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© Copyright 2007 Dow Jones and Company, Inc. Issues & Suggestions for OIC Shari’ah Compliant Indexes Rushdi Siddiqui firstname.lastname@example.org Global Director Dow Jones Islamic Market Index Group
© Copyright 2007 Dow Jones and Company, Inc. 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
© Copyright 2007 Dow Jones and Company, Inc. 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
© Copyright 2007 Dow Jones and Company, Inc. 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)
© Copyright 2007 Dow Jones and Company, Inc. 5 55 Where are we coming from? 1975-1990 Commercial Banking Syndications Islamic Conglomerates 1991-2000 Hard Asset Private Equity Fund Management Islamic Indexes 2001-2010 Structured Sukuk Mega Project Finance Mega Commercial Banks Market exposure: 20m Onset of Islamic Banks (Malaysia, UAE, etc.) Inefficient Command SOEs in Iran and Sudan, and Pakistan Market exposure: 100m Concentrations of Islamic Banks growing in GCC, Malaysia, Pakistan and Bangladesh 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 Timeline 1975-2010 Source: S. Farooq, BIBF
© Copyright 2007 Dow Jones and Company, Inc. 6 We are moving forward in IF M L R E PE VC Timeline/Products/Returns Activities Risk Reward IF IFI CF CFIs 300 plus years -Petro-liquidity & HNWs -Diversification -Shariah Scholars/research -Stress Tested/Time -Cross Sell CFPsIFPs S
© Copyright 2007 Dow Jones and Company, Inc. 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)
© Copyright 2007 Dow Jones and Company, Inc. 8 First Islamic Funds Jan-93Saudi ArabiaNational Commercial BankAlAhli US Trading Equity Jul-92Saudi ArabiaAl Rajhi Banking & Invest.Al Rajhi Local Share Jun-92South AfricaFuturegrowth AlBaraka May-91SingaporeMendaki Holdings Pte. Ltd.Mendaki Growth Fund Jun-86USASaturna CapitalAmana Income Fund May-71MalaysiaTabung Amanah Bakti May-68MalaysiaMara Unit TrustDana Al-Aiman InceptionLocationFund ManagerFund Name Source: Failaka
© Copyright 2007 Dow Jones and Company, Inc. 9 Growth in Assets in Equity Funds Source:Failaka
© Copyright 2007 Dow Jones and Company, Inc. 10 Growth in the Number of Islamic Equity Funds (excluding Asia) Source:Failaka
© Copyright 2007 Dow Jones and Company, Inc. 11 As regards Equity Funds Total Number of Islamic Equity Funds: 306 Source: Failaka
© Copyright 2007 Dow Jones and Company, Inc. 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
© Copyright 2007 Dow Jones and Company, Inc. 13 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
© Copyright 2007 Dow Jones and Company, Inc. 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
© Copyright 2007 Dow Jones and Company, Inc. 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
© Copyright 2007 Dow Jones and Company, Inc. 16 Screening Process Dow Jones World Business Descrip!ion Revenue DJIM Three Financial Ratios D/MC C+IB/MC AR/MC 95%
© Copyright 2007 Dow Jones and Company, Inc. 17 DJIM Screening DJIM Universe Financial ratios Impermissible Income Primary Business
© Copyright 2007 Dow Jones and Company, Inc. 18 DJIM Regional Breakdown (2007) UK CanaIndonesia
© Copyright 2007 Dow Jones and Company, Inc. 19 DJIM Sector Breakdown (2007) TechIndust Financial Credit & Impact on Financial
© Copyright 2007 Dow Jones and Company, Inc. 20 DJIM Performance (2007)
© Copyright 2007 Dow Jones and Company, Inc. 21 Islamic Equity Indexes Benchmark Indexes: Dow Jones Islamic Market Index ($17T) Sector Indexes: Industries (Broadest-Based) Compliant Sector Based Investing Oil & Gas Basic Matls Health Care Industrials Financials Technology Telecom Utilities Cons Goods Cons Svcs
© Copyright 2007 Dow Jones and Company, Inc. 22 Strategy and Theme Based Indexes 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. 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. Theme Based Investing
© Copyright 2007 Dow Jones and Company, Inc. 23 Islamic Asset Class Expansion Screening Pricing Data Education & Awareness Commodities REITs Hedge Funds Portfolio Indexes
© Copyright 2007 Dow Jones and Company, Inc. 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?
© Copyright 2007 Dow Jones and Company, Inc. 25 Sector Weighting Breakdown (Q2 2008) What does this mean? SctrsDJIM Malsi a T-25 DJ Malsi a 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 % 19 % 4%2%0% 2% BM 2330113811473710028 Ind 4024910881181521731 CG 3520410458141--1.28 HCR --.51214.9111-- 1 CS 111883.72.491--212 Tele 166206632113201025 UTI 36417374-- 0 FIN 227644--49--2045856951 TECH.4.37--.13--.21-- 9 10.69
© Copyright 2007 Dow Jones and Company, Inc. 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?
© Copyright 2007 Dow Jones and Company, Inc. 27 Muslim Country Islamic & Conventional Index Top 5 Components & Weightings (Q1 2008) DJIM Turkey DJW TurkeyDJIM 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) 64% 37%50%32%
© Copyright 2007 Dow Jones and Company, Inc. 28 Muslim Country Islamic & Conventional Index Top 5 Components & Weightings (Q1 2008) DJIM Malaysia Titans 25 DJ MalaysiaDJIM Indonesia DJ Indonesia IOI 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) 60% 29%70%50%
© Copyright 2007 Dow Jones and Company, Inc. 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)MTC (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%
© Copyright 2007 Dow Jones and Company, Inc. 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.
© Copyright 2007 Dow Jones and Company, Inc. 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
© Copyright 2007 Dow Jones and Company, Inc. 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
© Copyright 2007 Dow Jones and Company, Inc. 33 Billion Dollar Watermark Cross-Over Sukuk profileEurobond Market* * Source: Frank J. Fabozzi, Handbook of Fixed Income Securities, 1991 Malaysia
© Copyright 2007 Dow Jones and Company, Inc. 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)
© Copyright 2007 Dow Jones and Company, Inc. 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
© Copyright 2007 Dow Jones and Company, Inc. 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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