Investing for takaful - there IS a solution

06 June 2012
For many years, Islamic institutions, especially takaful companies, have struggled to invest according to the traditional balanced investment approach. In many cases familiarity with equities and comfort with vanilla deposits have meant that many institutions have been forced to adopt a somewhat barbell-type approach to investing, somewhat skewed toward cash and equities.

Over the past five years, the sukuk market has really come into its own. As a bond investor for 24 years, I can attest that the current market IS investable and IS liquid enough to support mandates. I have been personally running sukuk mandates since 2008 for individuals and institutions and the market operates just like its investment grade credit cousins in the West. It is only more recently that sukuk have been offered to institutions and takaful in a digestible format.

Up until a few years ago, institutions were faced with the heady task of buying sukuk on their own: sourcing the paper, getting a counterparty, finding a custodian, making sure that the reporting was sufficient, and managing the risks thereafter. Some of these tasks were done well and some not so well. Investing is a highly technical function and one that requires qualified analysts to research opportunities, comprehensive dealing procedures to maximize execution and minimize operational loss, transparent and independent risk management, and reporting and an ongoing monitoring of credits within the portfolio.

Few institutions can ever attain the critical mass to justify this expenditure and employ enough people and resources to fulfill the required functions. Thankfully, there is a small but growing band of fund managers that have the teams and the resources to achieve on client requirements and discharge this outsourced function - but beware, not all institutions offer the same thing.

In providing services for clients who require or prefer Shariah-compliant solutions, we firmly believe that neither Islamic principles nor solid investment practices should be sacrificed to attain the goal. Since joining the field of Islamic finance in 2008, I have always striven to uphold both principles in equal measure.

The team that we have developed in Abu Dhabi to service our clients also takes this ethic to heart; every member of the investment team that runs or manages Shariah-complaint assets is a qualified Islamic finance practitioner having passed the CISI's IFQ exam. This also extends to the middle office and support functions, the majority of whom are also qualified. Having a good understanding of Islamic principles is key to understanding the client's wants and needs as well as executing his business in a fashion true to the fundamental tenets of Islam.

With regard to investment practices, we have taken the lessons learnt from over 24 years of professionally investing institutional money on a global basis and formulated a investment process that has delivered consistent low risk and strong returning sukuk portfolios of our clients. We have successfully married long and deep institutional quality investment management experience with qualified and practical knowledge of Islamic finance to deliver solid product and good value to our customers.

When all is said and done, the sukuk market behaves like any global credit market with exogenous and endogenous factors affecting it. It is by focusing on both that we are able to reap solid low-risk returns for our clients. 

We firmly believe that it is not about 'pushing the envelope' of Islamic finance to create new and often complex products, but it is more about providing high-quality investment advice and good solid product to investors. We believe that the best interests of both the investor and the longer-term development of the industry is best served by getting the basics right.

The trend in the insurance market on the conventional side is clearly to outsource the asset management function; we firmly believe that this too will be the case over the coming years as many decide to outsource and manage the manager rather than bearing all the risk in-house.

Mark Watts is the head of fixed income at NBAD Asset Management Group. He has a global fixed income and macro investment background and has been responsible for numerous currency and emerging market mandates throughout his career.

© Zawya 2012

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