A more traditional funding pool for Shariah compliant investments is making its presence felt in the GCC region, in the form of defined contribution (DC) pension funds that have previously been relatively scarce in the private sector there.
AD Global Investors CEO David Rothon shared with IFN Investor that DC pension funds are gaining positive momentum as they underpin dual roles of fostering a savings culture while playing a pivotal role in developing the domestic retirement market.
Being mandated as deductions from monthly salaries – either by statutory law or private employment contracts – DC pension funds are boosted beyond an individual’s inflow by tacking on employer contributions and tax relief from the government.
Since these funds must be literally risk-free in terms of long-term gains and income streams, David said: “Internationally, when you’re dealing with some of the pension funds and companies outside the region, they are very focused on the track record and asset size.”
Because pension operators are still quite new within the GCC area, David added: “Our expectation is that our MENA fixed-income and Sukuk funds would grow quickly because there is less sensitivity to track records within the region.”
Even so, David emphasized the need to ensure competent expertise, especially with its Shariah compliant offerings seen suitable for pension fund investments. “We wanted to offer products for both sides.”
This observation comes amid a concerted effort by governments in the GCC region to focus on capital market development in general, including Shariah investments.
“Sukuk in particular, is on the radar of many investors, making it an exciting asset class to be active in. The Sukuk market presents a viable entry point for investors, given the current valuations and level of profit rate on offer.”
David said the UK has also seen an increase in demand for Shariah investment solutions in the DC pension fund space, which has historically been underserved in favor of conventional strategies.
Some of this demand stems from Shariah compliant workplace pensions for Muslim employers as there are approximately 3.9 million Muslims residing in the UK.
Looking further, David said there is also interest in Sukuk investing in South Africa, “especially since changes to offshore allowances mean that asset allocators are now considering offshore dollar Shariah solutions”.
In 2022, the criteria for South African resident individuals investing offshore was expanded to include investments in different offshore asset classes.
On Sukuk as an investment asset class, a further draw is the strong government balance sheet among GCC nations, giving investors peace of mind along with a decent profit rate.
“This is one of the reasons for the increasing level of participation in the Sukuk market by international investors in both the primary and secondary markets, with opportunities in Malaysia, Philippines, Indonesia and Hong Kong.”
With these prospects in play, David said: “We could probably manage US$15 billion to US$16 billion worth of assets in the emerging markets space, US$2 billion to US$3 billion in MENA fixed-income and another US$2 billion to US$3 billion in Sukuk.
“We are not planning any new Islamic products at the current time, as we have a flagship global Sukuk fund. As a nimble boutique fund manager, we stand ready to meet the needs of investors.”
