The global financial crisis and the ongoing Eurozone debt woes have caused many institutional investors to shy away from the US and other developed markets, favoring Asia and the emerging economies on concerns of risk, volatility and low returns.
These were the findings of the 2011 Pyramis Asia Pulse Poll that was conducted by Pyramis Global Advisors, a fidelity investments company comprising 95 institutional investors in Japan, South Korea, Taiwan, Hong Kong, Singapore and China with combined assets of more than US$1.1 trillion.
Young D Chin, the chief investment officer of Pyramis, said that the ongoing volatile market conditions has forced institutional investors to identify better strategies for managing volatility while still keeping risk management as a top priority. This involves “deploying timelier, more dynamic asset allocation strategies that can exploit market dislocations”.
According to the Pyramis survey, many institutions in Asia revealed that they will consider uncorrelated or less volatile asset classes as a risk management technique for managing volatility. The report also stated that the top approach for Asia (ex-Japan) investors is to diversify into alternative asset classes, followed by using currency hedging techniques.
In the Shariah space, Jahangir Aka, the senior executive officer at an asset management firm, SEI Investments, highlighted the need to develop a deeper institutional investor base particularly pension and institutional funds as they provide long-term stable money.
Without such investors, growth will be modest, he said. Jahangir added that within the Islamic space, there are family offices, a supranational bank and a few Islamic banks but “none of them are major investors in the mutual fund market”.
This was affirmed by Germain Birgen, the global head of fund solutions at HSBC Amanah Securities Services, who said that fund managers may still have an uphill task to convince their target investor base particularly new investments from large institutional players. He predicts that sovereign wealth funds could make the biggest impact in the fund sector particularly as these funds are not involved in Islamic finance.
Islamic funds meet the criteria of low volatility while providing better returns than conventional funds — it is safe to say that almost all fund managers with Islamic portfolios can vouch on this.
Fares Mourad, the managing director and head of Islamic finance of Bank Sarasin & Co was quoted saying that even prior to the financial crises, Islamic equities outperformed conventional equities. The application of Shariah screening requires investors to invest in companies that focused on their core activities to generate profits and have a solid balance sheet while addressing issues relating to environment and social responsibility.
Noripah Kamso, the chief executive of CIMB-Principal Islamic Asset Management, provided empirical evidence in a recent article published in the Islamic Finance news Supplements September 2011 Issue, that Islamic funds had even outperformed socially responsible funds as well as environmental social governance funds.
However, it is not all about performance, according to Jahangir, who discovered that institutional investors based their interest to invest on the size of funds instead of their performance. He said this was where Islamic funds were at a disadvantage as a majority of the global Islamic funds had a net asset value of less than US$100 million.
Birgen terms this conundrum as a vicious circle faced by the Islamic funds industry. He added: “To convince investors you need to grow and achieve scale, but for that you need investor appetite”.
This is the perfect opportunity for the Islamic asset management industry to attract a portion of the US$1.1 trillion into the Islamic space. Convincing these investors to choose an Islamic portfolio over a conventional one may have once been regarded an uphill task for fund managers.
However, these managers can use the continued uncertain market conditions to their advantage in winning over institutional investors. — RW