Interview with Faisal Quttaineh, Senior Investment Manager of the Global Investment House Islamic Fund of Funds
Global Investment House (“Global”) is a full-fledged investment company incorporated in 1998, and falls under the regulation of the Central Bank of Kuwait. Its underlying foundation is to meet the high expectations of local and international clients, and to enhance the investment service industry and the capital market in Kuwait and the region. Today, Global is listed on the Kuwait Stock Exchange, Bahrain Stock Exchange and Dubai Financial Market.
Global has accomplished much since the company’s inception, and has been vigorous in developing the capital markets. Its assets under management reached KD2.1 billion (US$7.4 billion) as of 31 March 2007. Global has acted as lead manager for bonds and Islamic finance deals, in addition to acting as a listing advisor for various companies. The company is also very active in managing an array of investment funds, accommodating to the different needs of its divergent client base.
With regards to the fund and fund manager, how is their approach different from others and what is the overall proposition for investors?
The Global Investment House Islamic Fund of Funds (GIFoF) is a unique asset allocation tool which provides investors access to a diversified portfolio of Islamic products; the fund invests across all available Shariah-compliant asset classes on a global basis.
The fund's approach to risk management and due diligence will delve into Global’s long experience in managing funds of funds which goes back to 1999; both processes have been modified and perfected throughout the years. Each potential investment will go through a rigorous due diligence process which involves both quantitative and qualitative analyses. We will be analysing the investment's volatility, correlation, AUM, historical performance, risk management and compliance, as well as the manager's experience.
The most important thing is the diversification of the underlying assets in the fund in order to provide the investor with capital growth and low volatility.
How would you characterise the investment/management style that governs funds from Global Investment House?
Global currently manages more than 35 investment funds of varying strategies and investment styles, all of which focus on maintaining low volatility with returns exceeding market indices. The funds aim to benefit from the vast investment opportunities available in the region as well as providing investors with a wide array of investment options.
What are the key challenges and opportunities associated with investing in your market of focus and how does your fund manage these?
The Islamic finance market is still young and in its early stages of development. As such it is difficult to find products and managers who have been in the Islamic sphere for a long time. This is the main reason for maintaining a solid and thorough due diligence database. As of yet, the ability to diversify in exotic products is restricted. Slowly, but surely, creativity in asset classes and access to regions and sectors which were once off the Islamic radar are providing the Shariah-compliant investor with variety. The scope for growth in the Shariah-compliant market is significant as it gains exposure and demand increases and we believe we will benefit from being one of the earliest Islamic funds of funds in the market.
Your mandate focuses on providing an investment of high liquidity and low volatility (reflected in your annualised standard deviation of 3.72%). How does this restrict your investable universe of transactions?
The liquid/low-vol nature of GIFoF, if anything, restricts its asset allocation. The fund's low volatility and liquidity is a product of diversification rather than a reflection of the fund's underlying assets. The investable universe is, as a result, not restricted to liquid/low-vol instruments; there is a maximum 10% allocation to closed investments to provide the fund with a chance to invest in attractive return-boosting deals, such as private equity, when the opportunity arises.
The fund specifically uses Wakala transactions. What are the advantages and disadvantages of using this financial instrument, and how are these managed by the fund?
The advantages of using Wakala transactions are, firstly, the yield on these instruments is very competitive compared to other instruments; secondly, they come in different trenches of 1, 3, 6, and 12-month deals; and last but not least, they are Islamic-compliant instruments.
The main disadvantage with Wakalas is that as the instrument becomes more and more popular, and with the increase in the volume of deals, it is becoming more difficult to sift through the deals to find the high-quality issues with solid ratings. Once again, this is where a solid and time-tested due diligence process will come in handy.
All the Wakalah contracts are pre-approved for Shariah compliance by the Al Raya International for Consultancy and Training (Shariah committee for our fund) and then by our Islamic Investments Unit for financial merit.
The fund invests in both local (GCC) and international investments. What is the proportion of these in the overall portfolio and how often are these weights reviewed?
The fund of funds will be investing between 50% and 70% of its assets in the MENA region and 30-50% in international investments. The asset allocation is reviewed on a monthly basis and the decision to over- or under-weight is taken accordingly.
How do you benchmark your fund’s performance? Is this done from a perspective of absolute returns or risk-adjusted returns?
GIFoFs is an absolute return product; initially, two or three indices will be chosen to benchmark it against: Eurekahedge Islamic Funds Index, Global GCC Islamic Index and possibly the Dow Jones Global Islamic Index.
How is the fund structured to comply with Shariah principles? How often is this reviewed and by whom?
The fund will only invest in Shariah-compliant funds or instruments. After the fund managers identify a fund for investments, we will forward it to our Shariah advisor for their approval. The Sharia Advisory Board of the fund is Al-Rayah International Consulting and Training. Al-Rayah Shariah consultancy board reviews and confirms all of the fund’s transactions to ensure compliance with the Islamic Shariah. The board members are comprised of experienced and well reputed Islamic scholars, namely:
Dr Abdul Aziz Al Qassar, Assistant Dean for Scientific Affairs and Higher Education and Research (Shariah College-Kuwait) and a member of various Shariah supervisory associations.
Dr Essa Zaky; Shariah consular in general Islamic authority (Kuwait), member of International authority of Shariah for Zakhat field, Shariah advisor at Kuwait Awqaf Public Foundation and a member of various Shariah supervisory associations.
Dr Abdul Sattar Abou Godaa, a member of Accounting and Auditing Organization for Islamic Financial Institution and a member of Fatwa authorities in many international Islamic banking establishments.
Dr Mohamed Al Khari, Master of Islamic Economics from King Abdul Aziz University-Jeddah, and a member of Fatwa authorities in many international Islamic banking establishments.
At the end of every year, the Shariah Board will issue a Shariah Audit Report which will address all the activities of the fund in that year.
Is Shariah compliance considered as part of your investment strategy or risk management approach?
We will attempt to accomplish the fund’s trading objectives by following the trading policies set forth below:
The fund’s assets will be invested mainly in Islamic and Shariah-compliant funds (sub-funds).
The fund manager will attempt to diversify its positions amongst different markets, although, until the fund is of a sufficient size, the diversification may not be extensive.
The fund manager may liquidate some or all of the investments he has taken and may refrain from taking any new ones during periods when, in their opinion, unusual market conditions exist that warrant such action.
The fund manager may invest the fund’s un-invested cash assets in any Islamic money market instrument or money market funds in any currency.
The fund may invest in all types of funds, similar but not limited to equity, real estate, hedge and private equity funds according to the Shariah law.
No sub-fund position shall exceed 20% of the total fund’s assets in open-ended investments, and no more than 10% in close-ended ones, with the exception of money market funds/instruments.
How would you describe your investors? What are they most interested in (growth/performance, Shari’ah-compliance, risk management/safety, etc)?
We are targeting Shariah-compliant investors: individuals or institutions. The fund's risk-return profile is also attractive to any investor, Islamic or conventional, seeking growth of capital with low volatility.
The fund is a one-stop shop which acts as a gatekeeper to the investor. The fund will focus on providing investors access to a globally diversified portfolio of Shariah-compliant investment avenues; back-testing has shown a low correlation of 0.17 with the GCC markets as depicted by the Global GCC Islamic Index. As such, the retail investor can benefit from the asset allocation while institutions and high net worth clients are able to hedge their investments in the regional markets by investing in this Shariah-compliant fund of funds.