Syariah scheme tends to do better in a financial crisis

SO what happens now that the Employees Provident Fund (EPF) has announced that it will kick off its fully syariah-compliant investment scheme with an initial fund size of RM100bil?

Could this perhaps see a bigger jump and demand in syariah assets, and hence an inflation in prices?

A comparison between mixed conventional funds and syariah funds on the Morningstar website anecdotally points to the syariah mutual funds appearing to do better than the conventional funds over the five and 10-year periods.

MNRB Holdings Bhd senior vice-president and group chief investment officer Akhter Abdul Manan feels that both asset classes perform quite similarly, but which asset class does better depends on whether there is a financial crisis.

Ahkter says during a downturn, syariah-compliant stocks tend to perform better as banking stocks, which are the leaders of the economy and have a higher beta, tend to get beaten during these periods. Banking stocks are not considered syariah-compliant stocks.

“When the economy is weak, and the banking stocks tend to underperform, the syariah stocks do better. So, the syariah-compliant funds will outperform,” he says.

Similarly, a look at our benchmark indexes show that as of Dec 31, 2015, the FBM KLCI was down 3.9% from a year ago, while the FBM Emas Syariah was up 2.3%.

Ahkter: ‘When the economy is weak and banking stocks tend to underperform, the syariah stocks do better.’

In fact, the general beta scores between the equity for the conventional and syariah index is almost the same.

“The correlation between the FBM Emas Index and the FBM Emas Syariah Index over the past five years was near perfect (positive),” says Akmal Hassan, the managing director of Asian Islamic Investment Management Sdn Bhd.

Eastspring Investments Bhd chief investment officer Chen Fan Fai says he would expect returns between the conventional and syariah funds to differ in the short term, given that conventional funds can invest in banks.

“Typically, at the start of a market uptrend due to an economic recovery, the banks tend to outperform, as they are a broad indicator of the health of the economy. Syariah funds that are benchmarked against the FBM Shariah Emas Index, meanwhile, would be exposed to sectors such as plantation, oil and gas and telecommunications. Hence, due to market volatilities the performance may deviate in the short term, but is likely to perform in tandem over the longer term,” he says.

Mohd Shahir Seberi, portfolio fund manager at Asian Islamic Investment Management Sdn Bhd, says returns between the conventional funds and syariah funds tend to track each other very closely.

“From a domestic fixed-income perspective, corporates now prefer to issue sukuk rather than conventional bonds due to a wider investor base. Hence, conventional and syariah fixed-income funds tend to have a largely similar investment universe which explains the close performance.”

He adds that over the longer term, he does not expect returns to be materially different as conventional funds can also benefit from every opportunity found in the Islamic market.

Akmal adds that in the short term, syariah funds tend to have a higher volatility due to the nature of the syariah market, which has a smaller stock universe compared with the conventional funds.

“Over the long term, the returns will be about the same for conventional and syariah, as syariah stocks are just a subset of the conventional stocks. There is still a 60% to 70% commonality, hence the difference will be in the weight of each individual stock and sector,” says Akmal.

Akmal: ‘Over the long term, the returns will be about the same for conventional and syariah.’

Eastspring’s Chen says it is possible for the syariah-compliant funds to do better as these funds have a restricted list of stocks to invest in.

“Given the abundance of syariah funds chasing too few stocks, there is an element of defensiveness for syariah funds.”

Akmal adds that syariah funds tend to do better due to the higher weighting of stocks in the portfolio.

“Since the universe is smaller, the natural thing is to be more concentrated on the stocks or in other words have a higher weight. Secondly, the syariah funds tend to do better not because of the limited supply of Islamic products. There are plenty of syariah products in the market and more are coming up. Funds tend to do better due to the nature of the fund wanting to be nimble to avoid major declines. With a smaller syariah universe, the strategy is to be early in and early out,” explains Akmal.

With the EPF launching its syariah-compliant scheme, Akhter maintains that he does not expect a surge in syariah-compliant stocks as the EPF is not starting from scratch. It is already starting from its existing portfolio.

“Also, we are not short of syariah assets. So, many of our stocks on the FBM KLCI are syariah-compliant stocks,” says Akhter.

Chen says few details have been announced as to how the EPF will carve out the syariah funds, but given that it will be from the existing pool of funds invested in Malaysian equities, it could be a case of transferring syariah stocks that have been identified for the fund, without the need to inject new cash for the full RM100bil.

“Hence, if this were the case, then it is not likely to see stock prices surge,” says Chen.

Akmal says there could be greater market support on the syariah-compliant stocks because more money is being poured into this asset class.

“However, it won’t just go up because once again, it all boils down to the fundamentals of the sector and company. Just because a stock is syariah does not necessarily mean it is investable. One has to also take into account valuations and market capitalisation,” he says.

Nonetheless, Akhter adds that this move by the EPF is significant because the participation of the EPF in syariah stocks will now increase.

“You will see more Muslims converting to the syariah-compliant funds and moving forward, you will see two distinct funds from the EPF,” says Akhter.

The syariah mutual fund industry

Statistically, the syariah fund industry still has a lot of room to grow.

As of Dec 31, 2015, Islamic assets under management (AUM) made up only 19.8% of the total industry’s AUM at its size of RM132.38bil.

In terms of new fund launches, the net asset value (NAV) of Islamic unit trust funds (UTF) currently only tops RM52.12bil versus the NAV of the entire industry, which is RM346.58bil. This means that the Islamic UTF new launches make up only 15% of the entire industry’s UTF.

Large sukuk issues in recent years have awakened investor interest and created the condition of requiring more institutional investment.

Chen: ‘Given the abundance of syariah funds chasing too few stocks, there is an element of defensiveness for syariah funds.’

The increasingly growing demand from institutions for the sukuk market has led pension funds and sovereign wealth funds such as the EPF to look at Islamic investment more closely.

Investors are increasingly getting positive about Syariah-compliant funds, which have shown to be resilient against the global recession.

General statistics show that syariah-compliant funds are in general less volatile than conventional funds over the medium to long term.

“This could offer investors a diversification opportunity if they are looking for a low-risk steady-yield investment option. In fact, the beta scores of syariah-compliant funds over the last three to five years show them in general to be significantly more stable than conventional funds,” says one Islamic portfolio manager.

Due to their relatively low risk and dependability compared to conventional funds, the demand for syariah-compliant unit trust funds has grown significantly. Industry capitalisation grew from 26.8% in 2008 to 37.5% in 2015, making up more than a third of the entire industry today.

Meanwhile, total Islamic AUM in Malaysia reached RM132.38bil last year, from RM110.6bil the year before, a marked 24% increase as reported by Reuters.

The resilience and lower volatility compared with medium to long-term conventional funds has contributed to syariah-compliant investment product growth as an essential option for a balanced portfolio.

“So now, even for non-Muslim clients, fund managers recommend a mixed portfolio consisting of syariah-compliant and conventional funds for conservative investors looking to achieve their financial goals,” says the Islamic portfolio manager.