Arab Bank made headlines recently when it decided to list nine funds on the CISX instead of investing in the regional stock exchanges. Mohamed Hairul Borhan reports
Institutional investors are both a boon and a bane to fund and asset managers in the Middle East. Although they have large amounts of cash to invest and are usually more willing to do so than retail investors, they can also be very petty and demanding, and may impose many requirements on banks and fund managers before investing with them.
They may require managers to only invest in funds that have very good ratings, certain minimum level of returns, or funds that are listed on reputable stock exchanges. As the Middle East has only a few such exchanges, this requirement has seen many companies listing themselves on overseas exchanges. Overseas listing also gives the fund manager greater exposure and access to a larger, more diversified, more mature pool of capital.
Jordan's Arab Bank, through its subsidiary Arab Bank Fund Managers Guernsey (ABFM), became the latest company to join this group, having recently decided to list nine funds, which are domiciled in Guerney, on the Channel Islands Stock Exchange (CISX).
Ramez Sawabini, chief investment officer for Jordan-based AB Private Banking, a fully owned subsidiary of Arab Bank, said, "The main factors for choosing to list the funds on the CISX are the conducive regulatory environment of the Channel Islands, and the CISX's international recognition as a reputable stock exchange. Moreover, Arab Bank has had a presence in the Guernsey since 1998 through ABFM, and understands its regulatory environment well.
"It was our intention to list our funds on a recognised stock exchange to allow institutional investors access to them, especially those who are only able to invest in funds that are listed on a recognised stock exchange. We did research other stock exchanges in Europe, but found the CISX to be highly responsive and conducive to our types of funds, especially in light of ABFM's long standing presence in the Channel Islands, particularly in Guernsey."
These funds are structured within protected cell companies (PCC), which according to the Guernsey Financial Services Commission (GFSC), is a single company that has the capability to create separate pools of assets and liabilities, so that the assets of one pool are not available to the creditors of
another pool.
The ability to incorporate a PCC has existed in Guernsey since 1997 when the Protected Cell Companies Ordinance 1997 came into force. Guernsey was the first jurisdiction to introduce legislation which enabled this type of structure to be incorporated without the need for a specific statute for each company.
Traditional investment fund structures such as umbrella or multi-class funds, whether established as companies or unit trusts, have always suffered from the potential risk of contagion, or leakage between the different share classes or sub-funds. There is a risk that losses attributable to one class or sub-fund may reduce or even extinguish the gains attributable to another.
Unique solution
Peter Neville, director general of the GFSC, said, "Guernsey's PCC legislation provides a unique solution to this problem. There are also potential economies of scale as PCCs are cheaper to establish and operate than a series of individual fund companies. For instance, only one fund application is payable in the GFSC, and only one set of directors, company secretary and registered office is required."
Arab Bank has a total of three such PCCs, IIAB PCC Limited, AB International Fund PCC Limited, and AB Alternative Strategies Fund PCC Limited. Sawabini said the decision to have three separate companies was because the bank wanted to separate its conventional and Shari'ah compliant funds, and to avoid possible contamination between them.
Within the IIAB PCC Limited, which was set up on 24 December last year, are two Shari'ah compliant funds, the IIAB Sukuk and Murabaha MENA fund and the IIAB MENA Feeder fund. Arab Bank's wholly owned Jordanian subsidiary, Al Arabi Investment Group, formerly known as Atlas Investment Group, acts as the investment advisor to the two funds, while Butterfield Bank (Guernsey) is the custodian of both the company and funds' assets.
IIAB PCC also has a Shari'ah board to establish general investment guidelines that are consistent with the principles of Shari'ah. It is made up of Dr Hamdi Moh'd Murad, Dr Abdel Salam Al-Abadi, and Dr Shiekh Izziddin Al-Khatib Al-Tamimi, all of whom are Jordanian.
The investment objective of the IIAB MENA Feeder fund is to achieve long-term capital growth by investing primarily, directly or indirectly, in a concentrated portfolio of Shari'ah compliant listed or unlisted equities, and related securities in companies established, or operating in the MENA region. It will invest in its master fund, the IIAB Islamic MENA fund, and is anticipated to hold cash and near-cash investments.
Share holders
As for the IIAB Sukuk and Murabaha MENA fund, its investment objective is to earn the highest level of current income while seeking to preserve the value of the invested capital. It aims to provide shareholders with a net return of more than three months of the US Federal fund rate annually by investing primarily in Murabaha and Shari'ah compliant cash transactions, and Sukuk or Shari'ah compliant lending arrangements.
Arab Bank's emphasis on enhancing its investment services in international financial markets and its intention to provide investors in all markets it operates in with safer investment options has led to an investment advisory agreement partnership with Allianz Global Investors for its conventional profile funds, which is the bank's core product offering.
These funds, managed by AB International Fund PCC, is made up of the AB Defensive fund, AB Conservative fund, AB Balanced fund, AB Growth fund, and AB Dynamic fund. Together, they provide investors with the ability to diversify their investments across seven asset classes, cash; fixed income; equities; hedge funds; real estate; commodities; and private equity, and enable them to invest in funds that provide risks and returns characteristics that closely match their optimal asset allocation portfolio.
Opportunities
Abdel Hamid Shoman, chief executive and chairman of Arab Bank, said the partnership with Allianz Global Investors will likely result in more benefits to investors, and provide them with more opportunities and ways to diversify their investments. The partnership will help them better mitigate the risks involved amid changing circumstances in regional and international markets, he added.
The bank's other two funds listed on the CISX are the AB MENA Feeder fund, also within AB International Fund PCC, and the AB Alternative Arbitrage fund, within the AB Alternative Strategies Fund PCC. All funds are denominated in US dollars.
Sawabini said the move was mainly to cater to the bank's clients in the MENA region, which predominantly transact in US dollars. Nonetheless, the bank does offer currency diversification through the underlying investments in each of its funds, which are not confined only to US
dollar investments.
Although it might seem unusual to see Middle East banks listing funds on overseas stock exchanges to attract investors back home, this trend is set to continue unless more resources are put in to elevate the status of existing stock exchanges in the region.
"It was our intention to list our funds on a recognised stock exchange to allow institutional investors access to them, especially those who are only able to invest in funds that are listed on a recognised stock exchange. We did research other stock exchanges in Europe."
Islamic Business and Finance 2008
