It’s hard to imagine that Canada’s fiercely competitive financial services industry would leave what one insider describes as a “soon to be $1-billion mutual fund niche market” virtually untapped.
Yet, with the exception of Toronto-based frontierAlt Capital Corp. ’s year-old Oasis group of funds, which have just $4.2 million in assets under management, there appears to be no other Canadian-based Shariah-compliant mutual fund products available to this country’s fastest-growing ethnic population, says Zaigham Hasan Shah, manager of the Oasis funds.
However, it isn’t just Canada’s Muslim community, estimated at 850,000 and growing, that frontierAlt has set its sights on, but the coveted wealth in the Persian Gulf region as well. Estimated at up to US$350 trillion, much of this wealth is held by investors who would like to invest in Shariah-compliant products in North America.
“We would like to attract Gulf investors to Canada through our funds,” says Shah, chief investment strategist at MAK Allen & Day Capital Partners Inc. in Toronto, who began managing the Oasis funds on Jan. 1. “If that happens, this should be a $1-billion industry in a very short time.”
FrontierAlt offers three funds through Oasis Funds Management Inc. — Oasis Canada Fund, Oasis World Fund and Oasis Global Income Fund — designed to adhere to the strictures of Shariah law observed by many Muslims, which opposes interest-bearing or speculative investments. Shariah law rules out holding equity in traditional banking, insurance or leasing sectors, as well as in companies that trade in alcohol and pork-related products.
The funds would also be suitable for non-Muslim investors looking for a strong ethical fund, Shah says. But the focus, according to the firm’s marketing initiatives, is on promoting the funds as “a vehicle for investors to participate in one of the world’s fastest-growing markets.”
Other Shariah-compliant mutual funds previously launched in Canada — such as Dynamic Mutual Funds Ltd. ’s SAMI group of funds, which was discontinued in 2006 with just $6.1 million in AUM after a change in ownership — have since disappeared from the market, ostensibly due to a lack of demand, says Rudy Luukko, investment funds editor at Morningstar Canada in Toronto.
However, Toronto-based Franklin Templeton Investments Inc. is said to be exploring the idea of launching a Canadian-based Shariah-compliant fund, Luukko adds. Its parent company, Franklin Resources Inc. of San Mateo, Calif., recently bought a 25% interest in Algebra Capital Ltd., a Middle East investment-management firm based in Dubai, seemingly with this in mind, he adds.
“Franklin Templeton has been watching the development of the Shariah segment, which has been growing at a rapid pace, with a lot of interest,” confirms Keith Damsell, the firm’s manager of corporate communications in Toronto. “We have been approached by several of our distribution partners and clients to provide them with Shariah-compliant versions of our international funds. We are, therefore, currently evaluating several possible solutions that can satisfy the needs of our clients in this area. Through our partnership with Algebra Capital, we will have the ability to provide Shariah-compliant solutions for local/regional asset classes as well.”
Although Franklin Templeton is investigating this area, Damsell notes, “There are no imminent plans to do anything right now.”
As for the Oasis funds, they invest only in companies screened by the Dow Jones Islamic global and Canada indices to respect prohibitions set by Shariah law. Excluded from Dow Jones Islamic indices are traditional banking, insurance or leasing firms; pork-related or alcohol-related companies; entertainment services companies such as hotels, casinos, movie theatres; pornography; and music. Also excluded from the Islamic indices — although not strictly forbidden for investment under Shariah law — are producers of tobacco products and defence and weapons companies.
Dow Jones’ Islamic indices, started in 1999, now number 70; they variously have global, country, region, industry and market-cap focuses. Interestingly, the Islamic indices have fared relatively well against the Dow Jones industrial average lately, having avoided exposure to bank stocks during the recent subprime mortgage meltdown in the U.S.
By the end of this year, assets invested in Oasis funds are expected to reach $25 million, says Shah. Currently, investors in Oasis funds are mostly in Ontario, but also in Quebec, Saskatchewan, Alberta, British Columbia, Man-itoba and Nova Scotia.
“It’s very much a growing industry,” says Shah, who recently visited the Gulf to promote the funds. “We’re still creating awareness. By the end of 2008, we should raise at least another $25 million [in AUM].”
@page_break@Shah notes that 87 mutual funds were launched last year in the Gulf region. “Two-thirds were Shariah-compliant,” he says.
Globally, Islamic-style banking is available in 75 countries, with an industry growth rate of 15% annually. Although 70% of the Islamic-style assets originate from Saudi Arabia, financial services institutions in Malaysia now manage 90% of Islamic finances, he adds.
“Investors in the Gulf are eager to invest in Canada. They can directly benefit from oil prices in the resources sector,” says Shah, who worked for 10 years as a fund manager in the Gulf before taking over frontierAlt’s Oasis group of funds. “Canada also brings more political stability, and the Canadian economy has a stable outlook.”
Still, despite the Oasis funds’ Shariah-compliant features, “it’s all about performance,” Shah says. “For the year-to-date, we are up almost 1.2%, where the Dow Jones [industrial average] is down around 5%. So, we have outperformed the index.”
The Oasis funds are based on the Dow Jones Islamic market Canada index and the global Dow Jones Islamic market index. Oasis Global Income Fund also includes up to 40% “fixed-income” securities known as sukuk. Unlike conventional bonds, sukuk are structured as ownership interests to comply with Shariah law’s no-interest dictates; frontierAlt says it is the first company to make sukuk available to Canadian retail investors.
As required by Shariah law, the frontierAlt Oasis funds are overseen by a local Shariah scholar familiar with the financial world, Azeemuddin Subhani, who teaches Islamic doctrine at the University of Toronto’s faculty of religious studies as well as at the University of Waterloo. When Oasis identifies a Canadian company that is believed to be Shariah-compliant, Subhani nominates the company to Dow Jones’ Shariah board for possible inclusion in the Dow Jones Islamic indices. Shah adds that Canada offers a “huge scope of companies” that would meet the Shariah requirements.
The top 10 holdings in frontierAlt’s Oasis Canada Fund — which targets undervalued companies in industries that meet the requirements of a Shariah screen — are Shoppers Drug Mart Corp., Canadian National Railway Co., Teck Cominco Ltd., Cameco Corp, ProEx Energy Ltd., Manitoba Telecom Services Inc., Uranium One Inc., Yamana Gold Inc., Canadian Pacific Railway Ltd. and Canadian Tire Corp. The fund is 98% invested in Canadian equities or cash and 2% invested in U.S. securities or cash.
Currently the fund’s sectoral holdings are 47% in cash, 20% in materials, 15% in transportation, 9% in consumer discretionary, 5% in energy and 4% in telecommunications.
The management expense ratio on Oasis Canada Fund, which launched in July 2006, is 2.25%. It had a 10.63% loss for the year ended Jan. 31, net of fees, says Kurankye Sekyi-Otu, a director of frontierAlt. Oasis World Fund was also launched in July 2006.
Oasis Global Income Fund, which was launched in August 2007, is still too new to cite returns but has an MER of 2.35%, he adds.
None of the Oasis funds are tracked by Morningstar Canada, says Luukko, who points out their fee structure is rather costly compared with more conventional mutual funds.
The Oasis funds are a bit more expensive because frontierAlt has to license the use of the Dow Jones global and Canadian Islamic indices and then actively manage and monitor the Oasis funds’ holdings to ensure investments remain in Shariah-compliant firms, Sekyi-Otu says. However, Shah says, the MERs will be scaled back as the new funds achieve efficiencies.
FrontierAlt isn’t stopping at its Oasis mutual fund family of products; it is also pursuing the establishment of other Shariah-compliant financial services in Canada, including sukuk and takaful, which are Shariah-compliant insurance products.
“We are working on launching the first Canadian sukuk [provider] very soon,” Sekyi-Otu says. “We are beyond the preliminary stages. By the end of the year, we will have a Canadian sukuk.
“Obviously, we see a tremendous opportunity in the Shariah-compliant market,” Sekyi-Otu continues, noting that there are tremendous amounts of uninvested capital in the Gulf region due to a shortage of Shariah-compliant investment products. “There is a lot of interest in the Gulf for [Shariah-compliant] equities and fixed-income investments.”
For instance, in 2001, the global sukuk market was just US$100 million. “In 2005, it went to US$9 billion; in 2006, it was US$15 billion; and by the end of 2008, it is estimated it will be US$30 billion,” Sekyi-Otu says, noting that Morgan Stanley Inc. is now starting the first U.S.-based sukuk.
Royal Bank of Canada reportedly briefly offered Shariah-linked notes through its private-banking division in 2004.
“We did a trial of Shariah financing products a number of years ago and determined that there was insufficient market interest at that time,” says Jackie Braden of RBC’s media relations department. “While we have no plans to implement a Shariah product at this time, we continuously look for innovative solutions to meet the financial needs of consumers.”
However, not all Muslims are eager to see Islamic-style financial products offered in Canada. In fact, the secular Muslim Canadian Congress has urged Canada Mortgage and Housing Corp. to stop its study of Islamic-style financial products, arguing they are too fee-heavy and not needed here.
In a letter sent to the CMHC in January, MCC president Farzana Hassan writes: “Islamic banking is nothing more than an attempt by Islamists, with backing from Middle Eastern financial institutions and their Western partners, to scare Muslim-Canadians into believing that they should pay more to the banks and demand less in return, as an act of religiosity.”
Nevertheless, Ottawa is considering two applications to start Islamic banks in Canada, including one by UM Financial Inc. , a Toronto-based $120-million provider of Shariah-compliant mortgage products. IE
Firms warm to offering Shariah-compliant funds
frontierAlt is aiming to increase its fund offerings, while other firms explore the option of entering the market
- By: Beth Marlin
- March 3, 2008 March 3, 2008
- 15:49