NAZNEEN HALIM speaks to BRYCE FEGLEY, CHIEF INVESTMENT OFFICER at Saturna Capital’s recently established Kuala Lumpur office, on why Malaysia trumped all in their search for a new outpost.

In Malaysia alone, Islamic banking assets are estimated at RM303 billion (US$94 billion); an inviting prospect to any asset manager looking to set up shop. Enter Saturna Capital, a US based investment firm with over 20 years’ experience in managing funds, and specialists in the Islamic fund realm.

First and foremost, why choose Malaysia to diversify your presence over, say, the Middle East?

The second choice to Kuala Lumpur, even the Middle East, was London. We felt the infrastructure there was well suited towards Islamic finance and finance in general, but we were also looking to have a research outpost.

We were looking to bolster our investment research process and gain an Asia specific perspective in terms of network of contacts and research. That made Kuala Lumpur the clear frontrunner because it offers both conventional and Islamic finance, and is also a fantastic place of transit for the region, allowing us to breach into countries such as China, India, Indonesia, Singapore and Thailand.

How was the approval process in gaining your license in Malaysia?

The Malaysian Securities Commission (SCM) was definitely the main body of approval. We began working closely with SCM’s licensing department last June. We first applied for a standalone license, and sometime late last summer, we were introduced to CK Lee, the majority owner and managing director of Alpha Asset Management here in Malaysia. In that introduction, CK was potentially interested in partnering with a foreign company and we were interested in partnering with a KL-based company.

We explored that relationship in the coming months and told the SCM about it, and they suggested partnering with a local institution as an alternative to a standalone license.

Were there any bumps in the road?

We did encounter a bit of stickiness along the way. The company we acquired, Alpha Asset Management, held a conventional fund management license; and in Malaysia, unlike other parts of the world, there is a dual-licensing process with a separate Islamic license.

Given that (Islamic) is our specialty, and there is a separate license for that; that was our clear preference. So we had to convince the SCM that we could do an adequate job in a short amount of time, and carry out a full conversion in terms of operations, assets, agreements and those sorts of things here to be fully Shariah compliant.

After that was done, within two months of getting approval to change shareowners and completing the transaction, we made the announcement to the market. There was slight anticipation in terms of timing; i.e. when the SCM would grant us the right to convert the license from conventional to Islamic, and what sort of milestones we had to meet in order to gain that approval.

What are your current assets under management (AUM)?

At the moment, Saturna Malaysia’s AUM are relatively small … We’re looking at RM10 million (US$3.1 million). Saturna-wide’s AUM are close to US$3 billion. Recent fluctuations in the market have brought it slightly lower than that, though.

Here in Malaysia, part of our conversion was convincing current clients to accept the Shariah compliant mandate, or to not accept that and transfer to another manager, liquidate their account or something to that extent. And we were quite happy with the ratio of clients who kept their money here; I think it was upwards of 80%. So we started with a small asset base, but we’re proud that we managed to maintain the clients at the rate we did.

Our AUM target here in Malaysia is US$100 million in two years’ time.

What can Saturna offer the market that is different from what is out there now?

Our target mandates going forward are going to be more global; global mandates that allow local investors and institutions to diversify away from Malaysian equity markets and into a global equity market, guided by our two decades of expertise in managing Shariah compliant global equity portfolios.

There is definitely a niche we can fill in Malaysia; seeing especially our strong track record in the US in managing these types of portfolios. This includes our integrated Shariah screening and investment process in global equities. I think there are strong Shariah compliant managers in Malaysia, but I don’t think there is a significant overlap between their expertise and ours; which is basically US and global equity portfolios with Islamic screening.

Who is your target market?

At this point, we are primarily targeting institutions and partnerships with other local finance institutions. We are not looking to launch any products like unit trust funds in the immediate future, but are acting more as managers willing to take on a mandate for a particular client.

What do you think is lacking in the Malaysian equity markets?

First of all, if you look at the list of Bursa Malaysia companies that are Shariah compliant, 70%–80% of them are in this vein. However, in terms of assets that are managed Islamically specifically, that number is a much smaller percentage in Malaysian equities.

Government linked bodies also do not devote a considerable amount, if any, of their investment pools to Islamic fund management mandates, even though a majority of their beneficiaries may be Muslim. We see some sort of growth market in Islamic equity management for Malaysian investors, and where we also have a niche is among those investors who want to have an Islamic mandate specifically.

In the US, we are the only real provider of Islamic mutual funds or Islamic fund management in the country. Our investors there are majority non-Muslims who are interested in our strong results and investment process.

I’ve read that Saturna’s screening process is something you are very proud of. How does that differ from the current screening processes?

Our investment process has grown around our screening process, and the two components are very closely linked. In some organizations you get this process where decision making sort of looks at the system as a whole, and then takes stocks and applies Shariah screens to see which of those will fit.

Instead, we start from the Shariah perspective and work backwards, and figure out what are the portfolio impacts of including these stocks and not the whole market. How do we structure our portfolio that will achieve well, given these distortions caused by the selection of securities that we have; and how does that mesh with our overall investment philosophy.

The other part of that, although this is not so prevalent in Malaysia, is we follow the AAOIFI standards, which is a little bit more focused on the gearing and the amount of debt a company has, and also how its balance sheet looks. We pay very close attention to this as well, and have always only invested in companies with a strong balance sheet, corporate governance and long-term sustainability.

Where do you think Malaysia is headed in terms of Islamic fund management?

There is definitely room for the Islamic specific mandate market to grow in Malaysia, with a percentage of total funds under management roughly at US$5 billion, according to the Shariah mandate in Malaysia. So we’re talking about only a few percent of the Malaysian equity market that is actually allocated specifically to Islamic mandates, even though the SCM and Bursa Malaysia considers the majority of the stocks to be Islamic.

There is definitely a slight dichotomy in those numbers. With a country that has a majority Muslim population, why are there so few mandates that have been enforced? I foresee this as something that will continue to evolve over the next decade here.