Malaysia is attracting Islamic investment funds from the U.S. seeking higher returns in Asia as growth in developed economies slows.
“Emerging markets is where we see global growth going for the next couple of decades and the source for a lot better opportunities,” Bryce Fegley, chief investment officer at Saturna Sdn., the Malaysian unit of Saturna Capital LLC, the biggest Shariah-compliant stock fund in the U.S., said in an interview on Aug. 10. Saturna’s expertise in Islamic finance “steered us to Kuala Lumpur as opposed to Singapore, Hong Kong or other emerging markets,” he said.
Saturna, the Bellingham, Washington-based company that oversees $2.7 billion of assets, set up Saturna Sdn. in March and obtained an Islamic finance management license in May, Fegley said. Franklin Templeton GSC Asset Management Sdn. got approval to offer services that comply with religious principles in January, according to the Malaysian Securities Commission’s website.
The 14 licenses issued by the Malaysian government allowing international companies to form Islamic fund-management businesses give tax exemptions until 2016. Foreign-ownership rules have also been eased in the global financial hub for services that meet Shariah guidelines.
Growth in developing economies in Asia will quicken to 9.2 percent this year, the International Monetary Fund said on July 7, three times faster than advanced countries. The U.S. economy may expand 3.3 percent after shrinking 2.4 in 2009, according to the Washington-based lender.
Islamic law bars funds from investing in industries such as gambling, alcohol and banking services that don’t adhere to the religion’s ban on interest. Companies with debt exceeding 33 percent of equity or accounts receivable of more than 45 percent of total assets are deemed as non-Shariah compliant, said Fegley.
The Dow Jones Islamic Market World Index of stocks, which has a market capitalization of $12 trillion, has climbed 10 percent in the past 12 months, while the Dow Jones Global Index gained 9.3 percent.
Asia’s accelerating growth is also encouraging HSBC Holdings Plc and Standard Chartered Plc to set up Islamic units in Malaysia, the world’s biggest market for sukuk and home to more than 16 million Muslims. Funds that have obtained Islamic asset-management licenses in Malaysia include Nomura Islamic Asset Management Sdn., OSK-UOB Islamic Fund Management, Reliance Asset Management (Malaysia) Sdn., and Aberdeen Asset Management Plc, according to data on the Securities Commission’s website.
Overseas investors can own as much as 70 percent of Islamic investment banks and sellers of takaful, or insurance that complies with religious tenets, up from 49 percent.
“Malaysia has a comparative advantage because the Islamic finance infrastructure was in place much earlier than other countries,” said Scott Lim, chief executive officer of Kuala Lumpur-based MIDF Amanah Asset Management Bhd., which oversees the equivalent of $670 million including Shariah-compliant equity and debt funds. “Malaysia has a big Muslim population looking for Islamic instruments compared to Hong Kong and Singapore, where there is no such demand,” he said in an interview from Kuala Lumpur on Aug. 13.
Malaysia’s $93 billion of Shariah assets account for 19.6 percent of the country’s total banking industry, according to Bank Negara Malaysia’s website. The nation has 279 billion ringgit ($87 billion) of outstanding Islamic debt, according to data compiled by Bloomberg.
Global sales of sukuk fell 28 percent to $7.9 billion so far this year, according to data compiled by Bloomberg. Asian issuers sold $5.5 billion compared with $8.1 billion in the same period a year earlier.
The government began a 230 billion ringgit, five-year development plan on June 10, which may revive offerings, according to Malaysian rating company RAM Holdings Bhd.
The yield on Malaysia’s 3.928 percent note due June 2015 rose five basis points to 2.84 percent today and reached 2.79 percent on Aug. 13, the lowest level since the securities were sold in May, according to prices from Royal Bank of Scotland Group Plc.
The difference between the average yield for emerging- market sukuk and the London interbank offered rate narrowed three basis points on Aug. 13 to 398, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The spread has narrowed 69 basis points this year.
Shariah-compliant debt returned 9 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Index, while debt in developing markets gained 12 percent, JPMorgan Chase & Co.’sEMBI Global Diversified Index shows.
Saturna Capital started the Amana Developing World Fund in the U.S. in September to invest in global emerging-market Islamic assets. The company bought Malaysia’s Alpha Asset Management in March and changed the name to Saturna Sdn.
Saturna Capital manages Islamic funds including the Amana Income Fund, Amana Growth Fund and the Amana Developing World Fund. Amana Income, which invests in dividend-paying corporations globally, gained 5.6 percent annually over the past decade, compared with the 0.8 percent drop in the Standard & Poor’s 500 Index over the same period, according to the company’s website.
“We’re all seeing that in the developed world there are major structural issues, demographically, with politics and with macro-economic factors that are really causing those economies to stagnate,” Saturna’s Fegley said. “It’s partly a diversification of our business interest” launching into the Malaysian market, he said.