Doug Bitcon, Rasmala: “Sukuk benefit from an expanding investment universe, improved secondary market liquidity and strong institutional and retail demand”

Doug Bitcon, head of fixed income funds and portfolios at Dubai-based investment manager Rasmala, says the new Global Sukuk Fund he manages is benefiting from a change in attitude on the part of investors, who in the wake of the financial crisis are attracted to sukuk as generally defensive instruments that provide predictable income streams as well as potential for capital growth.

GFM: What is the history and background of your company, principals and funds?

DB: Rasmala was established in 1999, with headquarters in Dubai and offices in the United Arab Emirates, Saudi Arabia, Oman and Egypt. We manage approximately USD650m and will be working closely with UK-domiciled and AIM-listed European Islamic Investment Bank, which recently acquired a controlling stake in Rasmala, to increase the range of investment products that can be offered to clients.
 
Rasmala Asset Management has one of the most experienced investment teams in the Middle East and North Africa. It also has an outstanding track record and 15 investment professionals specialising in fund management across the Arab markets, in both conventional and Sharia’a-compliant strategies and in fixed income, money markets and equities.
 
We manage discretionary portfolios for government entities, sovereign wealth funds, pension plans, corporate entities and ultra-high net worth individuals. The fixed income and equity funds managed by Rasmala include the Arabian Markets Growth Equity Fund (launched in July 2006), the Rasmala GCC Fixed Income Fund (March 2009) and the Rasmala Palestine Equity Fund (May 2011).
 
I am the manager of the Rasmala Global Sukuk Fund, launched in April this year. I have more than 14 years’ experience managing fixed-income trading and investment portfolios, the past six of which have been focused on Islamic finance.
 
GFM: What is the structure of your funds, and who are your main service providers?
 
DB: The fund is an open-ended, US dollar-denominated fund domiciled in the Cayman Islands.The custodian is HSBC, the administrator is Apex Fund Services, and the auditor is KPMG.
 
GFM: What is your distribution strategy and targeted client base?
 
DB: The initial target of the Rasmala Global Sukuk Fund is Sharia’a-compliant investors, including both institutional and private clients in the Middle East and North Africa, with a focus on Saudi Arabia, the UAE, Oman and Qatar. The European Islamic Investment Bank has made an initial investment of USD25m. The fund plans a semi-annual distribution of accumulated profit.
 
GFM: What impact has the recent global financial crisis and economic downturn had on your business?
 
DB: It is difficult to sell a relatively low-return product on its defensive qualities when investors are generating spectacular profits on real estate and speculative equity plays. The losses suffered by many investors as a result of the financial crisis have refocused minds on the risk-reward relationship. This has sparked a renewed interest in sukuk, which are generally defensive instruments recognised for providing predictable income streams as well as potential for capital growth.
 
GFM: Please describe your investment process.
 
DB: The investment process is driven by a mixture of fundamental credit analysis and our view of both the global and regional economic landscape. The fund will also target relative value strategies to generate alpha. Performance will be referenced to benchmarks, but this will not drive asset allocation within the fund.
 
GFM: How do you generate ideas for your funds?
 
DB: In the case of the sukuk fund, ideas are generated through internal research, a cross-pollination of ideas between the fundamental credit analysis of Rasmala’s fixed-income team and research undertaken by the equity team.
 
The underlying rationale is that if a company’s operational performance is strong, there should be a steady improvement in the underlying credit profile of the sukuk issuer, other things being equal. Trade ideas are generated by investment banks and other external sources with which we work closely.
 
GFM: What is your approach to managing risk?
 
DB: The overriding theme to our risk management approach is ensuring that the asset allocation is directed toward financially sound companies. Risk is managed through regular credit reviews of each portfolio asset, ongoing monitoring of idiosyncratic and broader market risks, and ensuring that the portfolio profit rate profile is correct.
 
GFM: What level of performance are you looking for from the fund?
 
DB: The new sukuk fund has a target of 3.5 per cent distribution per year. The Rasmala GCC Fixed Income Fund has been a top performer in the fixed-income market since its launch in March 2009, returning 40.32 per cent to investors up to the end of February this year.
 
In our opinion, the outlook for the global sukuk market continues to improve, with a steady stream of new names looking to access the market. The primary market for regional issuers will remain buoyant as issuers turn to longer-duration capital market funding.
 
As of April, we have seen six new sukuk issues worth USD4.70bn in the Gulf Co-operation Council region, from Emirates Islamic Bank, Tamweel, First Gulf Bank, Majid Al Futtaim, Saudi Electricity Company and Government of Dubai. We expect a steady supply of new issuance from both new and repeated issuers this year.
 
Looking further ahead, a supply/demand imbalance will prevail, and the spread between short-term interest rates in GCC pegged currencies and the US dollar will persist. We believe that medium- and longer-term dollar yields will be range-bound during 2012, creating opportunities for active management of duration to generate alpha.
 
Yields and credit spread levels of many global sukuk remain attractive relative to similarly-rated peers, but event risk surrounding the refinance of Dubai government-related entities and 2012 debt maturities remains.
 
GFM: How does observance of Sharia’a principles impact your fund’s investment strategy and performance?
 
DB: It reduces the depth and breadth of the investment universe, which remains skewed toward the financial sector. Sukuk typically trade at lower yields than conventional issuance due to the supply-demand imbalance, and tend to be less volatile, as a large proportion of sukuk investors are buy-and-hold accounts.
 
GFM: How do you view the development of the market for Sharia’a-compliant investment products?
 
DB: The outlook for the sukuk market remains positive, with an expanding investment universe, improved secondary market liquidity and strong institutional and retail investor demand. The supply-demand imbalance evident in the market continues to prevail, and issuance of well-priced investment-grade paper is easily absorbed. There is growing recognition and acceptance by investors that sukuk play an important role within a diversified investment portfolio, and this bodes well for the future of the product.
 
GFM: What developments do you expect to see in your investment sector or industry field in the coming year? How might they affect your firm and the performance of your fund?
 
DB: The regional backdrop remains constructive, with governments well placed to invest in their economies, and this is expected to support sukuk prices. A spread of social unrest in Europe driven by austerity measures, or an increase in political tensions between Iran and the Western world, would impact the fund’s performance negatively.
 
GFM: What do investors currently expect from managers?
 
DB: Investors expect strong performance and a rigorous investment process. Rasmala Asset Management follows an identical investment process irrespective of the credit rating of the issuer or the state of the underlying market.
 
Subtle differences in structures, covenants and legal jurisdictions are noted, and while these may not improve the portfolio return in a bull market, the importance of this detail often increases once the credit cycle turns – the majority of sukuk assets are asset-based, although there are instances where investors have recourse to tangible and perfected security.
 
GFM: What differentiates you from other managers in your sector?
 
DB: Rasmala Asset Management has one of the largest and most experienced teams in the region, with 15 investment professionals. We have an outstanding record of investment success in the management of fixed income, equity, and money market funds, as well as in Sharia’a-compliant investment strategies.
 
GFM: How do you view the environment for fundraising over the coming 12 months?
 
DB: Investors have liquidity that they are looking to put to work. However, they are extremely selective on asset allocation and generally require a strong track record from investment managers. Products that are structured and managed well continue to attract investors’ attention.

 



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