Global Sukuk Portfolio Management
New Challenges
Rafael DALMAU,
Fischer Francis Trees & Watts, BNP Paribas Investment Partners
Kuala Lumpur – IFN 2009 Issuers and Investors Asia Forum, 4th August 2009
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Managing a Global Sukuk Portfolio, New Challenges
● Main Challenge
● Defining the Eligible Market
● Selecting a Benchmark
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Global Sukuk Portfolio Management
Main Challenge - The Sukuk Universe Composition
Domestic Sukuk Market
International Sukuk
Market
USD76.2b as of 24th June 09
USD32.5b as of 24th June 09
SAR
8%
IDR PKR
3% 1%
Others
1%
AED
19%
Sukuk Universe
USD108.7b as of 24th June 09
IDR PKR Others
1%
1%
SAR 2%
6%
EUR
GBP
1%
0%
USD
24%
=
+
AED
6%
USD
80%
MYR
87%
MYR
60%
USD109b in Outstanding Volume with 30% in International Issuances
Outstanding volume is estimated based on data available on 24th June 2009 and the prevailing current exchange rate
Source: Bloomberg, FFTW
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Global Sukuk Portfolio Management
Main challenge – Developmental stage of the Global Sukuk market
Setting up the rules:
● Global Sukuk investment guidelines require broader deviation from Global Conventional
investment mandates
● Search for diversification (e.g., geography, currency)
● Clarity in definitions: Quasi sovereign - GRE’s versus corporate Sukuk
● Unbiased approach to benchmark selection
● Objective risk limits (e.g., tracking error)
● Active consultation with the Shari’a Board throughout the process
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Global Sukuk Portfolio Management
Defining Eligible Market - Idealized approach to overcome present challenges
Potential Options:
● Allow exposure to all sovereign issues (rating requirements can be defined)
● Allow implied ratings for unrated sovereign, government or quasi sovereign Sukuks
● Allow exposure to convertible Sukuks
● Allow manager’s internal/proprietary ratings for unrated corporate Sukuks
● Allow exposure to local currency Sukuks (e.g. MYR, SAR, SGD, AED)
● Allow exposures to match selected index weighting ratios
● Allow exposures to non-benchmark Sukuks (percentage of NAV can be defined)
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Global Sukuk Portfolio Management
Defining Eligible Market - Constrains under a conventional Global Bond Portfolio
approach
70
Outstanding Volume in USD
billion*
Typical Global
Number of Issuers*
Expanding
conservatively
Bond
Constrains
50
45
60
Typical Global
Bond
Constrains
Expanding
conservatively
40
50
35
40
30
23
30
20
20
15
5
10
-
23
10
15
8
4
2
25
13
5
-
Constrained
USD
AED
Our Recommendation
MYR
SAR
Constrained
Others
USD
AED
Our Recommendation
MYR
* Converts = Convertible Sukuks, Min 200MM refers to Sukuk with a minimum USD200MM in current outstanding issue size, Rating refers
to Sukuk with issue rating, HG = Investment Grade, G10 = currencies from group of 10
Source: Bloomberg, FFTW. Data as of 1st July 2009
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SAR
Others
Global Sukuk Portfolio Management
Defining Eligible Market - Constrains under a conventional Global Bond Portfolio
approach
Outstanding Volume in USD
billion*
Unconstrained
Number of Issuers*
Unconstrained
Constrained
80
50
45
70
40
60
35
30
50
6
4
3
25
6
20
15
Constrained
40
5
30
5
26
21
10
5
19
11
5
11
49
43
20
1
1
11
24
10
8
2
2
4
2
19
18
18
2
13
-
Total
ex.
Min
Converts 200MM
USD
Rating + HG Only Currency Min A3/AImplied + HY Sov
for Corps
Rating
AED
EUR
Total
ex.
Min
Converts 200MM
USD
GBP
AED
Rating + HG Only Currency Min A3/AImplied + HY Sov
for Corps
Rating
EUR
* Converts = Convertible Sukuks, Min 200MM refers to Sukuk with a minimum USD200MM in current outstanding issue size, Rating refers to Sukuk with issue rating
or implied ratings, HG = Investment Grade, HY = Non investment Grade, Currency refers to eligible local currency eligible for corporates issues, Min A3/A- refers to
the minimum A3/A- rating for corporates based on the lower of Moody’s, S&P and Fitch
Source: Bloomberg, FFTW. Data as of 1st July 2009
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GBP
Global Sukuk Portfolio Management
Selecting a Benchmark – Benefits and Weaknesses
LIBOR
Dow Jones Citigroup Sukuk Index
+ Absolute return + Beta return mix
+ Wider universe as fixed rate Sukuk is part of
Positives
+
+
+
+
+
Absolute return focus
Limited interest rate risk
Limited impact on rising rates
Low index volatility
Index is available
+
+
+
+
+
Negatives
─ Index does not represent risk hence
potentially high tracking error.
─ LIBOR rates are low
─ Limited use of fixed rate Sukuk to
reduce interest rate duration risk.
index
Representative of underlying risk.
Index allows for monitoring and objective
measurement
Includes both floating and fixed rate Sukuks
Limited interest rate risk, lowers risk of rising
rates
Index is available
─ Developing index with only five constituent
currently. The need to track the benchmark
may result in high impact from monthly
rebalancing
─ Sukuks in index may be hard to source
Source: FFTW
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Global Sukuk Portfolio Management
Selecting a Benchmark – Client Driven Process
Availability of Benchmark
Risk: Beta Volatility
Diversification: Country
Risk: Tracking Error
Diversification: Issuer
LIBOR
1
4
Return: Alpha/Spread
3
5
Risk: Beta Volatility
5
4
Risk: Tracking Error
1
5
Diversification: Issuer
4
3
Diversification: Country
4
3
Availability of Benchmark
5
5
Rising Rates
4
3
Dow Jones Citigroup Sukuk (DJSUKUK)
Equal Weighted Score
27
32
Weights
Return: Beta
Return: Alpha/Spread
Client Driven
Rising Rates
DJSUKUK
Return: Beta
FFTW non-weighted Multi-Factor
Scoring*
LIBOR
Factors for Benchmark Selection
* 5 = Most Favorable, 1 = Least Favorable
Source: FFTW
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Global Sukuk Portfolio Management
Selecting a Benchmark – Cost of low tracking error i.e. tracking a developing
index
Composition of Issues
Size and Number of Issues
Dec 2008 and July 2009
Dec 2008 and July 2009
10
9
8
6
4
5
6.3
4.7
2
0
Dec-08
Outstanding (USD' billion)
10
100%
8
80%
6
60%
4
40%
2
20%
0
0%
Jul-09
Dec-08
No. of Issue (RHS)
Jul-09
NIGSUK
DIBUH
DPWORL
EIBSUK
ISDB
QATAR
ADIB
SARAW
DIFCDU
Tracking the index would require rebalancing 65% of NAV between Dec-08 and Jul-09. At a 1%
transaction cost, this would result in a 65bps performance drag over this period
HG = Investment grade, HY = Non investment grade
Source: Bloomberg and FFTW as of June, 2009
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Disclaimer
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