“Planned a mission to Mars lately? Ever replaced a gyro on an orbiting telescope travelling at 17,600mph in a full vacuum?”

There just aren’t enough recruitment ads like this. These are the opening lines of NASA’s guide to employee benefits for its next intake of astronaut candidates – which is open for applications right now. Being an astronaut has been a dream to young people ever since the dawn of the Mercury and Vostok programs, but for a select few, it can be a reality.

But have you got what it takes to be an astronaut? And just what is it that you need to become one? To find out, DCM assembled some of the most knowledgeable voices imaginable: the head of astronaut selection at NASA, and two of the nine surviving men who have not only gone into space, but walked on the surface of the moon. You can’t get better advice than that.

To see this article as it ran, as Discovery Channel Magazine’s cover story, click here: Discovery_How to become an astronaut

THE GLAMOUR

“I was naked, lying on my side on a table in the NASA Flight Medicine Clinic bathroom, probing at my rear end with the nozzle of an enema. Welcome to the astronaut selection process, I thought.” So wrote Mike Mullane, who flew three times on the Space Shuttle.

For astronauts, the rewards of their missions are almost unimaginably good: sights that few others will ever see, and a chance to be part of the history of human endeavour. But all who have worked in the space corps are keen to stress that there is a lot of hard work, discomfort and a surprising amount of boredom involved in getting there.

Consider this: Alan Bean had one of the most stellar careers of all astronauts. He flew on Apollo 12 and was the fourth man to walk on the moon. He was mission commander on the second manned flight to the Skylab space station, and set a then-record for time in space. But in an 18-year career at NASA, he went to space just twice. Many fly once in an entire career. Vastly more time is spent waiting than adventuring.

“It was very frustrating,” Bean recalls from the Houston studio where, today, he paints pictures of his memories of the lunar surface. “Other people in my group were flying and I wasn’t. I felt that I wasn’t measuring up to the guys who were being selected.” But it was the same for all potential astronauts, even in the Apollo era when they tended to be fearless and hot-blooded “right stuff” test pilots from the Navy and Air Force who wanted nothing more than to get airborne. “Even in the early days there was a lot of preparation that went into a flight; it wasn’t just ‘let’s go strap it on’,” recalls Charlie Duke, the 10^th man to walk on the moon, on Apollo 16, who had been selected while a test pilot under legendary aviator Chuck Yeager. “So for an astronaut patience was a good character trait, because you needed to wait your turn.” He waited six years between selection as an astronaut candidate and flying in 1972 – his only ever flight into space.

But how to get into the queue in the first place? It’s no longer like Bean and Duke’s time, when you had to be a pilot (and a man) to stand a chance. For NASA at least, a surprisingly broad range of people are considered. And it really all starts with education. “To get to this astronaut selection office, you have to come through the door of the Johnson Space Center,” says Duane Ross, head of the astronaut selection board at NASA. “But that’s the second door. The first is the door to the school building.”

While NASA no longer requires doctoral level degrees, as it did when the focus started to shift from pilots to scientists in the late 1960s, it does require an undergraduate degree in engineering, science or maths. You no longer need to have flight experience – that can be trained later – and you certainly don’t need to have been in the armed forces. “As the Shuttle progressed, fewer and fewer who were selected were pilot astronauts,” recalls Duke, who was around for the early years of the Space Shuttle program. “There were more mission specialists and payload specialists. Plus, of course, 50% of the competition was cut out for my generation – because no women were allowed.”

In fact, you’re more likely to be restricted by health – which obviously must be good – and by height than ability to fly a plane: the earliest Mercury and Gemini-era astronauts could be no taller than five feet eleven, so as to fit into the tiny one-man capsules, and even today the height limit for the latest NASA intake is between 62 and 75 inches, to ensure you can fit in the Russian Soyuz capsules that NASA currently has to use to take astronauts to the International Space Station (ISS). “If you’re going to fly in space, you’ve got to fit in the spaceship,” says Ross. More than just height, he says NASA assesses what are called anthropometric requirements, such as the lengths of your arms and your legs, as spacesuits are also constrained by size.

Nationality is still an issue; NASA only accepts American citizens. But it’s no longer like the 1960s, when only a Russian or American could hope to go into space. Today, people from 38 nations have flown in space – and there’s every chance that the next person to set foot on the moon could be from China.

Don’t give up

The next thing you need is persistence. The first time Bean applied for the Apollo program, he was rejected. “They didn’t ever tell me why,” he recalls. But he noticed everyone who was selected was older and more experienced than him, so he just got more experience and applied again, this time successfully. In his view, it wasn’t just a question of being top of the class – which he was not, either academically, or as a pilot. “You need to be a certain IQ so you can learn things quickly, but you don’t have to be the smartest guy in the class. You’ve got to be able to get along with all sorts of other people, and not everybody can do that either. You don’t just hire a valedictorian and hope they work out.”

Some NASA intakes have attracted 8,000 applications, and the last time, 3,500 applied. 113 were interviewed, 48 got to a second interview – and just nine were hired. “There are two messages,” Ross says. “One, it’s very competitive. But two, the one guarantee is that if you don’t apply, you can’t get picked.” Like Bean, he stresses that being a genius isn’t the whole point. “It’s pretty simple: you need nice people. The world’s best scientists or pilots may not be the team players you need to go fly in space, particularly now we’re flying six months on the International Space Station. There is a huge personal aspect to this.”

Study once selected is intense. Ross calls it “kind of like getting a doctorate degree in being an astronaut in a two year period.” Since most space travel in the world today is geared around the ISS – and Russia’s Soyuz craft are currently the only way of reaching it since the Space Shuttle stopped flying – it is thought that astronaut training is fairly similar in Russia, Europe and the US today. On the menu are training to understand ISS systems, competence at flying (in NASA’s case in T-38 jets), land and water survival training, spacesuits, EVAs (extra-vehicular activity, or spacewalks), robotics on board, and mastery of Russian.

Parts of this are guaranteed to set the pulse racing: the jet flying, the simulators, the so-called Vomit Comet flights that simulate weightlessness. There’s plenty of work in 300-pound spacesuits in deep swimming pools.

There is, though, a lot of repetition. “In our lunar module simulator I probably landed on the moon 2,000 times over the time I was there,” recalls Duke. “I crashed it a few times too. But in the one that counted, we pulled it off.” In his case, one almost unique branch of training was the lunar rover, which he and John Young spent much of their three days on the moon driving around at what looked a fair old clip (in fact 11 miles an hour – the record for the fastest land speed attained on the moon).

Life in space

So you’ve waited the best part of a decade for your chance; you’re on the launchpad, ready to go. What should you expect about life in space?

OK, let’s deal with the obvious one first. Apollo veterans say the question they still get asked most frequently today is how you go to the bathroom. “When you’re on the moon and you’ve gotta go, you’ve gotta go,” Duke says. “You don’t run over to the nearest rest room and say ‘excuse me’.” In Duke’s day, when he was getting dressed in the lunar module to prepare to step onto the moon, the first thing he had to put on was something called an FCD, basically a diaper, followed by another similar gadget for urine, followed by a set of long underwear filled with plastic tubes to distribute cold water around the body and keep him cool. “One of the most efficient air conditioners I’ve ever had the pleasure of being associated with.”

By the Shuttle era, flight suits for take-off and spacewalks featured a sort of condom male astronauts would roll on before flight to take care of their urine; creating a similar system for women has been an enduring challenge. One of the biggest problems shuttle astronauts talk of is when they’re still on the ground, strapped on their backs, facing upwards, for several hours as the various checks are conducted during countdown. That condom device is all well and good, but try urinating directly upwards when strapped on your back. On board orbiting craft or space stations things are a little easier, with functioning toilets that never existed in the Apollo era, where they had to try to persuade their waste to descend into bags in a zero-gravity environment. “This bag,” says Duke, “is not a triumph of technology, believe me.”

Zero gravity is said to be a magnificent, freeing, euphoric experience, but it brings some curious reactions. Duke recalls zero gravity as “really fun, but at first very uncomfortable. Your head throbs with every heartbeat, your sinuses fill up; it’s like having a headcold. But within hours, everything adjusts.” And spacesickness has been a challenge ever since Apollo 8, when mission commander Frank Borman vomited and had diarrhoea, filling the cramped capsule with globules of vomit and faeces. Tricky to maintain mission camaraderie in those circumstances.

Odder still, astronauts routinely get taller in space, a consequence of the vertebrae of the back stretching out. “I grew about an inch and a half on my way to the moon,” Duke recalls.

Bean went into uncharted territory when he went 59 days in space on Skylab. “My concern to begin with was that we would get weaker and weaker as time went on,” he says. Much effort was spent on working out an exercise regime. “We began to understand what humans can do, which is why now they can go up on stations for six months or more and be OK when they come home.” This has given him some useful ideas about space tourism. “Someday when passengers go up in space, they’re going to have to spend an hour a day with a physical trainer. If one says ‘I feel sick today’, the captain’s going to say: ‘you got a choice. Exercise, or you go in the brig. Otherwise when you get back you’re going to die and then blame it on me.’”

NO FEAR

One thing early astronauts speak very little about is fear. It’s very much the Apollo-era way to be dead-pan about death (Duke on the parachutes on his returning capsule after re-entry: “Without those chutes, we would hit the water at a great rate of speed that would spoil your whole day.”) But both Duke and Bean had every reason to be fearful. Bean’s ship was hit by lightning in the first minute of its ascent, prompting Pete Conrad’s famous remark: “The flight was extremely normal for the first 36 seconds and after that it got very interesting”. One of its guidance systems was knocked out. And before his flight, Duke had seen the dangers while on the back-up crew of Apollo 13, which suffered an explosion and came within a whisker of losing its crew before a rescue even more remarkable than the flight itself.

But they were well trained and knew the odds. “We knew about risk before we joined up; we’d been doing things like that in airplanes for our whole career,” says Bean. “Some who weren’t so good at it got killed. You have to have luck. Look at Challenger: no matter how good an astronaut you are, you’re going to get killed.”He recalls Neil Armstrong saying he had a 90% chance of coming back alive and a 50% chance of making a landing; asked about his thoughts ahead of his own mission, Bean says his odds were “about the same. You have in your head these thoughts, but you think: is it worth it? Obviously, to us, it was worth it.” Chillingly, he adds: “Losing two crews on the shuttle [Challenger and Columbia] was better than we thought. We thought we’d lose more.” It’s a price crews are willing to pay to do what they love. “When you want to explore, it’s not like the American public think it is. You are on the cutting edge of what you can do.”

For Duke, the one moment he recalls fear was somewhat comical. He and John Young had spent three days on the moon and had achieved a great deal; it was almost time to go home, and with all their work done, in one-eighth earth gravity, they decided to conduct their own Lunar Olympics and set the record for the high jump. They began bouncing, then Duke fell flat on his back. You’ve probably seen the famous footage of Duke falling on his front earlier in the mission when attempting to conduct a drill experiment; his bouncing, press-up attempts to get upright again added to the sense of fun and humour of that whole mission. But falling on your back was a very different deal. “That was scary,” he says now. “That backpack was not designed for that kind of impact. If I’ve split my suit open, I’m dead.” He survived – and his high jump record still stands.

Nevertheless, acknowledgement of potential danger is essential. Mullane says that during his training, astronaut candidates for the Shuttle program were played the tape recording of Gus Grissom, Ed White and Roger Chaffee as they burned to death in the testing of Apollo 1 in January 1967, just to remind them what they were getting into. And, indeed, many members of Mullane’s class did die on the Space Shuttle Challenger in 1986.

There are sacrifices, too; separation from family is taxing, and not just on the astronauts. When Duke wrote his autobiography he did so in partnership with his wife, who wrote openly and movingly about how the depression she felt in being neglected during Duke’s career led her almost to suicide.

SO NOW WHAT?

For the Apollo moonwalker astronauts in particular, another question is just how you find meaning in your life after having done something extraordinary. “After Apollo I was standing on top of the mountain,” Duke says; “…there was nowhere else to go.” It’s fascinating to see the variety of paths their lives took. Buzz Aldrin suffered clinical depression and alcoholism after his return before successfully beating both; Armstrong became something of a recluse. Edgar Mitchell found belief in the paranormal and faith healing, while Harrison Schmitt became a Republican senator in New Mexico, and something of a sceptic about climate change.

For Duke, after a few years in the space shuttle program and a shift to business, he found meaning in religion. “I found peace and a purpose through my faith,” he says. And Bean found perhaps the most distinctive next phase of all: he has spent the later years of his life painting images from the Apollo missions, using small amounts of moondust from his mission patches, and applying texture through a bronze cast of his moonboot and the hammer he used for experiments while on the moon. “When I’m dead and gone these paintings will remain, and tell stories that would be lost any other way,” he says. When DCM calls, he is painting Neil Armstrong and Buzz Aldrin’s lunar module, the Eagle, flying over a crater looking for its landing site.

Have we put you off with this list of challenges, sacrifices and negatives? The final word, then, to a positive, to remind you what it’s all about. We asked Charlie Duke to cast his mind back 40 years to the Descartes Highlands of the moon and tell us what image stayed most clearly in his head. He thought for a moment.

“On our second EVA, we drove the rover to the south and up the side of Stone Mountain,” he says. “When we got up two or three hundred feet off the valley floor, we turned the rover around on a little bench on the hill and looked across the valley of the Cayley Plains. There was a distinct gap between the lunar surface and the blackness of space, with the lunar module sitting in the middle of the valley. It was a very dramatic sight… the beauty of the moon.”

It is for memories like this that people will always dream of being an astronaut.

Sidebars

Charlie Duke’s famous line

If you don’t know Charlie Duke by name, you know his voice. One of the most famous radio exchanges in history took place when Neil Armstrong piloted Apollo 11 on to the surface of the moon for the first time in 1969. Having found his planned landing site unsuitable, he flew over a crater and was almost out of fuel when he finally landed. “Houston, Tranquility Base here, the Eagle has landed,” said Armstrong. A broad southern drawl responded: “Roger, Twanq… Tranquility, we copy you on the ground. You got a bunch of guys about to turn blue. We’re breathing again.”That was Duke, serving as CAPCOM on the ground in Houston.

Today, he recalls: “The actual moment of landing was one of intense relief. I remember the tension in mission control was the highest I have ever felt it. There was dead silence, which was extremely rare, as people focused on their consoles. When Neil came back and said ‘The Eagle has landed’, it was like a balloon popping in mission control. I was so excited I couldn’t even pronounce ‘tranquility’. And it was true: we were holding our breath waiting for that landing.”

Charlie Duke’s famous measles

Charlie Duke had one of the world’s most famous cases of German measles. In inadvertently exposing Ken Mattingly to the illness, he caused Mattingly’s withdrawal from the Apollo 13 mission just three days before its ill-fated launch; it would have been him, rather than replacement Jack Swigert, who flicked the switch that caused the craft’s oxygen tank to explode, triggering the most audacious rescue in history. In real life Mattingly still got to fly to the moon, but on Apollo 16 instead – with Duke, the man who exposed him to the measles in the first place (which, incidentally, he never got).

Office politics on the moon

Even in the glorious Apollo era there were office politics when astronauts were jostling for assignments on to lunar crews. Alan Bean, prior to his assignment on Apollo 12, decided he must have been failing to show his good qualities to Deke Slayton and Alan Shepard, the Mercury 7-era astronauts with the greatest power in assigning Apollo crews. “If I had my time over, I would learn to hunt and go hunting, because Deke was a big hunter,” he says. “There’s politics in everything, it’s just the way it is.”

Looking back he thinks he was impeded by his tendency to go to Shepard and Slayton with occasionally crazy ideas; his colleague and mentor Pete Conrad, who would be commander on Apollo 12, told him to keep the weirder ones to himself. “I learned to shut the f*ck up. It worked out OK.”

But today, Bean thinks the differences in his approach serve him well – in his painting, such as using moon boot soles and a lunar hammer to give texture to his creations.  “If Al and Deke had been on my committee as a painter and I’d told them that, they’d have said: that’s a crazy idea, Bean. They’d be looking at me like: that is really stupid.”

Record breaker

The man who has spent the most time in space is Sergei Krikalev, a Russian cosmonaut. He spent time on Mir – he was up there when the Soviet Union disintegrated beneath him – flew on the first US/Russian joint space shuttle mission in 1994, and was one of the first two men to enter the International Space Station in 1988. By the end of his sixth mission in 2005 he had spent 803 days, 9 hours and 39 minutes in space.

Changing politics

It’s no secret the Apollo missions were launched primarily to beat Russia at something: they were a function of the cold war. “Apollo was a political decision in the beginning: a race to space with the Russians,” Duke recalls, although he said once selected, it was never really an issue. “The political context quickly changed to a scientific one.”

Today US-Russia relations have improved so much that American astronauts must use Russian Soyuz capsules to get into space, and are expected to learn Russian in their basic training. Russian cosmonauts must learn English and do parts of their training in the USA.

Instead, if there’s a space-race competitor today, it’s China. “I don’t have a sense of what China does at all,” says Ross. Well, the China Manned Space Engineering Office didn’t return DCM’s calls, but we do know this: the first Chinese man, Yang Liwei, flew to space onboard Shenzhou 5 in 2003; China launched a module called Tiangong 1 into space in September, then an unmanned ship, Shenzhou 8, to dock with it in October; and the first section of a permanent space station should be in place by 2015, with the full station complete by 2020 – when the International Space Station is due to retire. Further ahead, China has announced plans to send a man to the moon by 2025, to build a lunar observatory, and to send missions to Mars.

But increasingly, politics aren’t going to matter at all as the business of space travel – particularly cargo and space tourism – passes from state-backed agencies like NASA to the commercial world of groups like Virgin Galactic. Once it becomes viable to earn a profit from these ventures, expect space to become very crowded with private sector businesses.

Passport in Senegal

When Space Shuttle flights departed from Cape Canaveral in Florida, they had an option of a transatlantic landing if one engine failed, which on some launches would put them in Dakar, Senegal. To deal with this possibility, one astronaut would be sent all the way to Dakar International Airport to help air traffic control – with their entire crew’s passports and pre-arranged Senegal visas. Mike Mullane wrote: “I had a vision of standing in the customs line at Dakar airport in our shuttle flight suits with our helmets in the crook of our arms while a bureaucrat asked: ‘Anything to declare?’”

What’s next?

Since NASA no longer has a shuttle, why apply? In the short term, astronauts are being trained for the International Space Station. But a new multi-purpose crew vehicle is being designed (known as Orion), capable of taking humans beyond earth orbit. Further afield are plans to visit an asteroid.

But for Ross there’s one ambition that matters above all others. “For me, since I was a kid, all I think about is going to Mars,” he says. “That’s got to be one of the first destinations we go to. That’s the next hill we’ve got to go climb.”

Other missions will include developing and deploying a successor to the Hubble space telescope, and exploring what is probably the most exciting celestial body in our solar system – Jupiter’s moon of Europa, an ice-covered moon believed to have a water ocean beneath it. If there’s life elsewhere in our solar system, Europa’s our best candidate.

Advice from the man

Nobody’s advice is more relevant than the man in charge of astronaut selection. So, Duane Ross, what should budding astronauts do? “Don’t do anything just for the sake of getting to be an astronaut. A good education will help you whether you get to be an astronaut or not. Getting in to science and engineering is a good place to be. Also, it’s not just academics; be well rounded, do a lot of things, show teamwork, and enjoy working with other people in different situations and environments.” So far NASA has selected 330 astronauts since 1959.

[Facts and figures]

1. $45,360: The minimum price to commission an Alan Bean original.
2. 130-140: the measured heart rate of Alan Bean and colleagues when lightning struck Apollo 12 at launch.
3. 12: number of men who walked on the moon, in six successful missions. 24 men have been to the moon – three of them twice – but only half landed on it, and none more than once.
4. 1963: year Soviet Valentina Tereshkova became the first woman in space. 20 years later Sally Ride became the first American woman in space on the Challenger Space Shuttle.
5. 100: kilometres to the Kármán Line, where space officially starts (though NASA designates anyone who reaches more than 50 miles in altitude as an astronaut). Either way, it’s not far: you could drive there in an hour if your car would go straight up.
6. US$64,724 to US$141,715: pay scale for NASA’s latest intake of astronaut candidates (most new recruits will be at the bottom).
7. Charlie Duke left a picture of his family on the moon, including a dog called Booster – which provided a paw-print.
8. Among the benefits NASA lists for becoming an astronaut are “free parking”.
9. Transcripts of Bean’s flight are filled with Pete Conrad’s country and western music, starting with San Antonio Rose.
10. Apollo astronauts underwent not only the incomparable thrust of a Saturn Five rocket, but the jolts when one stage of the rocket stopped and was discarded and the next one fired up. Duke said it was “like a train wreck. So violent my first thought was we’d blown up.”
11. Apollo 16 was nearly aborted just a few miles from the lunar surface.
12. The first thing Duke and Young were ordered to do after landing on the moon was sleep.
13. Duke had a leaking valve in the drink bag within his space suit as he walked on the moon. Frequently a globule of orange juice would come out and start flying around his helmet. “It was very frustrating. It would hit my nose and start crawling up my head.”
14. Some found moonwalking easier than others. “John [Young[ could run like a gazelle,” Duke says. “I just waddled around like a duck.”
15. When Bean opened and Conrad opened their checklist on the moon, they found a picture of a naked woman had been added, presumably by a back-up crew, with a note: “See any interesting hills or valleys?”
16. On the way home Apollo 16’s Ken Mattingly did a space walk. As he did so his wedding ring, which had earlier been lost, drifted out of the capsule and into space – but bounced off the back of his helmet right back into Duke’s hand.
17. The last man on the moon was Eugene Cernan, who flew with Harrison Schmitt on Apollo 17 in December 1972. The youngest remaining moonwalkers are in their late 70s; Bean believes there will one day be nobody alive who has walked on the moon.

The dynamics around food are pretty straightforward: there are more and more people to feed, with less and less land available to grow food on. It’s a classic supply and demand imbalance. It is also an investment opportunity – but how to do it?

Until recently, it has been difficult for Australians to play the food industry, whether through soft commodities such as wheat and sugar, or through meat or fish. Oddly for a country that is a major producer of agricultural products and livestock, there are very few major listed companies that are exposed to those themes: the big exception used to be AWB, but in 2010 it was taken over by the Canadian group Agrium. There are still some out there – Goodman Fielder is a big example – but the dominance of the Australian market by banks and resource-linked companies is reflected in a relative paucity of food and agriculture stocks.

Yet the case for food investment is strong from both the long and short term perspective. To start with the bigger picture, the world population is today around seven billion; it only passed the three billion mark in 1960. Moreover, all those people are living longer. The proportion of the world aged over 65 – negligible as recently as the 1950s – is increasing fast. Just under eight people in every 100 on earth are over 65 today, and by 2050, it will be more than 16 in every 100. “The increased size and age of the population means we see additional demands for food, water, resources and everything else,” says Douglas Hansen-Luke, CEO for the Middle East at European fund manager Robeco, known for its work on the so-called megatrends that will shape our world over the coming decades. “It leads to scarcity.”

At a number of points over the last decade, food scarcity has become deeply problematic: there was an incident before the global financial crisis when Bangladesh, for example, was unable to secure rice at international auction because other countries were hoarding their own stocks. Had Bangladesh not had an excellent rice harvest that year, we could have seen severe shortages in a desperately poor country, and associated social unrest. Governments around the world are making food security a priority. “The absence of food security will make it much harder to pursue a broad range of other policy goals,” notes the UK-based Government Office for Science 2011 report on the future of food and farming. “It may also contribute to civil unrest or to failed states; it may stimulate economic migration or fuel international tensions.”

More pragmatically, that shortage suggests an investment case; UBS and Goldman Sachs are among the banks that have argued for a greater allocation towards soft commodities this year. Closer to home, a 2009 report from the Australian Agribusiness Group pointed out that less than 0.01 per cent of superannuation funds went into Australian agriculture, and that a greater proportion – as is common in international pension funds – would have insulated super funds from the global financial crisis. Soft commodities are a long term investment prospect and a diversifier too; and since food is usually a core part of inflation, they work as a hedge.

Shorter term, it’s trickier to be sure about the direction of any commodity in these uncertain times. “It’s not apples and apples,” says Ric Deverell, head of global commodities research at Credit Suisse, and a former Reserve Bank of Australia economist. “There are quite different balances in different markets: corn is fundamentally very tight, while wheat is nowhere near as tight.” But he says “the central tendency in most of these markets will be for markets to move sideways for the next year.”

That said, he says corn is “the tightest market we have seen since the 1970s; when it’s that tight, it only takes small changes in supply and demand to have very large movements in prices.” In that environment, weather patterns, a good or bad crop or some other macro consideration can have a major impact on prices. “If next year is an average season, some of the tension we saw because of crop failures fades away – but gee, it’s vulnerable.” And on top of that, he says the incremental global rate of corn consumption has doubled since 2003, partly because of its use in creating ethanol fuel – 40% of the US corn crop will be used in this way in 2012.

Also relevant are changing patterns in food consumption in emerging markets, and changing attitudes in different countries to self sufficiency. As always, China is a huge driver here: growing use of fish, meat and dairy products in the Chinese diet have had ripple effects all the way to Australian or South American pastoral businesses, while China’s decision to be self-sufficient in wheat and corn has had knock-on effects too – such as in soy, which it is now the biggest importer of, having reduced the amount of soy it grows domestically in order to achieve those wheat and corn ambitions. Clearly, seeing a way through all of these patterns and shift is enormously difficult, but the general long-term trend is up.

So how to play it? Late last year, it became much easier to invest in soft commodities when a series of new exchange-traded funds was launched by BetaShares. Exchange-traded funds behave like a share, in that you buy and sell them on a stock exchange, but they give you exposure to an index or an asset class, and so are a straightforward and low-cost diversifier.

BetaShares launched two new ETFs relevant to food: an agriculture product, and a commodities basket. The agriculture one tracks the performance of the S&P GSCI Agriculture Enhanced Select Index, which is made up of the big four commodities in agriculture: corn, wheat, soybeans and sugar. The commodities basket is broader, covering 24 separate commodities including energy and metals, but it also includes a wider range of food-related commodities: eight agricultural (the big four plus cotton, coffee, Kansas wheat and cocoa) and three livestock (live cattle, feeder cattle, and lean hogs). All of these commodities are established markets with a particularly long trading history in the United States.

Drew Corbett at BetaShares feels the new products fill a gap. “We’re trying to allow people access to different asset classes,” he says. “People have been able to invest in soft commodities overseas for 10 years now through access products [like ETFs], and now people here can access some assets they previously didn’t have a low cost solution to invest in.” He notes that in private portfolios, asset classes such as these can account for up to 10 to 15% of an overall portfolio, and argues retail investors in Australia should be allowed the same opportunity for diversity. And he also agrees with the macro point. “If you look at emerging market population growth, there is going to be substantial demand and pressure on food and agricultural commodities to keep up.”

One point to note about ETFs like this is that unlike a share index ETF, these can’t be backed by the underlying investments. Think about it: you’d have to have a vast warehouse full of corn and wheat that couldn’t be used (or, in the case of the oil ETF, a tanker) to back the fund. Instead, BetaShares backs its ETFs with cash, in order to reduce counterparty risk, a worry in some other ETFs.

CFD providers have watched the emergence of these ETFs with some interest, since they have provided the opportunity for investors to trade soft commodities for years without receiving a huge amount of takeup. At IG Markets, for example, you can trade cocoa (London or US), coffee (robusta or Arabica), orange juice, two kinds of sugar contract, cotton, lumber, oats, corn, soyabeans (including meal and oil), wheat (London, Chicago or milling), rough rice, live and feeder cattle, lean hogs or rapeseed. But, by and large, people don’t. “It’s not one of our most traded products, but more specialised investors will use it – we get a lot of farmers who trade these products, for example,” says Chris Weston at IG Markets.

He argues that anyone who is looking at ETFs should take a look at CFDs first. “CFDs are a much more cost effective way of trading commodities than ETFs,” he says. “They are cheaper, they track the spot or futures price more effectively than an ETF does, and we offer you a price identical to the futures price.” CFDs allow significant leverage, which magnifies both gains and losses.

Anyone who does invest in commodities needs to think about the currency. Commodities are generally quoted in US dollars, and as anyone who’s invested in gold in recent years will know, that can make all the difference if you have made your investment in Aussie dollars. The BetaShares products hedge for the currency. People using CFDs can add a currency hedge in a separate contract if they want to.

In this article we haven’t discussed the tax effective investment schemes that have sprung up around areas like wine, truffles and almonds; schemes like these tend to be used by investors for different reasons, chiefly tax. But in the big picture themes of agriculture and livestock (see box), expect more investment vehicles to emerge.

BOX: Beefing up

Alongside the grains and other soft commodities, a less-invested arm of the commodity world is livestock.

Alongside some of the ETF and CFD investments covered in the main story, a few other ways have been devised for Australians to gain exposure to this asset class.

There is a Beef Stock Market in Roma, Queensland, popular among people in the livestock industry but actually open to anyone with an Australian business number and an internet connection. The market sets a price, per kilo, to buy cattle, and also indicative prices for selling the cattle – one price for when a professional livestock manager suggests it be sold, and one for outside that period. Investors can buy a cow or a herd in this way.

During ownership, investors pay grazing fees – currently $1.15 per kilo gained, paid by direct debit every time your cattle are weighed – and at sale time, there’s an agent’s commission of 4% of the full sale amount, a compulsory industry levy of $5 a head and perhaps additional sales costs including transport to market and weighing. Whatever else is left – the difference between the buy and sell price, based largely on the weight gained in the meantime – goes to the investor.

The market provides this costed example of how it might work. You want to spend about $10,000 on cattle. The purchase price is $2.24 per kilo, and the average weight purchased 254.36 kilos, meaning you buy 16 head of cattle, weighing 4,069.76 kilos, for $9848.82. An invoice goes through for payment within 48 hours. While you own the cattle, every few months they are weighed and the portfolio updated with current weights, while your weight based grazing fee is charged to your account. Let’s say the average weight gain is 195.37 kilos and fees $1.14 a kilo; your grazing fees will be $3,594.81.

Then the livestock manager tells you the animals are in sale condition at an average of 449.73 kilos apiece. If you agree to go at this – the ‘finished sale price’ – the livestock manager goes ahead. Let’s say they sell at $2.22 per kilo, with no additional marketing or transport costs (a farm-gate sale); the portfolio of animals would have been sold for $15,974.41. Once levies, commissions and so forth are taken out, the bottom line is a return of $1,811.80 on your just under $10,000 initial investment, or a return of around 18%, which would have taken about a year to achieve. Clearly, though, there are a lot of unpredictable variables involved; this is just a costed example.

One of the leading producers of sheep and cattle in Australia is Macquarie, which is understood to have about 220,000 cattle and 240,000 sheep across more than three million hectares of land, all of it held as a method of giving investors exposure to Australian livestock. This tends to be the preserve of private or institutional investors; an example of a completed fund backed by Macquarie is Paraway Pastoral, formed in 2007, which runs 18 large-scale sheep and cattle stations across New South Wales, Queensland and the Northern Territory.

While Macquarie declined to comment on any specific funds, citing regulator issues, executive director Tim Hornibrook explains the broader investment case. In some cases, it’s similar to that for other foodstuffs around the world: too many people. “The investment case is a fairly simple one: we’ve got more people in the world eating more food but less land to produce that food on,” he says. “That is causing a structural imbalance between demand and supply, causing a shift in agriculture prices above their long term average. Over the last 40 years arable land available for agricultural production has basically halved. So whereas once upon a time we used to each have a football field we could go and farm on, today we have two fifths of a football field.”

On top of that are changes in what people eat and can afford. “There are not only more people, but those people are getting wealthier, and there is a strong correlation between wealth and diet,” he says. “As you get wealthier, you tend to consume more proteins, and that once again puts pressure on demand and supply.” To meet demand, animals are tending to be produced more intensively – pigs in piggeries, cattle in feed locks – which in turn puts further pressure on the grain and oilseeds used to feed the animals.

But some elements of livestock in Australia are very distinct to this country. “Australia is in a fortunate position,” says Hornibrook. While it ranks second as an exporter of beef globally, behind Brazil, it ranks first by value, “because we get a higher price in recognition of being a consistent provider of high-quality, disease-free meat.” Most cattle in Australia are grass-fed, which is cheaper than the feedlock system common in the US and also considered more humane, and also reduces linkages to rising grain prices. Australia has a lot of land to allow a pasture-based system; it is closer to the key Asian markets than Brazil, with cost and time benefits; and more than anything else, it is disease-free, without ever having suffered an outbreak of an export-restricting disease, a function of being an isolated island with strict quarantine and a national livestock identification system. “Once a cow leaves a farm in Australia it has to wear an electronic ear tag,” he says. “You could be anywhere in the world and order an Australian steak and I could trace it back to the paddock where it was born.”

All of these things make Australian beef (and lamb) a very compelling investment case, but for retail it’s still very hard to play. Macquarie does, though, have a track record of starting out with somewhat esoteric investment classes with institutions and private wealth, then gradually offering retail exposure to them, so that may change in future. In the meantime, the most obvious exposure is through listed companies, the principle example being Australian Agricultural Company, Australia’s biggest exporter of live cattle to Indonesia.

One of the many tests 2012 will administer is the resilience of Asian countries to capital outflows. There’s no question Asian countries are in better shape to deal with capital flight now than they were in the Asian financial crisis, or even 2008; but they might need to be a whole lot better.

Asia’s economies represent strong and sustainable GDP growth, low levels of sovereign debt, high foreign currency reserves and in many cases stout budget surpluses. That’s all well and good, but the fact remains that capital continues to flee these markets when things get bad in the US and Europe. With every passing period of global uncertainty, the rallying cry goes up that it’s different this time, and that Asia is decoupled; it’s never, remotely, different this time, and it won’t be next time either.

Asian stock market investors see this as a crushing injustice, but there it is. Across the problem nations in 2011 the Dow gained 5.6%, the S&P 500 was flat, the FTSE 100 lost 5.6% and Germany’s DAX lost 14.7%. Yet emerging markets were down 20%, as was Hong Kong’s Hang Seng index; of the mighty Asian BRICs, the supposed engines of global growth, China lost 18.2% in US dollar terms – worse in RMB – and India a dreadful 37.1%.

So long as Asian markets remain risk-on bets to global portfolio managers, this is going to keep happening, both in equities and debt, and it’s more important than ever for the Asian nations with free market access to be ready for it. That’s because foreigners have built up unprecedented positions in Asian government debt in particular: by August, foreigners accounted for 36% of all Indonesian government debt in rupiah, for example, and there are very high levels of foreign engagement in other markets such as Malaysia and Thailand. The fear has long been: what if it all goes away again? And, if the European situation turns for the worse, there’s every chance that will happen.

The question then is how sturdy Asian nations are to deal with it. We had something of a test case in September, when a period of dollar strength related to fears about Greece led to a decline in most Asian currencies and a correction in bond yields. Capital started to leave. In Indonesia, the most closely watched, the foreign ownership level fell from 36% to under 30% in a matter of weeks – but then it stopped, and has since stabilised at around 31%. The long-dated money in particular stayed put. There are similar patterns in other markets too.

One of the big differences is the financial strength of the countries themselves. In 2011 Indonesia topped US$100 billion in foreign exchange reserves for the first time; that hardly holds comparison with China’s multi-trillion dollar backing, but it’s more than enough to deal with a bit of volatility. Indonesia spent about $10 billion of its reserves to defend its currency, and brought to bear an elaborate set of initiatives to keep support in government bonds; not only did it succeed in stabilising the markets, it also sent an important message that it was going to back its assets. The absence of such a message in 1997-8 saw a sevenfold collapse of the currency in a matter of weeks; those days, it appears, are gone.

Elsewhere, Malaysia’s central bank argues that the biggest difference between the Asian crisis and today is the maturity of the financial system, from the banks and asset managers to the local capital markets themselves. This means the system is much more able to intermediate flows, whether in or out, without broader damage to the marketplace or a sense of panic. Similar arguments are made, with varying degrees of plausibility, in Thailand and the Philippines.

But as with everywhere else in the world, it’s all a question of degree. Asian nations today can handle volatility; they can handle shocks, even distant crises. But something as systemically vast as the collapse of the euro? Nobody’s safe from that, no matter how big their population, how vast their stocks of coal, and how muscular their forex reserves.

When the enabling legislation to allow Australian banks to issue covered bonds passed through Canberra’s parliament in October, expectations were high. For banks, there was the prospect of a new, cost-effective, diversifying funding source. And US and European investors would get exposure to one of the most secure, steady and reliable banking sectors in the world – in the agreeably high-ranking form of a covered security.

But it didn’t quite work out like that. In November ANZ became the first Australian bank to launch a covered bond, swiftly followed by Westpac, and from the issuer perspective they were successful: they raised $2.25 billion between them at attractive terms. But within 10 days, both deals were being bid 30 basis points outside their reoffer. Granted, markets were exceptionally difficult, but there was also a sense that the Aussies, galvanised by their strong domestic standing, had demand pricing that was too tight for their role as vanguards of a whole new market. In the fallout, Commonwealth Bank of Australia cancelled a planned deal in euros; National Australia Bank, the first of the four to roadshow and announce a planned deal, has still not even formally mandated one.

There has consequently been a great deal of finger-pointing among the issuers and their lead managers (ANZ, Citi, Nomura and UBS on the ANZ deal; Barclays, Bank of America Merrill Lynch and Westpac on the Westpac deal). Some blame the issuers, others the bookrunners.

“Investors were disappointed by the spread widening seen after the launch of the first Australian covered bond issues,” says Ted Lord, managing director at Barclays Capital. “These investors have strong confidence in the Australian banking system, but they thought that the pricing pushed the envelope a bit too much – especially for inaugural covered bond deals from an inaugural covered bond market.”

There’s also a sense of Australians not having properly conveyed the strength of their own system to investors who are used to troubled European banks. Australian banks weathered the financial crisis better than any developed nation bar Canada; they still pay dividends and have a great economic story underpinning them. But that’s not obvious to European investors.

In particular, there is a feeling that Australian banks were so intent on beating each other on pricing that they missed the broader point: a favourable start to a new market will that will important to all of them. “The investor market really wants to have a very strong successful Australian covered bond market, because people feel comfortable about the country, the banks and the future. But they want the process of creating this to be much more collaborative,” says Lord. “That’s the message.”

The prize is potentially very big. The Australian Prudential Regulatory Authority (APRA) limits covered bond issuance to 8% of total system resident assets for each bank. “That could equate to about A$160 billion for the major Australian banks overall if they maxed out capacity,” says Fergus Blackstock, head of debt capital markets at UBS in Sydney. “Everyone will maintain a slight buffer inside that, which brings it down to about $120 billion. Most issuers are probably going to try to build up to that and not do it all at once, but you could still expect to see about A$5 billion per major bank per annum.” For banks, there’s every reason to participate in this market as fully as they can. “Covered bonds will form a core part of funding,” Blackstock says. “They will still do senior deals and RMBS, but covered bonds will be another string to the bow.”

From his perspective, having worked on the ANZ deal, he put the reception down to the fact that “the markets were tough, and just getting tougher. We were pleased with the way the ANZ transaction went: the initial primary subscription was strong, we were oversubscribed with $1.45 billion in the book, and the performance immediately on the break was pretty strong. But then the market deteriorated.” In his view, all regular comparables issuers – the Scandinavians, the Canadians – were under similar pressure. “Timing was unfortunate; legislation came through at the point when markets were really turning, and ANZ managed to hit what turned out to be a very small window.”

Blackstock accepts that “with the underperformance of the initial bonds, we need to make sure, as the market stabilises, that performance can come back. New deals will have a chance to perform in a better market and put the product back on track.” But he adds: “there’s not a material hole in the covered bond product that needs addressing.”

Is it realistic to expect a group of banks who compete vigorously among themselves to collaborate in building a successful funding market? Lord points to Germany, Sweden and the UK as examples of places where this has happened. When markets stabilise and shelved deals return, it will be interesting to see whether issuers are prepared to leave a little more on the table for the greater good.

It’s certainly in their interests to have happy investors – and not just because of the established European and American buyers. “Several Asian central banks are now finalising plans to invest in covered bonds for the first time,” says Lord. “Australian issuers will probably enhance that, because Asian investors – whether banks, pension funds, insurers or central banks – have a good and comfortable knowledge of Australia.”

As another banker, not involved in either of the first two trade, succinctly puts it: “It would be nice if they don’t screw up the market before it’s even started.”

No bank in Taiwan has made a more strident play to take advantage of thawing cross-Straits relations with China than Fubon. The truth is that progress for Taiwanese financial services groups in China has been glacially slow, and it will be years before it has any meaningful impact on the bottom line of any Taiwanese bank. But when the money does start to flow, banks across the country will owe Fubon a vote of thanks for getting the pioneering deal through.

When Fubon Financial Holdings bought a 19.9% stake in China’s Xiamen Bank in 2008, it represented the culmination of years of effort and negotiation. The deal was permitted because Fubon bought the stake through its Hong Kong subsidiary, and hence was not a direct purchase by a Taiwan-based bank of a Chinese one; consequently it involved close discussion between not just the People’s Bank of China and Taiwan’s Financial Supervisory Commission, but the Hong Kong Monetary Authority as well.

A minority stake in a smallish Chinese bank is not going to make a big change to anybody’s P&L, and certainly not Fubon’s, but the more important point was that it got all three key regulators around the same table and caused them to hammer out some important issues. Doing so made it easier for what followed: relaxed FSC and PBOC regulations allowing Taiwanese banks to set up business operations in the mainland, a potentially transformative step for the entire Taiwan financial services industry. Fubon launched its first rep office on the mainland, in Suzhou, on December 5.

Like its peers, Fubon must have a rep office in operation for a year before being allowed to upgrade to a branch, and then a further two years before it becomes a subsidiary (and even then only if it was profitable for a year as a branch); it’s only then that they will be able to offer deposits and financing in RMB, which is a crucial part of the product set whether representing Taiwanese businesses or Chinese ones. Development in investment banking and brokerage will evolve from there, a modest securities presence within Xiamen Bank notwithstanding. But the point is, a foothold has been achieved.

Back home, Fubon is one of the largest financial groups in the country, a leading consumer brand with particular strength in Greater Taipei. The investment banking arm, Fubon Securities, includes an impressive presence in brokerage and local underwriting, although the group’s mainstays are more generally seen as corporate lending, wealth management and insurance. As of June 2011 it ranked third by trading value among the island state’s securities firms, and was third for spot trading brokerage, fifth in margin loans, and second in underwriting local IPOs.

But it’s really in Greater China that it will make its name, initially in broader corporate work but in time perhaps also in securities and brokerage. Already the only Taiwanese financial holding company to own a Hong Kong bank, it has set its mainland ambitions firmly on the West Strait Economic Zone centred around Xiamen in Fujian Province – geographically, the closest to Taiwan. Fubon has been a first mover in China, but it’s also been focused and smart.

No Asia-domiciled house has made a more strident attempt to be a regional player than Singapore’s DBS. It’s been this way for more than a decade, as one CEO after another has come to fulfil a vision of a bank from Asia, covering Asia. The latest CEO, Piyush Gupta, puts it like this: “The Asian bank of choice for the new Asia.”

DBS got its pan-regional ambitions underway with the acquisition of Dao Heng in Hong Kong in 2001 and has been steadily adding pieces and bedding down businesses ever since. Today, Gupta aims for a DBS with a 40:30:30 split of earnings, split Singapore/Greater China/South and southeast Asia, chiefly India. In this, it differs from CIMB, the closest comparable approach in the region, which aspires only to be a powerhouse within Asean.

Where does investment banking fit into this? In truth, it’s not the sharpest part of Gupta’s vision; he told Euromoney in September 2010 that “We are really a good commercial bank, a good universal bank.” He said that did not cut out investment banking, but “there is a recognition that this will not be our forte, to go out against the bulge bracket banks in high end capital market transactions. It’s not our principal area of strength.”

Be that as it may, DBS is an exceptionally powerful presence in investment banking in Singapore and is increasingly exporting that into other markets. “We originate out of Asia and distribute globally,” says Clifford Lee, who heads the fixed income business. “From an origination standpoint we are very much focused in Asia: this is where our expertise lies, when we are investing to add more value to the market.” Asia’s occasional opacity is an asset for DBS, he says. “The most valuable commodity in the market now is information. Certain markets are more opaque, onshore and offshore areas of control make things a little less transparent than we would like, and credit information is less available. We hope to be able to navigate through these issues in a more informed manner, considering this is our back yard.”

It is already a leader in all areas of investment banking at home: it has turned up on the landmark IPOs from SingTel’s S$4 billion IPO back in 1993 right through to the deal that took its record, HPH Trust, which raised US$5.5 billion in March. It was instrumental in launching the REIT market (and business trusts, of which HPH was the biggest example) and has handled a greater volume of underwriting on these than anybody else. It is a clear leader with the debt and equity needs of SMEs. It has helped to build one of the greatest duration curves in any local currency debt capital market, beyond 40 years. And it appears on most M&A deals involving a major Singaporean institution.

Along the way has come a sense of what can be achieved in other markets too. It has been involved on cross-jurisdiction equity deals for years: examples are Adaro Energy in Jakarta, San Miguel Brewery in Manila, Astro All Asia Networks in Kuala Lumpur and Australand in Sydney. And generally, the newer frontiers are making a steadily bigger contribution: China, India, Taiwan and Indonesia contributed 17% of group revenues in the third quarter, with earnings up 35% from a year earlier.

It’s perhaps on the debt side where regional strength with a local feel is most valuable. “In the immediate future, we intend to stay relevant and competitive in the G3 space, which is extremely crowded in Asia already,” Lee says. “But it is in local currencies in the region that we really hope to continue to grow. The faster markets open up, the faster we will be able to make headway.” DBS dominates Singapore dollar league tables in the debt side but is also starting to appear more frequently on CNH, or offshore RMB bonds. DBS was a bookrunner on the RMB3.6 billion offshore RMB bond from Baosteel in November – the largest corporate dim sum bond to date. It has appeared on several others as well. “CNH feels more like a credit market than the bank space, which is more of an interest rate play,” Lee says, suiting DBS’s strengths. He says he will “continue to monitor” Indonesia for opportunity, with a focus so far on the high yield space (where it has worked on deals for Indosat and Adaro, among others), and has built a rupee capability in India.

China is an example of a business where investment banking does make a key contribution. Gupta has said corporate and investment banking in China, which drive that business, have been growing at 40 to 50% per year, at least in the run-up to China’s slowdown. This is arguably the great advantage of Dao Heng: the fact that it creates a way in to China rather than starting from scratch. Half of DBS’s customers in China are from Hong Kong, while red chips are responsible for the biggest growth in the Hong Kong business.

Going regional is not straightforward. “The difficulties of maintaining a multi-regional, multi-country strategy or platform for an investment bank are not only must you be very good in your home market, you must at the same time take on the best of the local market players in each of the other countries you set your sights on,” Lee says. “That’s becoming increasingly difficult as domestic banks are improving, increasing in sophistication, and are increasingly able to provide more basic investment banking needs.”

But going regional is now a key part of the DBS plan. “We were born in this region, we’ve been invested in it for a long time, and we invest on a much longer term basis and have ridden the storms,” Lee says. “The competition is harsh but we just have to psych ourselves accordingly to take them on.”

CIMB has long been the pre-eminent investment banking presence in Malaysia. Year after year it sweeps the investment banking categories in our Awards for Excellence, commonly making a clean sweep at the top of the equity capital markets, debt capital markets and M&A league tables to complement the most powerful brokerage in the country.

Nazir Razak, CIMB Group’s CEO – and sometimes referred to in Kuala Lumpur circles as Malaysia’s unofficial finance minister, since his brother, the Prime Minister, is said to seek his advice – rose through investment banking. He built that business before the many mergers that turned CIMB into a full service bank, and it remains the bank’s most impressive arm.

It’s consistently on the deals that matter nationally each year: the RM14.8 billion IPO for Petronas Chemicals Group in 2010, the US$3 billion bonds and US$1.5 billion sukuk from Petronas the previous year, the RMB20 billion Islamic MTN programme for Pengurusan Air, the RM11.2 billion Maxis IPO. And it has been a leader when Malaysia’s national champions have ventured into other markets, such as on the S$1.5 billion sukuk for Khazanah Nasional and US$1.26 billion of trust certificates for 1 Malaysia. Major M&A deals in recent years have included Sin Chew Media and Nanyang Press Holdings merging with Hong Kong’s Ming Pao and the demerger of Telekom Malaysia.

But local excellence is no longer the challenge. “We have gone quite public on the fact that we want to be the top regional universal bank – meaning southeast Asia,” says Dato’ Charon Wardini Mokhzani, CIMB’s deputy CEO and the head of the corporate and investment banking businesses, who combines a smooth confidence with a magnificent Koizumi-styled shock of silver hair. “Within that, that includes also being the top regional investment bank.”

This is a much bigger ask than dominating Malaysia’s investment banking landscape, and it puts them into competition with some powerful local competitors across the region. But there are a lot of signs of progress: CIMB is among the leaders in broking in Singapore, where it has been strong ever since acquiring local broker GK Goh in 2005, and in Indonesia, where CIMB is extremely well entrenched through its ownership of CIMB Niaga, the fifth largest bank by assets in the country.

More recently, CIMB has sought to beef up in Thailand, striking a deal with Siam Industrial Credit Public Company (usually abbreviated, tremendously, as SICCO) to buy 70% of SICCO Securities in September. This broker has 13 branches across Thailand and will be built into the existing presence, CIMB Thai Bank; Charon says that combining their market shares immediately brings it into the top 15 brokers nationally, and should be a platform to build a leader. There is already strength in investment banking. “In Thailand, Bloomberg ranks us number one for IPOs this year,” Charon says. “We are getting there.”

“Clearly, it is going to take time to be in the top three in each market in all categories. But it’s something we think is achievable.”

Next up is likely to be the Philippines, where Charon confirms the bank is in discussions to take a stake in Bank of Commerce, owned by San Miguel. That wouldn’t, in itself, create a meaningful presence in investment banking, but it would give a platform to build one; additionally, it has an agreement to distribute Philippine equities and research. “There are 10 Asean countries and we are present in eight of those [the Philippines and Laos being exceptions – CIMB’s commercial arm already has an established presence in Cambodia].

Evidence is beginning to come through in significant deals, most notably in Indonesia – which, being the region’s most populous market, has the greatest potential. CIMB was, for example, appointed as an underwriter on a bond issue from Indomobil earlier this year, and was an advisor on CVC’s buyout of Matahari Department Stores in 2010. “Because we have the number five bank, we’re really able to offer a complete universal banking-type solution,” Charon says. “Because we are positioning ourselves as an Asean regional bank, we can give regional solutions to clients; it’s surprising the number of southeast Asian companies who are investing elsewhere in southeast Asia. There is a lot of interest in regional investment flows.”

Growth in these cross-border flows will clearly be crucial to CIMB’s success as a regional player. “Intra-Asian trade is a big number, and a growing number; clearly we want to be there, growing with that,” he says. As Asean moves towards a free trade zone, more cross-border trade and investment within the region should follow. “Asean as a unit has a population half the size of China, with a GDP probably bigger than India. As a region, it’s very dynamic.”

One problem with the idea of an Asean bloc (see Euromoney, September 2011) is that it doesn’t yet exist in a meaningful form: there are still different regulations from one market to another and capital does not yet move freely. But Charon tries to present this continued variance as a positive. “Because it is diverse, it is an interesting place to be in: it’s not one homogenous market,” he says. “Finance is finance. The economics which make an M&A effective, or raising capital internationally – these don’t change and can apply anywhere.

“Each country clearly has different regulations and structures, but because we are a southeast Asian bank, we have a very strong indigenous team in these markets. We don’t fly expatriates into another country and ask them to run investment banking. We use the people in the country.”

And how about the opportunity presented by other western investment banks pulling back due to problems at home? “I don’t want to sound like a vulture fund taking advantage of other people’s weaknesses, but you would imagine that as people have issues back in their core domestic markets, they would retreat to some extent from southeast Asia,” he says. “There will be opportunities for southeast Asian banks to step in.”

BOX: Badlisyah Abdul Ghani

One area that both Malaysia and CIMB have excelled in taking an early lead is Islamic finance. Malaysia has the most sophisticated industry, and enabling framework, for Islamic finance anywhere in the world; within it, CIMB is probably the name most closely associated with innovation.

The man most responsible for building CIMB’s Islamic business, particularly on the investment banking side, is Badlisyah Abdul Ghani, now the overall CEO of CIMB Islamic. He made his name being a part of innovative structuring techniques, among them the world’s first ijarah sukuk, and asset-backed deals using the musyarakah structures. Quietly spoken and lacking some of the more outgoing statesmanship that some of his peers assume, he is nevertheless known as one of the most effective and connected people in the Islamic finance industry worldwide. Beyond CIMB, he was closely involved in Bursa Malaysia’s launch of a Shariah-compliant commodity exchange, and is also closely involved in attempts to build fund flows from the Middle East to Malaysia (he is, among other things, head of corporate client solutions for the Middle East and Brunei at CIMB at a group level). He’s on the Islamic capital market consultative panel of the stock exchange and chairs the Islamic capital market committee of the Malaysian Investment Banking Association. His involvement in such a wide range of sukuk from Malaysia has helped to shape the country’s distinct approach to Islamic finance, which differs in some crucial ways from the interpretation of the Middle East; but he has always argued that differences in interpretation, rather than needing to be ironed out and standardized, should be welcomed as a spur for innovation.

All of this has helped CIMB to a position of strength in Malaysian Islamic investment banking, but the place it might really pay off is Indonesia. The opportunity here is vast. Indonesia is, like Malaysia, a Muslim nation, but has almost nine times the population. Islamic finance is far less developed in Indonesia than Malaysia, but all the same drivers that spurred it in Malaysia exist there too: a desire to invest in a way consistent with faith; growing sophistication of the investor base; and a rising wealthy middle class. Most of the necessary legislation is in place in Indonesia now, and it’s really a question of when, not if, Islamic finance becomes widespread. Through its Niaga presence, CIMB and Abdul Ghani are better placed than most to take the opportunity.

Asia is widely accepted as the most enticing market for asset management growth in the coming decade and beyond. It’s little surprise, then, that the region also hosts a vibrant market for M&A transactions.

This can take a number of forms. One is international businesses seeking to acquire local enterprises, or – where regulation requires – to form joint ventures with them, as is most commonly the case in China. Alternatively, local businesses often acquire one another, or conduct mergers of equals, in order to achieve scale – something that is prominent among the Australian industry funds landscape, for example. Drivers of M&A can include regulatory change and the framework of the institutional investment industry that these fund managers seek to support.

China and Australia dominate M&A in asset management, and China generates by far the most attention.

There are several reasons for this. Firstly, China is obviously the region’s main prize, not so much for the market it represents today but what it is likely to turn into tomorrow. Even after considerable slippage since 2007, the public mutual fund industry in China had RMB2.027 trillion under management at the end of the third quarter, and in brighter economic circumstances is likely to soar. It’s still very clearly an important industry to have a foothold in. Retail mutual funds represent only about 3% of retail investor portfolios, according to research group Z-Ben.

Plenty, though, have already done more than secure footholds. When Essence FMC was established in November, it became the 69^th fund management company active in China. For anyone new seeking to get involved, they must wait for a new licence, and, although six have been established this year (only one of them a JV), it is very hard to know how many more will be licensed and at what pace. A rule of thumb is to wait three years for a new business to be licensed and launched. For foreigners, it can make more sense to find an existing joint venture (there are 36 active) with a foreign partner who wants to exit.

On top of that, regulatory change has driven M&A activity. No domestic fund management company can be 100% owned by one company (although a local company can hold more than 49% in a Sino-foreign JV, in some cases going as high as 80%). Instead, no shareholder can own more than 49% of a domestic fund manager. Consequently many of the bigger local groups have had to sell stakes – either domestically or internationally – and in some cases have opted to change their structure to a JV.

These three trends (potential scale, need to enter an established industry, and regulatory change) are what has made China such fertile ground for M&A.

Perhaps the most striking in 2011 involved China AMC, the biggest local asset manager with almost 10% of all industry assets under management, owned by CITIC Securities. Being the biggest made the China AMC stake difficult to sell, and for some time CITIC found itself in violation of local law because of the size of its shareholding. Eventually, China AMC was banned from new launches until it redressed the problem.

So in 2011, it created five tranches for auction. First, 10% went to Shandong Rural Economy Development and Investment Company, for RMB1.6 billion, and then an 11% stake to South Industry Asset Management Company for RMB1.76 billion. But the most significant sale was the third, in August, since it went to Power Corp, a Canadian financial services firm, for CAD276 million (which at the time was RMB1.78 billion) for a 10% stake. This sale to a foreign house has turned China AMC into another joint venture.

While China AMC, as the biggest, is the most striking example of Chinese M&A, there have been many others besides. Bohai International Trust bought an 18% stake in Orient FMC in 2010, while ICBC announced that Cosco – a shareholder in the ICBC Credit Suisse joint venture – would sell its 20% stake to the bank, with Credit Suisse selling 5 of its 25% stake. The 20% piece cost RMB258.2 million. Southwest Securities, based in Chongqing, bought a 20% stake in Yinhua, another fund management company. Analysts expect other bank-backed JVs, such as CCB Principal, Bank of Communications Schroders and ABC-CA, to see the banks try to up their holdings in future.

The following charts look at the composition of the joint venture businesses in Chinese asset management today.

[Contact Cerulli to see version with charts]

In Australia, one of the main drivers is the pension fund (or superannuation) industry, and in particular industry funds. In an open and highly competitive market for funds, there is a clear need for scale. In early 2011, five separate industry fund mergers were underway simultaneously: First State Super with Health Super, AustralianSuper with Westscheme, LGSuper with City Super, Equip Super with Vision Super, and Non-Government Schools Superannuation Fund with Cue Super. There have been others besides.

While the quest for scale is understandable, it may not always be in the best interests of members. Russell Investments launched a paper in August saying that the cost efficiencies and economies of scale from mergers are not necessarily serving the members of the fund. Issues raised by the paper include ensuring member equity in addressing differing exposure to liquid and illiquid assets between merging funds. Handling varying member balances and managing transparency and accountability principles also raise difficulties. Members are often not given a detailed analysis of expected costs, so can’t then hold their trustees accountable.

Outside these two markets, M&A volumes are lower, but there are several interesting trends underway. India deserves close scrutiny, partly because its own asset management industry has similar demographic potential to China. Here, acquirers of stakes in local businesses, or creators of new joint ventures, have been a widespread group in recent years, from homegrown ambitious businesses like Religare to international heavyweights like Robeco, Nomura, T Rowe Price and most recently Goldman Sachs.

The chart below demonstrates how many of the leaders in international asset management are well represented in ventures of various forms in India today. As with China, a number of different approaches are possible. Some entities carry the name joint venture but are in fact 100% foreign owned, such as those established by Morgan Stanley, Franklin Templeton, ING, HSBC, BNP Paribas, Fidelity and JP Morgan, though the last of those was set up in 2006. Since then, full foreign ownership has also been possible, but they are now termed private sector entities: this approach describes the ventures owned by AIG, Mirae, Daiwa and Goldman Sachs, among others. Still others are true JVs in which the foreign partner ties up with a local, sometimes in a majority stake, sometimes a minority; this is the approach for BlackRock (tied with former Merrill Lynch partner DSP), Sun Life (with Birla), Standard Life (with HDFC), Prudential (with ICICI), and Nomura. Finally groups like T Rowe Price – which holds 26% of a venture called UTI Asset Management – and Robeco and Pioneer (with stakes alongside Canara and Bank of Baroda respectively) have taken a model termed bank-sponsored.

As with China, movements in stakes in these businesses can often be driven by events outside of India. So, for example, Daiwa Asset Management is there not because Daiwa bought in but because it acquired fellow Korean Shinsei Asset Management in 2010. Others change hands because of mergers elsewhere; just as BNP found itself with stakes in three Chinese JVs and was obliged to sell out of two of them following its various financial crisis-era mergers and acquisitions, in India it ended up with two and had to sell its stake in Sundaram BNP Paribas in October 2010.

There is not scope in this article to go into Taiwan and Korea in detail, but both are also important markets for M&A, as the charts below demonstrate.

That’s the backdrop. But should a foreign party acquire a business, or a stake in one, rather than building organically?

There are clear arguments on both sides. It can be extremely hard to launch a greenfield business in many emerging markets. The process of licensing can be opaque and time-consuming, and, once achieved, it is very difficult to start from scratch in an intensely competitive field – none more so than China, but also in established markets like Korea and Taiwan. That’s a clear argument for buying into a business or JV: access to existing client base, infrastructure, and local knowledge, with the opportunity to revamp or improve an existing product range, rather than having to launch and market a whole new one.

On the negative side, it can be frustrating to be the minority partner in a joint venture – and in several markets, China among them, that’s as good as it’s going to get in the near term. There is no opportunity to exercise leadership and to drive the direction of a business. That’s not so much of a problem if the local partner has the right strategy. But no venture ever takes place without some internal friction. Additionally, in competitive markets like China, the costs of acquisition are getting steadily higher, as the China AMC sales show; in a slowing market, no matter how much potential it has, that’s a difficult situation in which to thrive.

ROADTEST

Clime Australian Value Fund

Who runs the fund? Clime Asset Management, a value investor. John Abernethy is the chief investment officer and founded Clime in 1996 after 10 years as head of equities at NRMA Investments.

The basics: Looks for good value Australian stocks in order to deliver consistent capital growth and growing income over three to five years.

The process: Underpinned by three key beliefs: preservation of capital; sustainable return on equity determines value; and the value of a company will be reflected by its share price in the medium term (in other words, be patient and value will be delivered). Holds a concentrated portfolio of around 20 stocks. An easily understood business model, well funded balance sheet, absence of heavy debt, and high dividend yields are also attractive.

The bottom line: Looks truly exceptional lately. In the last three years to October 31 it is up 17.74% a year, according to Morningstar, more than 3.5 percentage points higher than its nearest value-style rival. It’s also the top performer in its field over the last 12 months (up 4.76%) and five years (6.63%).

Fees: 1.03% for retail, 0.87% for wholesale, plus a performance fee of 15.38% of outperformance above of benchmark of 12% per year. That is a much higher benchmark than many fund managers apply.

Verdict: Consistently excellent results for the last five years just can’t be argued with.

NEW FUND

Mutual Cash Terms Deposits and Bank Bills Fund

What is it?

Basically a cash fund.

Sounds boring.

In this environment, boring is good. All it aims to do is outperform the UBS Australian Bank Bill Index, and at a time when equity markets are either plunging or volatile, that will do some people very nicely, thankyou.

How does it invest?

Looks for the best term deposits offered by the major Australian banks and authorised deposit-taking institutions, including credit unions and building societies, provided they qualify for the Commonwealth Government ADI Guarantee. It can’t use gearing, or derivatives – it keeps it very simple.

How much can I expect to make from that?

When last disclosed on September 30, the weighted average yield of the portfolio was 5.84%. Almost all of the fund was invested in four deposits at that stage, through CBA, Westpac, NAB and Bank of Queensland.

And what do I get charged?

A 0.4% management fee.

What if I need to get my money out in a hurry? In the last financial crisis there were ‘enhanced cash’ products that got cash-locked.

The fund pledges access to liquidity within seven days without an interest rate penalty.

Is it a good time to be in cash?

It is exceptionally difficult to call the likely direction of stock markets at the moment, and not particularly easy to draw conclusions about bonds either. That is the sort of environment that very much favours cash. You might miss investing at the bottom of share markets but you also won’t lose money.

What do analysts think?

Zenith calls it “a very safe and high quality investment.”

GIZMO

Fujitsu Stylistic Q550

Having buckled and bought an iPad recently, I’m impressed, but couldn’t countenance it replacing a laptop on business trips yet – the biggest reason being I’m so married to Microsoft Office, for better or worse.

So I was interested to find this new product from Fujitsu which looks a lot like an iPad – it’s a slim tablet of similar size and weight – but is equipped with Windows 7 Professional and can handle all the usual Microsoft Office documents and functions. You can still use it for games apparently, and play music, but that’s not really the point of the device: it’s meant to be an iPad that you can work with on a trip. Indeed, Fujitsu even markets it as “for professionals only”.

For me, the lack of a keyboard is still a problem, but I think I’m in a minority there, so for those who want the portability of an iPad with the programs they use in the office, this is worth a look.

FUND WATCH

Trust Company Imputation Fund

Ouch. Everyone knows these are testing days for fund managers but this fund is suffering worse than the market, particularly over the last 12 months. Part of the problem is that, as an imputation fund, its strategy is chiefly around stable stocks that pay a good healthy dividend; but in recent years, dividend payouts have been under a lot of pressure, particularly at the banks.

In terms of sector breakdown and top stocks, the fund looks a lot like the broader market: almost 40% of the fund in financials, much of the rest in basic materials and consumer defensives. The fund is keeping the faith with the big four banks; they occupy four of the five biggest holdings in the fund, after BHP. A fund like this will thrive in brighter times when dividend security is restored and the steady stable heavyweights lead the way out of market problems. But those days could be some distance away.

Private banking is growing as a distinct discipline within Islamic finance. Both within the Islamic world, and among international banks, the need to provide Shariah-compliant offerings to high net worth individuals is going to become steadily more important.

Partly, this is a function of demographics: the rising wealth of the Muslim world. It is hard to put precise figures for the world’s 1.6 billion Muslim population, but Cap Gemini and Bank of America Merrill Lynch reported in their most recent World Wealth Report in June that the number of high net worth individuals in the Middle East stood at 400,000, representing a 10.4% increase during 2010. Between them they had combined wealth of US$1.7 trillion at the time of the survey, up 12.5% year on year.

“The Islamic world has experienced superior growth rates in terms of wealth generation, especially during the last two years,” says Stefan Leins, thematic research analyst at Credit Suisse. He notes that the largest part of the global Muslim community is in Asia, where wealth grew at an average of 5% a year from 2000 to 2009 before leaping 15% from 2010 to 2011. “Much of the Islamic world’s new wealth has been created by the emergence of a growing middle class in large parts of Asia and the Middle East. This leads us to the assumption that wealth generation in the Islamic world is not only superior but also sustainable.”

On top of that, Islamic banks themselves are becoming more sophisticated, and clearly see high net worth advice as a vital source of revenue, particularly as more and more mass market Muslims achieve greater wealth. In Malaysia, Islamic private banking has been a discrete field of finance for years, and it continues to grow. “Moving forward you will see a lot more momentum in Islamic private banking,” says Badlisyah Abdul Ghani, CEO of CIMB Islamic in Kuala Lumpur. And it’s not just because of demographics, but because of the sense that Islamic finance – tied as it is to real, tangible assets – is increasingly seen as resilient in an economic downturn. “Arising from the recent crisis, much of the wealth that used to be managed by conventional private bankers is now coming into the hands of Islamic private banks,” he says. “Islamic banks are now forced to come up with a framework that would be able to facilitate the needs of these high net worth individuals.” Because it is perceived as being more safe? “One of the reasons is that perception,” he says. “The other is centred on pure diversification of exposures, and who manages their funds. They want to be able to spread out a bit in terms of who is managing their wealth.”

CIMB has had a distinct Islamic private banking business for several years; at Maybank, executive vice president Choong Wai Hong says that “establishing an Islamic private bank brand is something we’re exploring right now.” For him, part of the prompt is the fact that Middle Eastern money is becoming increasingly prominent in Malaysia. “Some of these customers are more discerning in what they expect,” he says.

International banks, too, see private banking as an increasingly vital part of an Islamic offering. “It is an area which is getting to be very important,” says Wasim Saifi, global head of Islamic and consumer banking at Standard Chartered. “You’ve got customers who are quite sophisticated. Shariah compliance is an important need, but on top of that they need to balance it with the commercial aspects of that proposition. Unless and until you have a Shariah compliant range of products available, your appeal is not to the entire market.” He says it has become an especially important focus for Standard Chartered in the Middle East, particularly in Saudi Arabia, Qatar, Kuwait and parts of the UAE. “These are places where having a Shariah range of products is becoming a very important plus for a private bank.”

Leins at Credit Suisse says Islamic private banking has “absolutely” emerged as a new discipline. “Many global banks that are active in private banking, such as Credit Suisse, have started to structure a whole range of private banking services in a Shariah compliant way in order to meet Islamic clients’ demands.”

At Citibank, Ahmad Shahriman Mohd Shariff, Islamic banking head in Malaysia, adds: “A separate discipline is required if one considers all the additional obligations and considerations an Islamic investor would have with regards to his wealth.” These aren’t as straightforward as one would think: for example, Shariff points to zakat, a pillar of Islam you can roughly translate as philanthropy, which has quite specific rules for calculation that must be adhered to (see box). “While in the past, these needs were met by Islamic investors privately, there is an opportunity for Islamic financial institutions to offer commercial solutions that will help Islamic investors to meet these needs.”

Clearly, the available product suite to sell to Islamic HNW investors has improved considerably over the years, and continues to do so with every new sukuk. “The most popular instruments in Islamic investing would be the sukuks, especially in the MENA region and Malaysia,” says David Pinkerton, chief investment office of Falcon Private Bank, which is owned from the Middle East. “They have become fairly liquid, and provide investors with fixed income, which is very popular among Islamic HNWIs.” It is common for bankers to insist that Shariah compliance is not a constraint but an opportunity. “Restrictions imposed by the Shariah on investments that are available for Islamic investors should not be seen as a disadvantage,” says Shariff. “The financial crisis in 2008 has shown that there is wisdom in the restrictions imposed, and that Islamic investors who followed the restrictions saw their wealth protected during the crisis.” Shariff would like to see more product development in Shariah-compliant risk management tools, and broader wealth management solutions, but in terms of investment products, that is rarely raised as a problem these days.

But not everyone agrees with that assessment. John Sandwick, a Californian who spent much of his youth living in the Gulf before becoming a Swiss private banker tasked to bring in Arabian private clients, started his own advisory business, called Islamic Wealth & Asset Management, seven years ago in Geneva. He did so partly because his clients were asking for investments that were halal, yet in fact within the private bank many of the assets in their private banking accounts were actually haram, illegal under Shariah, because they were interest-bearing, which is prohibited.

To his mind, most of the process of asset management under Islam ought to be the same as conventional: you start with a client profile, evaluating risk appetite and investment objectives; then you create an investment strategy to fit, typically in an income, balanced or growth strategy; and then you go and buy the appropriate securities. Since it’s only the last of those processes that is any different in Islam, he set about building his approach to asset management the same way, and to do that, he decided he needed a comprehensive database of Shariah-compliant securities, or at least funds. “An asset manager has to examine all the possible securities in the investable universe,” he says. “If he doesn’t, then he is driving blind, and he is not doing his job.”

The first surprise he got was to learn that no such database existed, so with the help of some graduate students in the UK, he set about building one. The next surprise was that the resulting universe was small: 850 Islamic products. And when he filtered out funds that were too small, new, opaque, illiquid, or didn’t have a suitably robust fatwa to assert their Islamic compliance, that number shrank to 150. “It’s pathetic,” he says. “There are 66,000 suitable funds in the conventional universe.” Be that as it may, 150 has proven sufficient to build the sorts of growth, balanced and income portfolios he believes should be widely available for Islamic investors, and he says they have performed exceptionally well, not just in terms of returns but the various measures of the risk involved to get them. “While there are only really 10 fixed income funds to examine, and I would much prefer there to be 2,000, it so happens that 10 does the job. It’s an awful situation to have so few Islamic funds but we have reached the point where there are enough to achieve investment goals in a professional manner.”

Sandwick’s broader objection, though, is that if nobody else really has the database that he has, then how are they conducting asset management? “If you do not have full information on your investable universe, you cannot do asset management,” he says. “People tell me they do Islamic asset management. I say: no you don’t, you do random product sales. If you don’t have the entire universe to select from, I don’t know what you’re doing but it’s not asset management.”

Sandwick’s assertion rests on the assumption that other banks have not done the same level of research that he has, but nevertheless he has a point. There is a dearth of the sort of fund-of-fund or multimanager diversified investment products that are commonplace in the conventional mainstream. What one has instead, particularly from the international banks, is a slew of structured products underpinned, at some level, by derivatives. “Derivatives are the garbage of the professional asset management universe,” he says. “The Bill and Melinda Gates Foundation manages $36 billion. Go find me a single derivative position in there. Go to Calpers; there’s a modest amount, but only when it meets specific investment objectives. Professionals don’t buy this crap. Muslims are told it’s all they’ve got. It’s shameful.” Where, he asks, are the straightforward balanced portfolios? “If I go to [an international banker in the Middle East] and say: show me your conventional US dollar balanced portfolio, he’ll reach on his shelf and get something right away,” says Sandwick. “If I say: give me the same thing – back-tested, optimized, with all your global sorting and filtering – but with fatwa, he can’t do it.”

This touches on another point: private banking is often seen as a source of innovation in Islamic finance, in order to create equivalents to conventional world securities. It is impossible to spend more than an hour at an Islamic finance conference without hearing someone call for more and faster innovation, but a counter-argument runs that the real priority should be doing the simple things right.

On top of that, the differences in Shariah interpretation, particularly between Malaysia and the Gulf, make it difficult to think of a single investment universe that applies to the whole Islamic faith. “It’s a challenge everyone faces,” says Choong at Maybank. “When customers come from the Middle East, we have to be very sensitive about how the same principles of fatwa are interpreted there and here. It’s quite tricky.”

Beyond investment, Islamic private banking is undergoing the same transition as its conventional equivalent in Asia: a shift from pure investment advice to true wealth management. “The special needs of Islamic HNW investors have progressed from finding good Shariah compliant investment opportunities, to having a comprehensive Shariah-compliant wealth management solution,” says Shariff. That includes Shariah-compliant estate planning, takaful (insurance) and zakat (see box).

Pinkerton says that beyond selection of compliance securities, this largely mirrors the conventional world. “Shariah-compliant high net worth individuals have the same basic needs as the conventional investors in terms of capital preservation and income generation.”

But here, too, there are distinct differences. Choong at Maybank points to the concept of faraid, or wealth distribution; this governs the treatment of inheritance under Muslim law. “It is quite specifically governed by Islamic laws,” he says. “How you distribute, to whom – there is no conventional option that a customer can opt for. It is very clearly defined.” Maybank has built the capability within its trustee business to deal with this Islamically, and Choong thinks this will be “one of the anchors” of an Islamic private banking offering.

Whatever form it takes, private banking is going to continue to grow within Islamic finance, simply because every relevant factor is growing: Muslim world wealth; investor sophistication; acceptance of Islamic finance; and availability of investments. There is, quite simply, no reason for it to do anything but grow.

BOX: Islamic philanthropy

The Muslim principle of zakat requires believers to give a fixed proportion of their wealth to charity, although the proportion given – and what constitutes wealth – is widely debated. Additionally, Muslims are encouraged to make voluntary contributions, or sadaqat. Consequently philanthropy is an enormously important part of Islamic wealth management.

“The pattern of giving is not much different from the conventional world, but I think there is more giving among the Islamic high net worth than the conventional, because they see other benefits over and above what they get in this world,” says Badlisyah Abdul Ghani at CIMB Islamic. “Not necessarily the volume but the number of times that they do such giving is more, and they don’t announce it.”

Shariff at Citibank Malaysia agrees. “In general, from an Islamic perspective, philanthropy should be done discreetly with no publicity.” He says Islamic investors approach philanthropy first by calculating their zakat obligations, then adding voluntary donations. “In certain countries, Islamic investors have the option of fulfilling zakat obligations either privately or through a state appointed organization,” he says. “Regardless of the option chosen, an Islamic investor would require good advice on how to calculate the amount of zakat payable, and where possible to tie payment of zakat to tax planning as well.” This, he says, is an area where Islamic financial institutions need to do more to work out how they can provide appropriate solutions to investors.

The requirement for philanthropy has also found application in the fund management world. Last year Maybank’s Islamic banking arm created a fund through which parts of the returns go to a particular Shariah-approved charity; it represented an easy and compliant way to fulfill philanthropic duties.