Q1. What are the key challenges faced by conventional investment companies in developing comprehensive and diversified Shariah compliant products?
For a conventional company it takes twice the effort to develop shariaa' compliant product especially when you are up against prominent institutions like KFH in Kuwait for example.
The challenges faced are similar to any product development process in order to ensure its success mainly summarized in 3 major points:
Q2. Do you observe any significant differences between building conventional and Shariah compliant Products? Do you follow similar allocation methodologies or are there any stark distinctions?
The philosophy if well understood and implemented goes in line with the conventional investment philosophy with the main difference such in the case of the Modaraba for example where "Rab-ul-mal" or the provider of the financing is perceived as a provider of capital or a partner or and not as a lender.
That is to say that the major difference comes at the level of the financing structure assuming that the underlying activity is shariaa' compliant de facto. Take the example of the "Ijarah" that resembles leasing as it is practiced in today's commercial world. In a nutshell the distinction appears at the level of the structure and not the concept.
Q3. The scope of Shariah compliant investment products now spans the entire globe, however do you find any specific areas (i.e. geographies, asset classes, currencies, etc) which are still not properly covered?
Asia mainly Malysia, Pakistan and the GCC are considered to be the hub that is hosting and enticing the development and the perfection of the shariaa' investment and compliance philosophy and implementation. The fact that the Islamic world and specifically the GCC holds a substantial amount of sovereign wealth and due to the major increase in the pool of Islamic funds seeking shariaa' compliant investment opportunities, has raised the awareness on the necessity of such products within the major financial economies such as the US, UK and Europe. Education on Islamic investment is now available in major universities in the US and the UK.
Q4. Would you maintain that this universe of compliant investments carries a problem of quantity (more funds needed) or quality (better managers needed)? Or both?
I think it's both as more products are definitely needed with enhanced liquidity and hedging features and I believe this is the main challenge that the Islamic investment is facing, especially in today's Investment environment where minimizing risk has become a major portion of the investment equation through hedging possibilities and enhanced liquidity, I am not sure that there is a consensus amongst shariaa' scholars on the compliance to the injunctions of Islam of some the instruments used for hedging.
Q5. With your experience managing both conventional and Shariah compliant products side by side (such as your Shariah compliant Kamco Energy Services Fund), do you see a distinct client preference for either one?
Feels like hitting two birds in one stone at first sight when you structure a Shariaa' compliant product under the assumption that a shariaa' compliant product would be appealing to shariaa' compliant and conventional investors, our experience shows that this is not always the case especially when you realize that there are two levels of Islamic investments the shariaa' compliant and the shariaa' compliant by articles of association thus another layer of distinction in Islamic investment.
Q6. Much has been said about real estate and/or illiquid investment products in Islamic finance, to what extent do you mitigate any potential issues of concentration, liquidity, idiosyncratic risk, etc on your portfolios?
Mainly through diversification when and where possible, we have to remember that the Islamic financing is still at its infancy however things have been improving as we speak and we believe that there is a tendency especially after the global crisis to lower the risk within the Islamic product structures but again we are nowhere near the level of conventional products, I can think of the example of derivatives, or hedge funds products that are being sold under the shariaa' compliance banner by major financial institutions but his does not mean that these products are being fully accepted by the Islamic investment community.
Q7. Do you manage all of your mandates internally (using in-house fund managers) or have you sought to utilize external managers as well? Would this be relevant for specific products such as a high-conviction strategy or an allocation into a specific geography?
In some cases we use external managers especially when we are targeting shariaa' compliant equities in the US and Europe such in the case of our Energy services fund where we are using the advice of a prominent international investment bank and their equities research capabilities to help us determine the shariaa' compliant universe within the alternative energy and energy services sectors. Also the need for a shariaa' advisory board is required for periodic compliance screening.
Q8. What are some of the key trends that you are monitoring in the industry (with regards to new products, new markets, etc)? Which would you argue hold more opportunity and where is the greater potential for growth?
Modaraba is one area that we are seriously contemplating, the beauty of Modaraba is that it is similar to the project financing concept as far as the recourse to the financial status of the main company is concerned i.e. if for example if an Islamic investor wants to invest in a sector where the leading company is not Shariaa' compliant because of its leverage the Modaraba offers the opportunity to the Islamic investor to venture with the company on a specific project through the establishment of Modaraba Management Company (MMC) regardless of the compliance status of the main company assuming that the contemplated activity or sector is shariaa' compliant.
We believe that the Modaraba is a bridge between the conventional and Islamic investment world offering the possibility of a venture between both worlds.