How did Daiwa Asset Management get started in the Islamic funds business?
About two years ago, we wanted to expand our overseas business further. At that point of time, we already had some businesses in markets in Europe and some areas in Asia such as Singapore but we did not have anything in the Middle East. We realised that the region has cash, and with oil prices surging up for the past several years, we decided to try to start our business in this region. However, we did not know how to start.

And then, accidentally enough, in December 2006, Standard and Poor's (S&P) announced that they have invented an Islamic finance index. We then went around checking whether there were other Shari'ah indexes developed and found out that the FTSE had already developed a Shari'ah index catering to some Asian shares. However, they did not have a Japanese index.

We then had a meeting with FTSE and S&P, and even though FTSE not have any Shari'ah Japan index, they very keen to work with us and they were committed to develop such an index on behalf of Daiwa. We then had to decide on which market to list the ETF that we had created. We had discussions with the FTSE and they recommended that we should list on the Singapore Stock Exchange (SGX) because it was very keen to promote Shari'ah-compliant derivatives products. The Singapore government had also announced that Singapore would be the financial hub for Islamic finance in the area.

The Daiwa Securities Group, our holding company, had also decided to concentrate more on its Asian businesses, ahead of its European and American businesses. The group had also decided to turn the Singapore office into its hub for Asia. Those were the two main considerations for basing our business
in Singapore.

But Singapore is not widely recognised for its role in Islamic finance. Wasn't the company taking a big risk by being based there?
We need a market-maker for the Exchange Traded Funds (ETF) business and the role of that entity is very important. First of all, they are going to give us the seed money to set up the ETF itself. Secondly, in the secondary market, they have to be able to make good bid/offer levels to the client. If they make the wrong pricing, it will hurt us. We have to be very careful with our market-maker and we have decided that Daiwa Securities SMBCDaiwa Securities SMBC, our sister company, will be our market maker.

Another reason why we did not choose to be based in Malaysia was because we did not have any infrastructure there. This was crucial because the market maker had to be able to connect with the stock exchange in order to be able to make the correct pricing.

Are you happy with your listing in Singapore?
Definitely. If I am not wrong, then this is Singapore's first Shari'ah-related product. It was kind of the Singapore government to invite us, a Japanese-based asset management company, to attend this conference.

How the fund doing right now and what are your expectations for 2009?
In terms of returns, it is quite difficult to predict, but based on current levels of the Nikkei and some other markets globally, we can expect returns of at least 20 to 30 per cent once the market has stablised, which we think will be in the second or third quarter of 2009.

Which sector does this fund invest in?
We worked with a Dubai-based Shari'ah consultancy to help screen the fund. They used two methodologies to screen the funds. One method was to exclude some sectors such as, among others, financials, alcohol, amusement and weapons. We had to exclude companies that were related to those sectors.

Secondly, they also exclude companies that have a debt ratio of more than 33 per cent.

Out of 480 shares in the FTSE's Japan Large and Middle Cap indexes, only 250 shares passed the Shari'ah screening. We then took the top 100 shares based on capitalisation to make up the FTSE Japan 100 ETF. It is currently screened and rebalanced on a quarterly basis.

How has the response to the fund been? Has there been an increased level of interest?
Actually, the reverse is true, partly because of the market sentiment. The timing for our listing was really bad. We listed our products in May and then Lehman Brothers went bankrupt in September or October. We were hit hard by the financial crisis. If our timing was good, we would have garnered a lot of business. A lot of our clients now are just sitting on cash and are not doing anything with it.

Are you looking to list the fund somewhere else?
Firstly, we are looking to see whether we can make any cross listing, maybe in Dubai or some other places. We are still in the process of developing our Islamic business. In the long-term, the costs of cross-listing might result in almost the same as having a new listing altogether.

The Dubai Financial MarketDubai Financial Market has already indicated some interest in working with us. Right now, we do not know where the next best place to list is. It's difficult to judge but in any case, we do need some help from the SGX. We would like to work using the advice given by them. Any place will be suitable for us as long as we have the support.

Are you planning to launch another Shari'ah-compliant product soon?
We may have some plans in the very near future to launch a Shari'ah-compliant Asian share index. But this will only happen when the market is more stable. We expect the market to bottom out somewhere between the second and third quarters of 2009.

Do you expect any competition from Japan for these types of products?
No. I don't think so. We do need local capability to be able to set up an ETF or even a new product and it is quite hard to find the right talent. It is also quite difficult to find a good market-maker.

We are doing it alone at the moment but we are looking for a regional partner. We do not have any base in the Middle East, so first of all, we need some good distributors for our products. Moving on, if there is a good company which is able to manage our funds, then we would be content to be just the advisor and let the company manage our funds.

Do you plan to establish a physical presence in the Middle East?
The answer is no at the moment. However, we will definitely do so in the future once the business expands. We just entered the market so we have no plans to set up a new branch or subsidiary.

© Islamic Business and Finance 2009

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