Benefits of dealing with an Islamic asset manager
I have just started writing on Islamic asset management and in the last article I had described a few benefits to investors when dealing with an Islamic asset manager.
Any individual investor would be concerned about the risks associated with the investment and hence would keep a close watch on market movements, thereby devoting a lot of time in doing so.
At times, it really gets onerous to be able to keep tracking the market and make a decision whether to throw in the towel or continue with the investment in the hope of good days. This phenomenon equally applies on any investor, be it Islamic or conventional.
Nevertheless, the collective investments through conventional or Islamic funds, operated by a professional asset manager, take away the worry since this provides a higher level of asset diversification to help reduce the systemic risk an individual investor is faced with, to a great extent.
An asset manager is an entity equipped with licensed investment managers who have the market pulse and ensure they take care of clients’ investment in the most professional manner with an all-time endeavor to increase the value of clients’ investments and generate handsome returns.
In order to be a licensed investment manager, you are required to participate in the examination conducted by the country’s authority entrusted to deal with securities and commodities markets. In the UAE, the Emirates Securities & Commodities Authority manages the task.
The Islamic asset manager complies with the same country regulations as a conventional one does. A typical asset manager entity has the general assembly comprised of its shareholders, followed by the board of directors (BoD) constituting experts from the equity and investment landscape.
The BoD appoints the CEO and senior management to manage the overall investments received from clients, provides the strategic direction and oversees the investment performance through reviewing periodical reports. The board also approves the annual financial results prepared by the external auditors and the distribution of dividends to investors.
In compliance with the country’s regulations and to acquire high professionalism, an asset manager entity segregates functions by hiring the services of an administrator, a custodian and a transfer agent. The entity may also appoint independent brokers to bring in investments and these could include the commercial banks with a large client base.
The difference between a conventional asset manager and an Islamic asset manager is that the latter must also constitute the Shariah supervisory board to ensure that the entire function of the entity, including all investments and operations of the entity, are run in accordance with the Shariah principles. This is because the very purpose of establishing an Islamic asset manager entity is to provide Halal returns to the investors and shareholders.
The asset manager entity has to follow the country’s rules and regulations and submit periodic returns to the concerned regulatory authority which may visit the entity to verify the reported adherence and performance as and when felt necessary.
The other benefit of dealing with an asset manager entity is that it gives full attention to the market movements and has the authority conferred by the investor to take immediate action to cut losses by divesting from a losing asset class and diverting the investment to profitable avenues.
However, it is important to note that the asset manager entity, be it conventional or Islamic, cannot guarantee the return or redemption of the originally invested amount since it will be acting merely as an agent for the investor and not as the borrower.
Nevertheless, the negligence, if any, by the staff of the asset manager entity or its appointed agent, shall be dealt with as per the country’s regulations. In almost all jurisdictions having a market regulator, any proven negligence must be made good by the entity through the professional insurance obtained by the entity for its staff.
Another advantage of dealing with an asset manager entity is that the legal structure of the investment vehicle is designed to provide tax shields to investors, ie the entity endeavors to completely avoid or incur the minimum possible tax liability to investors.
In return for all of this, the asset manager entity charges the initial subscription fee at a percentage of the subscription amount, the fixed or variable annual administration fee and the performance incentive should the entity achieves over and above a certain profit threshold.
All of this is fine from a Shariah perspective so long as these amounts are either known at the time of making the investment by the investor or can be determined in future when they fall due, based on a certain percentage or unambiguous formulae. This is to avoid the uncertainty from the Islamic investment which may render it void.
The purpose of this educative series and the article is not to hurt any religious or commercial sentiments either consciously or even unwittingly.
Sohail Zubairi is an Islamic finance specialist and AAOIFI-certified Shariah advisor and auditor. He can be contacted at sazubairi1979@gmail.com.
Next week: Islamic asset management — Part 3
