Global Sukuk Portfolio Management

New Challenges
Rafael DALMAU,
Fischer Francis Trees & Watts, BNP Paribas Investment Partners Kuala Lumpur IFN 2009 Issuers and Investors Asia Forum, 4th August 2009

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Managing a Global Sukuk Portfolio, New Challenges

Main Challenge Defining the Eligible Market Selecting a Benchmark

Global Sukuk Portfolio Management

Main Challenge - The Sukuk Universe Composition
Domestic Sukuk Market
USD76.2b as of 24th June 09
SAR 8% IDR PKR 3% 1% Others 1%

International Sukuk Market

USD32.5b as of 24th June 09
AED 19% EUR GBP 1% 0%

Sukuk Universe
USD108.7b as of 24th June 09
IDR PKR Others 1% 1% SAR 2% 6% USD 24%

+
USD 80%
MYR 87%

=
AED 6% MYR 60%

USD109b in Outstanding Volume with 30% in International Issuances

Outstanding volume is estimated based on data available on 24th June 2009 and the prevailing current exchange rate Source: Bloomberg, FFTW
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Global Sukuk Portfolio Management

Main challenge Developmental stage of the Global Sukuk market
Setting up the rules: Global Sukuk investment guidelines require broader deviation from Global Conventional investment mandates Search for diversification (e.g., geography, currency) Clarity in definitions: Quasi sovereign - GREs versus corporate Sukuk Unbiased approach to benchmark selection Objective risk limits (e.g., tracking error) Active consultation with the Sharia Board throughout the process

Global Sukuk Portfolio Management

Defining Eligible Market - Idealized approach to overcome present challenges
Potential Options: Allow exposure to all sovereign issues (rating requirements can be defined) Allow implied ratings for unrated sovereign, government or quasi sovereign Sukuks Allow exposure to convertible Sukuks Allow managers internal/proprietary ratings for unrated corporate Sukuks Allow exposure to local currency Sukuks (e.g. MYR, SAR, SGD, AED) Allow exposures to match selected index weighting ratios Allow exposures to non-benchmark Sukuks (percentage of NAV can be defined)

Global Sukuk Portfolio Management

Defining Eligible Market - Constrains under a conventional Global Bond Portfolio approach
70 60 50 40 30 20 10 8 Constrained USD AED MYR 23

Outstanding Volume in USD billion* Typical Global

Bond Constrains Expanding conservatively

Number of Issuers*
50 45 40 35 30 25 20 15 10 5 13 23 4 2

Typical Global Bond Constrains

Expanding conservatively

5 15 Our Recommendation SAR Others

Constrained USD AED MYR

Our Recommendation SAR Others

* Converts = Convertible Sukuks, Min 200MM refers to Sukuk with a minimum USD200MM in current outstanding issue size, Rating refers to Sukuk with issue rating, HG = Investment Grade, G10 = currencies from group of 10 Source: Bloomberg, FFTW. Data as of 1st July 2009
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Global Sukuk Portfolio Management

Defining Eligible Market - Constrains under a conventional Global Bond Portfolio approach
Outstanding Volume in USD billion* Number of Issuers*
Unconstrained
50 45 40 35 30 25 20 15 10 5 Total ex. Min Converts 200MM Rating + HG Only Currency Min A3/AImplied + HY Sov for Corps Rating 26 6 6 5 5 21 19 11 11 5

Constrained
80 70 60 50 40 30

Unconstrained

Constrained

4 3

49

1 11

20

43

2 2 24 19 4 18 2 2 18 13

1 8
-

10

Total

ex. Min Converts 200MM

Rating + HG Only Currency Min A3/AImplied + HY Sov for Corps Rating

USD

AED

EUR

GBP

USD

AED

EUR

GBP

* Converts = Convertible Sukuks, Min 200MM refers to Sukuk with a minimum USD200MM in current outstanding issue size, Rating refers to Sukuk with issue rating or implied ratings, HG = Investment Grade, HY = Non investment Grade, Currency refers to eligible local currency eligible for corporates issues, Min A3/A- refers to the minimum A3/A- rating for corporates based on the lower of Moodys, S&P and Fitch Source: Bloomberg, FFTW. Data as of 1st July 2009 7

Global Sukuk Portfolio Management

Selecting a Benchmark Benefits and Weaknesses
LIBOR Dow Jones Citigroup Sukuk Index + Absolute return + Beta return mix + Wider universe as fixed rate Sukuk is part of Positives + + + + +
Absolute return focus Limited interest rate risk Limited impact on rising rates Low index volatility Index is available

+ + + + +

index Representative of underlying risk. Index allows for monitoring and objective measurement Includes both floating and fixed rate Sukuks Limited interest rate risk, lowers risk of rising rates Index is available

Negatives

Index does not represent risk hence potentially high tracking error. LIBOR rates are low Limited use of fixed rate Sukuk to reduce interest rate duration risk.

Developing index with only five constituent currently. The need to track the benchmark may result in high impact from monthly rebalancing Sukuks in index may be hard to source

Source: FFTW
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Global Sukuk Portfolio Management

Selecting a Benchmark Client Driven Process
Factors for Benchmark Selection
Return: Beta

FFTW non-weighted Multi-Factor Scoring*

Weights Client Driven
DJSUKUK 4 5 4 5 3 3 5 3 32 LIBOR Return: Beta Return: Alpha/Spread 1 3 5 1 4 4 5 4 27 Risk: Beta Volatility Risk: Tracking Error Diversification: Issuer Diversification: Country Availability of Benchmark Rising Rates Equal Weighted Score

Rising Rates

Return: Alpha/Spread

Availability of Benchmark

Risk: Beta Volatility

Diversification: Country

Risk: Tracking Error

Diversification: Issuer

LIBOR

Dow Jones Citigroup Sukuk (DJSUKUK)

* 5 = Most Favorable, 1 = Least Favorable

Source: FFTW
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Global Sukuk Portfolio Management

Selecting a Benchmark Cost of low tracking error i.e. tracking a developing index
Size and Number of Issues
Dec 2008 and July 2009
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Composition of Issues
Dec 2008 and July 2009

10 8 6 4 2 0

10 8 5 6 4
4.7

100% 80% 60% 40% 20% 0% Dec-08

NIGSUK ISDB DIBUH QATAR DPWORL ADIB

6.3

2 0

Dec-08 Outstanding (USD' billion)

Jul-09 No. of Issue (RHS)

Jul-09
EIBSUK SARAW DIFCDU

Tracking the index would require rebalancing 65% of NAV between Dec-08 and Jul-09. At a 1% transaction cost, this would result in a 65bps performance drag over this period
HG = Investment grade, HY = Non investment grade Source: Bloomberg and FFTW as of June, 2009
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Disclaimer
This document is issued by Fischer Francis Trees & Watts, a member of BNP Paribas Investment Partners. BNP Paribas Investment Partners is the global brand name of the BNP Paribas group's asset management services. The individual asset management entities within BNP Paribas Investment Partners are specified herein for information only and do not necessarily carry on business in your jurisdiction. Opinions expressed are current as of the date appearing in this document only. This document is confidential and may not be reproduced or redistributed, in any form and by any means, without FFTWs prior written consent. Past performance is not indicative of future results. The value of investments and the income derived from those investments may fluctuate over time such that the value of a portfolio at any given point in time may be more or less than its original value. No warranty is provided as to the performance or profitability of any portfolio or any part thereof, nor is any guarantee made that the investment objectives, expectations or targets described in this presentation or anywhere else will be achieved, including without limitation any risk control, risk management or return objectives, expectations or targets. A portfolio may suffer loss of principal, and income, if any, may fluctuate. The value of investments may be affected by a variety of factors, including, but not limited to, economic and political developments, interest rates and issuer-specific events, market conditions, sector positioning, and other factors. This document is not to be construed as an offer to buy or sell any financial instrument. It is presented only to provide information on investment strategies and current financial market trends. The analyses and opinions contained in this document are those of Fischer Francis Trees & Watts, and are based upon information obtained by Fischer Francis Trees & Watts from sources which are believed to be reliable. Fischer Francis Trees & Watts provides no assurance as to the completeness or accuracy of the information contained in this document. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Investment strategies which utilize foreign exchange may entail increased risk due to political and economic uncertainties. The views expressed in this document may change at any time. Information is provided as of the date indicated and Fischer Francis Trees & Watts assumes no duty to update such information. There is no guarantee, either express or implied, that these investment strategies work under all market conditions. Past performance is not a guarantee of future results. Readers should independently evaluate the information presented and reliance upon such information is at their sole discretion. The information contained herein includes estimates and assumptions and involves significant elements of subjective judgment and analysis. No representations are made as to the accuracy of such estimates and assumptions, and there can be no assurance that actual events will not differ materially from those estimated or assumed. In the event that any of the estimates or assumptions used in this presentation prove to be untrue, results are likely to vary from those discussed herein. Fischer Francis Trees & Watts is authorized and regulated in the UK by the Financial Services Authority. Products and services of FFTW are directed exclusively at eligible counterparties and professional clients as defined by the rules of the Financial Services Authority. Products and services are not available to retail clients. FFTW UK is also registered with the US Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended.

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