The Ernst & Young Islamic Funds & Investments Report 2011 reveals the various types of Islamic funds and their domiciles, as well as their size or their assets under management, and the range of assets each fund has in different countries. Saudi Arabia, Malaysia and the US are the dominant players but there are a lot of other countries vying for the top position. Recent news is that Malta wants to join the race as a center for Islamic funds. The same goes for Luxembourg, Ireland and South Africa. However, it is evident from the report that these countries have little traction. The dominant players are still the ones in the leading Islamic finance countries of Saudi Arabia and Malaysia.
There is not much cross-border selling of these funds going on. For example, in early October there was a client in Egypt whose financial advisor in the US wanted to purchase a Shariah compliant fund giving him a global mandate. The issue here is that clients want to purchase a Shariah compliant fund while the broker or advisor of the fund obviously wants to pick the best fund in that asset class but at the same time wants to keep it on his own platform so that he can get paid for it. So how can it be done? This is where the actual question comes in. If you can solve this vital problem then you should be able to distribute your product on a global basis. In the case of the Egyptian client, there are multiple avenues the broker or the adviser or the fund manager setting up the fund could have used.
Avenues for sales
The first is the widely known Undertakings for Collective Investment in Transferable Securities (UCITS) model. However, the problem with this model is that it was designed for European regulations, in order to be able to sell funds across the European Union. It was not designed to sell funds in other countries like Dubai, Saudi Arabia or even Malaysia. So there are limitations to what one can do with a UCITS structure.
Another avenue is by way of feeder funds. The main fund is, for example, could be domiciled in the US with feeder funds in multiple jurisdictions. Investments from the feeder funds can then be fed into the main fund. The problem is that if an investor is in Egypt and the adviser is using a feeder fund into the US, the broker must then pay fees to the main fund while the adviser still charges a fee for purchasing the fund: so the investors’ returns are eroded by the additional fees. Also, feeder funds require regulatory permission from each country, which adds to the cost.
A third alternative is to have a domestic fund that is sold in different jurisdictions. However, this can become very cost-prohibitive for the fund managers themselves because they have to spend the money on going into each jurisdiction and hiring relevant legal expertise, as well as paying the regulatory fees of each respective country.
A better method is for the regulators to intervene and create cross-border agreements. For example there are currently agreements between Malaysia and Dubai as well as between Malaysia and Hong Kong. Thus, if you have funds launched in Malaysia then automatically (or with a very low bar for regulation), you can sell those funds in Hong Kong or Dubai. Now imagine a world where Malaysia can go out to every Muslim country, from Indonesia to Morocco, with agreements in place to distribute funds with minimal regulation and cost. This would be the ideal situation.
Sales channels/distribution
All the above avenues fall under the heading of direct sales. The easiest and most cost-effective method is the multi-jurisdictional basis. This is currently a work-in-progress, but the regulators need to work together to address bilateral issues among themselves. This is not something that the funds industry can do on its own and because of the bilateral issues, it will take time before these agreements can be implemented.
What we basically need is to find a viable way for investors globally — whether Shariah conscious or even those just looking for higher returns — to be able to find best of breed Shariah compliant funds anywhere in the world. So if an investor in the US wanted to access funds in Southeast Asia, he or she could do it not only through Southeast Asia but through Saudi Arabia, Morocco or anywhere else for that matter, depending on where they could find the best fund manager for their needs. There is also a need to keep fees as low as possible as fund managers know that the lower the fees, the higher the possibility of outperforming the index, thus attracting more investment into the funds. This applies on both the fund management side and also on the investor side.
Regulators need to ease regulations to facilitate these cross-border or multilateral agreements so that fund managers are able to sell their funds into other jurisdictions as well. The best way to achieve this will be to use third parties to accept the funds on consolidated platforms so that investors can purchase, sell and distribute funds anywhere in the world with ease.
Monem A Salam is the director of Islamic investing and deputy portfolio manager of Saturna Capital. This article is an excerpt taken from his presentation during the IFN Issuers & Investors Asia Forum 2011.