Last week Samba Capital, the investment arm of Samba Financial Group, launched the Al Nafees Global Commodities Equity Fund in Saudi Arabia. The US dollar-denominated Shariah compliant fund will invest in the equities of commodity-related companies relating to agriculture, energy, base and precious metals as well as renewable energy, timber and water.
According to Eisa Al Eisa, the chairman of Sambacapital, commodity-related companies are capitalizing on growing global demand due to rising population, rapid industrialization and increased consumption. He added that the contribution of this sector to global GDP currently stands at around 15%.
SambaCapital has joined the likes of Al Rajhi Capital, Riyad Capital and HSBC Saudi Arabia, which have all launched commodity funds in Saudi Arabia. Funds of this asset class in the Islamic funds industry normally invest in the equities of commodity-related companies. The HSBC Amanah Commodity Index Fund invests in commodities and is aimed at tracking as closely as possible the performance of the HSBC SA Enhanced Commodity Index.
From the range of funds available in the Shariah compliant space, hard commodities – particularly precious metals funds – are popular with fund managers and investors alike. Examples include the DWS Noor Precious Metals Securities Fund as well as the DSAM Kauthar Gold Fund, which was the first in the DSAM Kauthar Fund series of commodity-linked funds as well as the first Shariah compliant hedge fund of its kind. The volatility of commodity prices in 2011 has caused these funds’ returns to thread into negative territory, however, with the DSAM Kauthar Gold Fund registering -5.3% yield-to-date (YTD) returns as at the 1st November 2011 while the DWS Noor Precious Metals Securities Fund recorded a YTD return of -15.69% as at the 30th December 2011.
Apart from mutual funds, investors – retail or institutional – are also now taking to precious and industrial metals exchange traded funds (ETFs). In 2008, ETF Securities (ETFS) launched what is believed to be the world’s first Shariah compliant precious metal exchange-traded commodity (ETC) based on physical platinum, palladium, silver and gold as well as a basket of the previously mentioned metals. An ETC, although similar to an ETF as it trades and settles similar to equities, it is not a fund. Instead it is a security structure allowing investors access to commodities markets through a priced security listed on an exchange.
According to Eurekahedge, ETFS Physical Gold has seen a 23.37% return, placing it in the top spot of YTD returns among the 660 global Islamic funds that the data provider tracks. In 2011, assets under management of this ETC surged from US$5.98 billion on the 3rd January to US$7.51 billion as at the 8th December, a clear sign that investors’ attraction toward this commodity has not waned.
Little is known of South Africa’s Absa Capital NewGold ETF, declared Shariah compliant in 2008, four years after its initial listing. The ETF showed an impressive 43.27% for its one year returns as at the 31st October 2011. NewGold ETF is the first and only product in South Africa that allows institutional and retail investors to directly invest in physical gold bullion.
As investor demand grows exponentially in this sector, asset management companies should realize the potential opportunities to launch more physical metals ETFs, particularly due to the current absence of this investment tool in the Shariah space. In August another conventional ETF provider, Source, had its physical Platinum ETC and physical palladium ETC certified Shariah compliant on the back of increasing demand from Islamic investors.
In general, commodities have a low correlation to traditional equity markets as they do not always fluctuate in tandem with market movements. Investors must look to such alternative asset classes when seeking to diversify their portfolios, particularly in such testing times. Islamic fund managers have to play catch-up fast if they want a piece of the pie or they might end up missing out on this opportunity. — RW