BUSINESS SCOPE

Malaysia's rising star

Islamic equities are outperforming their conventional counterpart in Malaysia. Will these sectors continue to shine?

Last year was a stellar year for Malaysian equities. After making a return of almost 32%, the Kuala Lumpur Composite took third place among Asian bourses in 2007. The red hot bull markets of China and India took the first two spots while the highly competitive economies of Singapore and Hong Kong came in 12th and 15th place. Within the Malaysian stock-market, the benchmark index commonly used by Islamic funds, the FTSE Bursa Malaysia Emas Syariah, made an even better return of 45.57%. The benchmark index for Malaysian Shariah-compliant investments outperformed the broad market as well as its conventional counterpart, the FTSE Bursa Malaysia Emas Index, which posted a gain of 36.84%. Consequently, actively managed Islamic funds in Malaysia made an average gain of 22.84% and surpassed the average returns made by conventional funds of 21.33% in 2007. Performance of these Shariah-compliant securities can be partly attributed to the sub-prime crisis in the US and the ensuing volatility in global stock markets.

This single event shook the confidence of financial markets globally once major financial institutions such as Citigroup and Merrill Lynch reported losses amounting to billions of US dollars in a single quarter. As Shariah law prevents investments in conventional banks, Islamic assets avoided the impact of the crisis.
Of 485 funds registered for sale in Malaysia, the top performer, CMS Islamic fund, scored a hat trick by finishing in the top position for two consecutive years. Fund manager CMS Trust Management Bhd also manages CMS Premier Fund, the conventional equivalent of CMS Islamic fund. Both these funds are fairly similar—applying the same strategy of acquiring shares in Malaysian companies that generate the bulk of its revenue overseas and holding the same portfolio of top five investments (as at the end of last year). However CMS Premier Fund did not make it in the list of top 10 performing funds in Malaysia, as “its financial holdings dragged down performance,” said chief investment officer Scott Lim. At The Edge-Lipper Malaysia Fund Awards 2007, CMS Premier Fund was named the best equity Malaysian fund for the 10 years’ category ending 31 December 2006.

From an industry perspective, sectors that are Shariah-compliant— such as commodities, infrastructure, telecommunications and property— were among the top performers in the market. Pretta Mehrotra, head of research for Perkasa Normandy advisors Sdn Bhd, a local fund rating agency, says: “Although restrictive, the limited sectors of Shariah-compliant equities benefited Islamic funds. The question now is whether these sectors will continue to outperform? Gains made in liquid blue chip stocks—most of which are Shariah-compliant—were the first to lose value when the market tumbled in early January.” Ms Mehrotra expects increased volatility of global markets and the absence of corporate exercises such as the amalgamation of three Malaysian plantation companies last year (that led to the creation of Sime Darby Bhd, the biggest plantation group in the world, with 543,000 hectares of land and the largest on Bursa Malaysia with a market capitalisation of more than RM50 billion) will ‘limit performance’ of Islamic assets in coming months. “However, increasing demand for Shariah-compliant assets from the Middle East will spur growth of more Islamic products and this would undoubtedly augur well for performance,” says Ms Mehrotra.

It was, however, a different story for Malaysian fixed income securities. Funds investing in suk­uks underperformed conventional bond funds. The overall poor performance of the bond market was attributed to a situation of over-supply. Total bonds outstanding stood at RM415.9 billion at the end of last year, of which RM31 billion were sukuk. At end of 2007, announcements were made of the largest bond issue in the country, Binaring GSM Sdn Bhd’s issue of RM12 billion to fund the buy-out of the largest mobile operator Maxis Commun­ications Bhd, which is also Shariah-compliant. Worries of an oversupply in the fixed income market and the resulting fall in prices for these securities affected bonds’ funds, especially those invested in sukuk. Yvonne Phe, chief investment officer for fixed income at AmInvestment Group Bhd, says: “With an outlook of rising inflation and likely removal of oil subsidies by the government, bond prices remain under pressure this year,” says Yvonne Phe, chief investment office for fixed income at AmInvestment Group Bhd.  

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