© Copyright 2007 Dow Jones and Company, Inc. Issues & Suggestions for OIC Shari’ah Compliant...

© Copyright 2007 Dow Jones and Company, Inc.

Issues & Suggestions for OIC Shari’ah Compliant Indexes

Rushdi [email protected] DirectorDow Jones Islamic Market Index Group

2 © Copyright 2007 Dow Jones and Company, Inc.

Presentation Overview

Are the various Islamic Funds assisting and promoting OIC Countries economic and capital market development at:

Member Country Level Intra-OIC Portfolio Investments

Liquidity on Stock Exchanges Transparency & Governance Listed Firms

Deyaar, Tamweel, Nakheel, etc. Regional/OIC Level

Viewed as a common market OIC Global Level

Foundational, not Transactional, Infrastructure Paradigm


Dow Jones Indexes Timeline: Key Dates

10/6/97-Cash options on DJIA begin trading on CBOE 2/26/98-Dow Jones STOXX Indexes launch 2/5/99-Dow Jones-AIG Commodity Index launch 2/9/99-Dow Jones Islamic Market Indexes launch 7/14/99-Dow Jones Global Titans Index launch 9/7/99-Dow Jones Sustainability Group Indexes launch 2/14/00-Dow Jones U.S. Total Market Index launch 2/18/03-Dow Jones Indexes Islamic Blue-Chip Indexes launch 11/3/03-Dow Jones Select Dividend Index launch 11/30/05-Dow Jones Wilshire U.S. Industry Indexes launch 1/23/06-Dow Jones Islamic Market Sustainability Index launch 3/6/06-Announced launch of Dow Jones Citigroup Sukuk Index 5/31/06-Dow Jones Islamic market China Offshore Index launch 6/7/06-Dow Jones BRIC 50 Index launch


Dow Jones Islamic Market Index Awards

Best Shariah Compliant Index Provider (Global Finance Magazine, US, 2008)

Global Recognition in Islamic Finance for a Finance Institution (Dubai, IIFF 2008)

Best Islamic Index Provider (Euromoney, London, 2008) Best Islamic Index Provider (Islamic Finance News, Malaysia, 2007) Best Islamic Index Provider (Terrapin, Singapore)- 2007 Best Individual Contribution to Islamic Finance (Kuala Lumpur Islamic

Finance Forum (KLIFF), Malaysia, 2007) American Muslim Achievement Award, Islamic Center of Southern

California, USA (2006) Sh. Mohmmad Rashid Bin Makhtoum Award for Contribution by

Western Institution to Islamic Finance (2006) Contribution to Islamic Capital Market Development, International

Islamic Finance Forum, Singapore, 2006. Failka Award for Contribution & Development to Islamic Funds (2006) Deloitte/KLIFF Award for Special Contribution to Islamic Finance (2005) CERT (Malaysia) Award for Excellence in Islamic Finance (2004) Sh. Mohmmad Rashid Bin Makhtoum Award for Innovation in Islamic

Finance (2003)


55

Where are we coming from?

1975-1990Commercial Banking SyndicationsIslamic Conglomerates

1991-2000Hard Asset Private EquityFund ManagementIslamic Indexes

2001-2010Structured Sukuk Mega Project Finance Mega Commercial Banks

Market exposure: 20m

Onset of Islamic Banks (Malaysia, UAE, etc.)

Inefficient Command SOEs in Iran and Sudan, and Pakistan

Market exposure: 100m

Concentrations of Islamic Banks growing in GCC, Malaysia, Pakistan and Bangladesh

Market Exposure: 250m

Conversions, Islamic Windows & Subsidiaries of Mega Banks,

Establishment of significant Islamic Banks in Non-Muslim states

Muslim populated states getting interested Syria, Libya, Soviet bloc

Timeline 1975-2010Source: S. Farooq, BIBF


We are moving forward in IF

ML

R

E

PE

VC

Timeline/Products/Returns

ActivitiesRiskReward

IF

IFI

CF

CFIs

300 plus years

-Petro-liquidity & HNWs-Diversification-Shariah Scholars/research-Stress Tested/Time-Cross Sell

CFPsIFPs

S


Hypothetical “Islamic Investor & Asset Manager” Dilemma?

Increased Volatility: Exclusion of prohibited industries that may be

the current high-fliers Exclusion of financial sector Exclusion of highly leveraged firms Exclusion of companies with high non-operating

interest income Bias: Technology, Healthcare &

Energy Quarterly Reviews (turnover)


First Islamic Funds

Jan-93Saudi ArabiaNational Commercial BankAlAhli US Trading

Equity

Jul-92Saudi ArabiaAl Rajhi Banking & Invest.Al Rajhi Local Share

Jun-92South AfricaFuturegrowth AlBarakaFuturegrowth AlBaraka

May-91SingaporeMendaki Holdings Pte. Ltd. Mendaki Growth Fund

Jun-86USASaturna CapitalAmana Income Fund

May-71MalaysiaTabung Amanah Bakti Tabung Amanah Bakti

May-68MalaysiaMara Unit Trust Dana Al-Aiman

InceptionLocationFund ManagerFund Name

Source: Failaka


Growth in Assets in Equity Funds

Total Asset in Islamic Equity Funds (Global Universe)

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Year

Ass

ets

in $

Mil

lio

ns

Source:Failaka


Growth in the Number of Islamic Equity Funds (excluding Asia)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 $-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

0

20

40

60

80

100

120

140

Growth in Islamic Equity Funds

Fund Assets Total Funds

Year

To

tal

Ass

ets

in

US

$ M

illi

on

s

Source:Failaka


As regards Equity Funds

Total Number of Islamic Equity Funds: 306

Islamic Equity Fund Universe by Asset Class

European2%

North America4%

Other8%

GCC15%

Global11%

Emerging Markets6%

Sector Specific 5%

Asian Equity/Balance

49%

Source: Failaka


Nearly Full Range of Products

Hedge Fund 6-7 nearly there; 2 operational

Balanced Easy to duplicate and 17 available

Sector Funds 9 available

Regional Funds (45 funds dealing in GCC Equities)

Small Company (Al-Rajhi Global Small Cap Equity)

Single Country (SABB Amanah Saudi Equity)

Emerging Market 19 available (BRIC, South Africa, Turkey)

European Equity 7 available

US Equity 12 available

Asian Equity 7 by non-Asian based managers

Global Equity 27 available

Fund categories

Source:Failaka


Its all Relative

Total Mutual Funds in the World: 56,863

Total Islamic: 550

Total Islamic Equity: 320 (including balanced)

Total Socially Responsible (SRI): 201

Source:Failaka


Assets Under Management: In Perspective

Total Assets invested in Mutual Funds: US$ 17.8 Trillion

Total Assets in SRI Mutual Funds: US$ 179 Billion

Total Assets in Islamic Equity Funds: US $ 17.3 Billion (est.)

Source:Failaka


DJIM Screens

DJIM Shariah Supervisory Board v Outsourcing Shariah Primary Business

Negative Screens ~ Socially Responsible Investing Positive Screens: DJIM Sustainability Index

Revenue Accountability Financial Screens

Debt/MC <33% Cash + IBS/MC <33% Acc Rec/MC <33%

Debt Screen Impact: Enron (Deleted: 3Q’01), Worldcom (2Q’01), Tyco (1Q’02) &

Global Crossings (2Q’01) AAOIFI Standard (21): Product Standard

DJ CitiGroup Sukuk Index: Standard Product Price Only, Market Cap & Free Float Weighted Indexes

Price, Equal, MC and Fundamental Indexes Low Debt/Non-Financial Social-Ethical Index Alpha

Strategy


Screening Process

Dow Jones World

BusinessDescrip!ion

RevenueThree Financial

Ratios

DJIM

D/MC

C+IB/MC

AR/MC

95%


DJIM Screening

Primary BusinessImpermissible IncomeFinancial ratiosDJIM Universe


DJIM Regional Breakdown (2007)

0

10

20

30

40

50

60

US Jap Ma'sia

DJIM

DJWI

UK

Cana Indonesia


DJIM Sector Breakdown (2007)

0

5

10

15

20

25

Oil/Gas HCR CG

DJIM

DJWI

Tech Indust Financial

Credit & Impact on Financial


DJIM Performance (2007)

0

5

10

15

20

25

30

35

40

World US Can EU A/P WorldDev

DJIM

DJW


Islamic Equity Indexes

Benchmark Indexes: Dow Jones Islamic Market Index ($17T)

Sector Indexes:Industries (Broadest-Based)

Compliant Sector Based Investing

Oil

& G

as

Bas

ic M

atls

Hea

lth C

are

Indu

stria

ls

Fin

anci

als

Tec

hnol

ogy

Tel

ecom

Util

ities

Con

s G

oods

Con

s S

vcs


Strategy and Theme Based Indexes

Dow Jones Islamic Market Sustainability Index

• First indexes from major provider; widely accepted as the standard.

• Measure companies that have been screened for compliance with Islamic principles based on financial ratios and industry.

• Family includes 70+ indexes for countries, regions, sectors and cap ranges.

Dow Jones Sustainability Indexes

• Based on the cooperation of Dow Jones Indexes and Zurich-based SAM, Dow Jones and Dow Jones STOXX Sustainability Indexes track the performance of the leading sustainability-driven companies.

• The family includes global and regional indexes, and subindexes excluding alcohol, gambling, tobacco and/or armaments and firearms.

Theme Based Investing


Islamic Asset Class Expansion

Screening Pricing Data Education & Awareness

Commodities REITs Hedge Funds Portfolio Indexes


Islamic Investing in OIC Countries

Location Source of Funds GCC

Location of Underlying Assets Invested LME Murabaha

Palm Oil (Malaysia) Equity Real Estate Commodities PE/VC (ArCapita, etc.)

Absorption of Liquidity without Asset Inflation Capital flight: How does it benefit Muslim Country?


Sector Weighting Breakdown (Q2 2008) What does this mean?

Sctrs DJIM Malsia T-25

DJ Malsia

DJIM Turk

DJW Turk

DJIM PK

DJW PK

DJIM Ind

DJ Ind

Arbia 50

DJ Bah

DJ Kw T-50

DJIM Kw

Oil/Gas

.6% 1% 19% 9% 31% 19% 4% 2% 0% 0% 0% 2%

BM 2 3 30 11 38 11 47 37 10 0 2 8

Ind 40 24 9 10 8 8 11 8 15 2 17 31

CG 35 20 4 10 4 5 8 14 1 -- 1 .28

HCR -- .51 2 1 4 .91 1 1 -- -- -- 1

CS 1 11 8 8 3 .72 .49 1 -- 2 1 2

Tele 16 6 20 6 6 3 21 13 20 10 2 5

UTI 3 6 4 1 7 3 7 4 -- -- 0 --

FIN 2 27 6 44 -- 49 -- 20 45 85 69 51

TECH .4 .37 -- .13 -- .21 -- -- 9 -- 10 .69


What does Sector breakdown mean for an Islamic OIC Index?

Largest sector Eliminated Conventional Financial

2-3 Sectors more than 70% of Weighting One Company Sector

Lack of Technology sector implies: VC Industry/Angel Investing? Innovation? Equity Culture? Knowledge Based Economies?


Muslim Country Islamic & Conventional Index Top 5 Components & Weightings (Q1 2008)

DJIM Turkey

DJW Turkey DJIMPakistan

DJW Pakistan

Egreg DeMir Ve Celik (24%)

Turkcell 9% Dawood Hercules Chem (10%)

MCB (15%)

Turkeye Petrol (22)

Turkiye Garanti (9)

Pakistan oilfields (10)

Pak State Oil (5)

BIM Birlesik (8) Akbank (8) Pakistan Petroleum (10)

Oil/Gas Dev (4)

Asya Katlim (6) Turkiye Is Bankasi (6)

Oil/Gas Dev (10) J&S Co (4)

Turcas Petrol (4)

Egreg DeMir Ve Celik (5)

Engro Chem Pk (10)

Natl bank of Pk (4)

64%

37% 50% 32%



DJIM Malaysia Titans 25

DJ Malaysia DJIM Indonesia

DJ Indonesia

IOI Corp (19%) SimeDarby (7%) Bumi Resources (25%)

Bumi Resources (16%)

SimeDarby (19) IOI Corp (6) Telekomunikasi (23)

Telekomunikasi (14)

DiGi.com (9) Bumiputra Comm Ltd (6)

Astra Intl (12) Astra Intl (7)

KL Kepong (8) Public Bank (5) Perusahaan Gas (6)

Bakrie Bros (7)

MISC (7) Malayan Banking (5)

Indosat (4) Bank central Asia (6)

60% 29% 70% 50%



DJIM Kuwait

DJ Kuwait Titans 50

DJ Arabia Titans 50

DJ Bahrain Stock Exchange

DJ MSM

Investment Dar (10%)

NBK (10%) Maroc Telecom (10%)

Ahli United Bank (22%)

NBO (10%)

MTC (9) KFH (9) Orascom Const (7)

Batelco (12) Raysut Cement (10)

Agility (9) MTC (9) Orascom Telecom (7)

GFH (11) BM (9)

Gulf Cble/Elec (6)

NIG (6) MTC (6) NBB (6) Oman Telecom (9)

Boubyan Petro (5)

Comm Bank of Kuwait (6)

Arab Bank (6)

Ithmaar Bank (6)

Ren Services (7)

39% 40%

36%

55% 45%


What does this sampling of top 5 weighting mean?

Conventional components from OIC Comparable to non-OIC EM

Capping weightings Financial sector available Trading in top 20 companies

Shari’ah compliant components from OIC Largest/liquid sector eliminated

Free Float Illiquid Mid-Small caps available No equity culture (debt screen)

Volatility Established OIC v Emerging OIC

Malaysia, Turkey, Pakistan, Egypt, Saudi, UAE, Kuwait, etc.

Bangladesh, Nigeria, Jordan, etc.


Suggestions OIC Countries

Risk Mindset: Debt v. Equity Culture? Habit Mindset: Depositors v. Investors?

Fraud on the Unsuspecting (Returns advertised)

Understanding Mindset: Real estate v. Other asset class comprehension?

Shariah Screening Muslim owned companies One methodology does not fit all

geographies or asset classes Consensus on Primary Business


Suggestion Number 1 (Sukuk):

Financial Screens Conventional Debt

Reduction over a given time frame Islamic Indexes v Funds: Selling no longer

compliant companies Conversions FIs to IFIs (Sharjah Islamic Bank) Acquisitions (ADIB acquires Natl Bank of

Development (Egypt)) Equitization of Balance Sheet via Sukuks & Equity

Recapitalization PLUS (Malaysia) WIDER SHAREHOLDERS

Sukuks [financial incentive within time, Ex: IDB Incentive Fund]: Primary & secondary mkt development Sukuk Market Development Yield curves for corporate tenors Sukuk Trading & Investing vehicles Expansion to other issuers Cross Issuers & Buyers


Billion Dollar Watermark Cross-Over

0

0.5

1

1.5

2

2.5

3

3.5

1964 1965 1966 1967 1968 1969

0.1

0.6

0.7

1.1

1.8

3.1

0

10

20

30

40

50

60

70

2001 2002 2003 2004 2005 2006 2007

0.8

0.8

5.7

6.9

11.8

24.1

70

Sukuk profileEurobond Market*

* Source: Frank J. Fabozzi, Handbook of Fixed Income Securities, 1991

Malaysia


Suggestion Number 2:

Index for investable and tradable OIC countries DJ OIC Index DJ OIC Islamic Index

[Profile Indexes: DJIA, S&P 500, DJIM, MSCI EAFE, FTSE 100, Russell 2000, etc.)

Sub-Indexes Transparency & Governance Investable Products off of the Index Intra-OIC Investments Liquidity Liquidity Encourages Listings (BB v FPI)


Suggestion Number 3 (Complimenting COMCEC: OIC Exchange Cooperation OIC VTP)

Arab Stock Exchange? Islamic Stock Exchange:

Location? Deciding Compliance? Listing of companies/products?

OIC VTP: Neutrality Gatekeeper of compliance? Trading of companies & products

Funds Supermarket Supported by financial information, news, analysis, PLUS:

Obligatory Information Liquidity to traded company Home country exchange Proprietary Trading Global Secondary Sukuk Trading Platform Cross sell


Conclusion

Suggesting a Path for Shariah compliance for OIC publicly listed Companies & Encourage Listings Add Depth & Breadth

Encouraging Use of Sukuks Developing an Equity/risk taking culture in OIC Establishing an informed Global Portal for Intra-

OIC Investment Opportunities for ALL investors Win Country OIC Level Win Regional OIC level Win Global OIC Level

© Copyright 2007 Dow Jones and Company, Inc. Issues & Suggestions for OIC Shari’ah Compliant...

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