IFR Asia – Islamic asset management in Malaysia
Malaysia boasts one of the biggest and most sophisticated Islamic asset management markets in the world. It has the highest number of Shariah-based unit trust funds of any country – 143 as of June 2009, according to the Securities Commission – with a combined net asset value of RM20.72 billion on July 31, which ranks second in the world after Saudi Arabia. Islamic products account for 26% of the whole Malaysian unit trust industry by number of funds, and 12% by assets.
While Malaysia isn’t a world leader in mutual fund asset terms, it does lead in the range and sophistication of available Shariah-compliant products. The biggest fund management groups, Public Mutual and CIMB-Principal Asset Management, have more than 20 Shariah-compliant trusts apiece, covering a wide range of asset classes and investment approaches: equity, fixed income, money market, cash, balanced, structured and yield, across a range of geographies. The average size per fund is relatively modest – RM144 million apiece – and since there are a number of cash or equity funds with billions of ringgit in assets, it is clear that there are many funds with negligible amounts under management. But the range of available product is strong and continues to grow: the number of Shariah funds tripled between 2002 and 2007, according to the research group Cerulli Associates, before declining slightly in the difficult market conditions of the last 18 months.
But perhaps the most significant development underway in this field is that institutions are increasingly willing to invest their money in a Shariah-compliant way. This is a major point of differentiation from the big Islamic asset management markets in the Middle East, which tend to be chiefly a retail rather than an institutional story. “A lot of institutions are putting out Shariah compliant mandates,” says Hanny Yap, head of market development at CIMB-Principal Asset Management, including its Shariah business, CIMB Principal Islamic Asset Management. Anthony Siau, head of product and strategy at RHB Investment Management, agrees. “It started with the EPF [Employees Provident Fund, Malaysia’s key state pension fund] and Bank Negara, all the government-related institutions,” he says. “Then lately we’ve started to see government-linked companies, the GLCs semi-owned by the government, starting to look at Shariah investment.”
This reflects a drive on the part of the government, central bank and regulator in concert to promote Malaysia as an Islamic finance hub. Driving its key institutions to invest in a Shariah-compliant manner is part of that process. Some institutions, such as Tabung Haji, which exists to help Malaysian Muslims fund their Hajj pilgrimages, are natural candidates to invest only Islamically but the net is potentially much bigger than that; Petronas, the state-owned energy utility, is among the institutions thought to have put out Shariah mandates or requests for pitches. Additionally, Khazanah, the closest thing Malaysia has to a sovereign wealth fund, appears to be moving in this direction: Azman Mokhtar, the managing director, has spoken of encouraging companies within the group to invest or run on Islamic principles. Since Khazanah holds stakes in more than 50 companies, with assets of over US$20 billion, including Telekom Malaysia, Tenaga Nasional, CIMB, Proton, Malaysian Airlines and UEM Group, this is quite an influential event if it is carried through. Then there’s the rapidly-growing takaful industry (see separate article): these Islamic equivalents of conventional insurers are required to manage their investment funds – secured from premiums just like conventional insurers – in compliance with Shariah, which clearly creates a further opportunity for asset managers.
This shift in attitude has quite an impact. Most obviously, it increases the volume of funds that are available for Shariah-compliant managers to invest. That wall of capital – and steady, sticky capital that doesn’t dart in and out of funds in volatile times – then drives managers to raise their standards and innovate. And in particular, it is a vital part of the process of getting the Malaysian International Islamic Financial Centre (MIFC) off the ground, with the Employees Provident Fund earmarking RM2 billion to help to seed the various new Islamic asset management ventures, all involving foreign participation, that are setting up there. Since those ventures can’t register funds for retail, they are generally targeting either mandates from local fund managers to build international equity funds, or are hoping for money from domestic institutions. See the “foreign institutions” chapter of this guide for more on this.
Local houses believe that Shariah funds will continue to gain market share relative to conventional ones. Recent statistics bear that out. Zulkifli Ishak at Prudential Funds Management in Malaysia says that from 2006 to 2008 there were 66 new Islamic funds launched, which between them had RM10.6 billion under management by the end of 2008. “Since there were 256 new funds launched during the same period, this means one out of four funds was Islamic or Shariah-compliant as an investment fund choice for Malaysians,” he says. During that period, Islamic products accounted for 33.4% of funds under management.
It’s certainly not hard to build products locally: 88 per cent of Bursa Malaysia, the Malaysian stock market, is Shariah compliant, making domestic equity products straightforward (albeit rather difficult to distinguish from mainstream ones in asset allocation terms, with the main difference being bank holdings). On the fixed income side it has the biggest and most vibrant local sukuk market in the world, and the only one with any history of decent secondary market trading (see capital markets chapter for more). “There’s still room to expand,” say Yap. “Usually, when we have something conventional we have mirrored it in the Islamic space. So, when we did a Greater China equity conventional product, we have this year launched an Islamic version too.” CIMB Principal has 22 Islamic funds compared to around 40 conventional ones, she says.
Siau at RHB says there is still strong retail demand for capital protected products, but that presents some problems. “For Islamic managers to structure capital protected products is not that simple. There are a lot of different interpretations of Shariah law,” he says. (RHB is known as having a particularly strict Shariah advisory committee.) “So we haven’t seen much offering in terms of that asset class. For institutions, most of them are looking at fixed income or money market investments.”Nor Rejina Abdul Rahim, managing director of Nomura Asset Management Malaysia, which like all the foreign asset managers has to focus on institutional business, has a different take. “Equities seem to be a favourite still,” she says. “That’s simply because there aren’t any investment restrictions on equity, whereas in fixed income the market is not as liquid.”
She hopes to coax institutions into international equities. So do other foreign managers. “Local managers have expertise mostly in the domestic markets. Some of them are beginning to develop their regional capabilities, but mostly in southeast Asia”, says Angelia Chin-Sharpe, executive director and country head for Malaysia and Brunei, BNP Paribas Investment Partners. “So for us, we see the gap mainly on a global basis. A number of Islamic banks, takaful and retakaful companies have set up in Malaysia and they will need expertise to help develop their global products, or to invest their proprietary capital. That is an opportunity for us.” Chin-Sharpe is also BNP Paribas Investment Partners’ regional head for Islamic business development.
Methods of distribution vary. There is not yet a culture of independent financial advisors, nor of intermediated investment platforms, so instead most distribution is either done through the bank channel or agency, with the method depending very much on the house. Public Mutual, the biggest asset manager in Shariah funds in Asia and one of the biggest in the world, has a formidable agency force and does all its distribution through that; CIMB uses a combination of agency and bank distribution; and most others go through the banks, which have the more powerful distribution networks. Managers report that sales are strong to non-Muslims as well as Muslims; partly because they appreciate the diversification, and partly because by and large products run on an Islamic basis have tended to fare better than conventional ones in the global financial crisis (for example, they could not have held US banking stocks because they were not Shariah compliant). “Shariah funds have generally done better than their conventional counterparts since the subprime crisis last year as most have been insulated from the crisis,” says Ishak. He says at Prudential more than 50% of retail investors in Shariah funds are not Muslims.
While there is some sense that retail penetration of Shariah funds may be nearing a ceiling, the change in institutional appetite, driven by the state, is clearly good news for local and international managers alike. The next step for Malaysian Shariah asset management is international, on two fronts: building products that invest globally; and also attracting international funds into Malaysia to be managed on a Shariah-compliant basis.