy and Theme Based Indexes Dow Jones Sustainability IndexesBased 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 IndexFirst 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 ScreeningPricingDataEducation & AwarenessCommoditiesREITsHedge FundsPortfolio Indexes
24 Islamic Investing in OIC Countries Location Source of FundsGCCLocation of Underlying Assets InvestedLME MurabahaPalm Oil (Malaysia)EquityReal EstateCommoditiesPE/VC (ArCapita, etc.)Absorption of Liquidity without Asset InflationCapital flight: How does it benefit Muslim Country?
25 Sector Weighting Breakdown (Q2 2008) What does this mean? SctrsDJIM Malsia T-25DJMalsiaDJIM TurkDJW TurkDJIM PKDJW PKDJIMIndDJ IndArbia 50DJ BahDJ Kw T-50DJIM KwOil/Gas.6%1%19%9%31%4%2%0%BM23301138473710840249151731CG352045141--.28HCR.51.91CS.72.49Tele1662113UTI7FIN27444945856951TECH.184.108.40.206.69
26 What does Sector breakdown mean for an Islamic OIC Index? Largest sector EliminatedConventional Financial2-3 Sectors more than 70% of WeightingOne Company SectorLack 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 TurkeyDJW TurkeyDJIMPakistanDJW PakistanEgreg 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 25DJ MalaysiaDJIM IndonesiaDJ IndonesiaIOI Corp (19%)SimeDarby (7%)Bumi Resources (25%)Bumi Resources (16%)SimeDarby (19)IOI Corp (6)Telekomunikasi (23)Telekomunikasi (14)DiGi.com (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 KuwaitDJ Kuwait Titans 50DJ Arabia Titans 50DJ Bahrain Stock ExchangeDJ MSMInvestment 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 OICComparable to non-OIC EMCapping weightingsFinancial sector availableTrading in top 20 companiesShari’ah compliant components from OICLargest/liquid sector eliminatedFree FloatIlliquid Mid-Small caps availableNo equity culture (debt screen)VolatilityEstablished OIC v Emerging OICMalaysia, Turkey, Pakistan, Egypt, Saudi, UAE, Kuwait, etc.Bangladesh, Nigeria, Jordan, etc.
31 SuggestionsOIC CountriesRisk 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 ScreeningMuslim owned companiesOne methodology does not fit all geographies or asset classesConsensus on Primary Business
32 Suggestion Number 1 (Sukuk): Financial ScreensConventional DebtReduction over a given time frameIslamic Indexes v Funds: Selling no longer compliant companiesConversions FIs to IFIs (Sharjah Islamic Bank)Acquisitions (ADIB acquires Natl Bank of Development (Egypt))Equitization of Balance Sheet via Sukuks & Equity RecapitalizationPLUS (Malaysia) WIDER SHAREHOLDERSSukuks [financial incentive within time, Ex: IDB Incentive Fund]:Primary & secondary mkt developmentSukuk Market DevelopmentYield curves for corporate tenorsSukuk Trading & Investing vehiclesExpansion to other issuersCross Issuers & Buyers
33 Billion Dollar Watermark Cross-Over Eurobond Market*Sukuk profile* Source: Frank J. Fabozzi,Handbook of Fixed Income Securities, 1991Malaysia
34 Suggestion Number 2: Index for investable and tradable OIC countries DJ OIC IndexDJ OIC Islamic Index[Profile Indexes: DJIA, S&P 500, DJIM, MSCI EAFE, FTSE 100, Russell 2000, etc.)Sub-IndexesTransparency & GovernanceInvestable Products off of the IndexIntra-OIC Investments LiquidityLiquidity 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:NeutralityGatekeeper of compliance?Trading of companies & productsFunds SupermarketSupported by financial information, news, analysis, PLUS:Obligatory InformationLiquidity to traded company Home country exchangeProprietary TradingGlobal Secondary Sukuk Trading PlatformCross sell
36 ConclusionSuggesting a Path for Shariah compliance for OIC publicly listed Companies & Encourage ListingsAdd Depth & BreadthEncouraging Use of SukuksDeveloping an Equity/risk taking culture in OICEstablishing an informed Global Portal for Intra-OIC Investment Opportunities for ALL investorsWin Country OIC LevelWin Regional OIC levelWin Global OIC Level