i -VCAP Sets its Sights on Being the Premier Regional Islamic Fund Manager

On the 21^st January this year, i-VCAP Management, a wholly owned subsidiary of government-linked ValueCap, created history with the launch of Asia’s first Shariah exchange-traded fund (ETF), the MyETF Dow Jones Islamic Market Malaysia Titans 25 (MyETF-DJIM25). The ETF, which listed on Bursa Malaysia on the 31st January, received overwhelming response.

MyETF-DJIM25 has an authorized fund size of 10 billion units, of which 840 million units at RM1 each were issued for the first of several tranches. About US$250 million was allocated for the first tranche and a larger portion is planned for listing on a foreign stock exchange. i-VCAP is now working on the remaining tranches, with plans to launch the second tranche worth US$150 million in the first quarter of next year. CEO Zainal Izlan Zainal Abidin said the company is targeting to release the other tranches within 18 months from the launch of the first tranche in January this year.

At the same time, i-VCAP is also planning to launch a few Shariah funds. “We will start the activities on the new funds next year.

We are identifying a few themes or concepts, in light of the current investment environment. We are looking at launching these Shariah-based funds next year,” he said. The Shariah compliant funds will also be offered to regional investors.

i-VCAP was incorporated in October 2007 with the initial objective of launching MyETF-DJIM25, a national project initiated by the government.

In an exclusive interview with MIF Monthly, Zainal Izlan elaborated on the second tranche, company strategies and how i-VCAP can realize its vision of becoming the premier Shariah compliant fund management company in the region.

How is the performance of MyETF-DJIM 25?
As the benchmark index is down by 48% (as at the 28th October), the net asset value (NAV) is down by 47%. Unfortunately, the absolute performance is negative, given the current market conditions but we are tracking the index closely which is the main objective of the ETF.

How has the response been from investors since it was launched on the 31st January?
We are conducting education-related activities as investors are generally not very familiar with the product. We have participated in conferences to reach institutional investors and corporate management in their professional and personal capacities.

We will be taking part in a series of roadshows organized by Bursa Malaysia. The program has started and we will be joining them to reach the retail investing public.

We also took part in an investor exposition that was held last month at the Kuala Lumpur Convention Centre, and in “Minggu Saham” organized by Permodalan Nasional. Our investor education activities will continue and it will take some time for investors to be familiar with ETF as a product.

For example, we were informed that in France, the ETF industry only took off four to five years after the launch of its first ETF. Our ETF was launched early this year; and as the first Shariah ETF in Asia, we still need to work on the investor education part.

When does i-VCAP plan to launch the second tranche?
That plan is very much intact. But we have to reconsider the timing in view of the current market volatility. Generally, it is good to launch a fund when the market is low, when prices are low so that when it improves, you can get better returns.

However, because it is extremely volatile not only in Malaysia but also other parts of the world — even the Dow Jones and the Nikkei are fluctuating by up to 10% a day — it is not conducive to have the launch of the second tranche at this point.

We are waiting for some stability in order for us to proceed. We are looking at early next year (for the launch). While we don’t know how the market will perform, based on our present assessment, we feel that the first quarter looks more achievable.

And the value of the second tranche?
We are trying to raise about US$150 million. In January, we launched the first tranche with a value of US$250 million. Our target is to launch a total value of US$1 billion, as had been announced. The other tranches will be launched in later stages.

When do you expect to launch the rest of the tranches?
It is still flexible. We would like to have all the launches take place within 18 months from the launch of the first tranche. But we have to be mindful of market conditions. There is no point in launching for the sake of launching when the market is not conducive.

We have to take into account the market conditions which will influence the demand. While we have the target in terms of timeline, we also need to be realistic in terms of market conditions as the current volatility was beyond expectations, if you go back 12 months or to the beginning of this year.

Are there plans to list a tranche of the MyETF-DJIM25 on foreign stock exchanges?
We are exploring the possibility but have not decided on the actual structures and whether or not it’ll be a dual listing. It is still in the planning stages and will still use the same underlying benchmark.

We are looking at about US$500 million for the foreign listing. Even though the fund is Shariah compliant and the obvious target market is the GCC, in terms of listing, where it is listed does not really matter.

Now, cross-border investment is very convenient; we can list in Europe or Asia, not necessarily on a GCC exchange. For now, we are studying the pros and cons of listing it on several exchanges.

Apart from MyETF-DJIM25, what other activities are in the pipeline?
Our immediate business objective is to launch this national ETF (MyETF-DJIM25). This is a national project initiated by the government. We have been entrusted with the responsibility and are committed to ensuring that the government target is achieved.

i-VCAP is a fund management company licensed by the Securities Commission. We are looking at other fund management services, with a focus on Shariah compliant instruments.

Apart from exploring actively managed funds for our future offerings, we are looking at institutional investors for segregated mandates. We will be rolling out our plans in 2009. In relation to MyETF, we will continue with our road shows and education programs.

As for other business activities, these will commence in 2009. For some of the businesses such as the segregated mandates for institutional investors, there is a gestation period and we do not expect institutions to award mandates to new fund managers immediately but we have better control in terms of timing in launching the new funds that we are planning… the actively and passively managed funds.

For now, we are identifying themes or concepts for the funds and our expectations of where the market is heading.

How many funds are slated for launch?
We are still looking at the numbers in conjunction with the market conditions. Of course, from the commercial perspective, we are looking at as many funds as possible but we have to be cognizant of market conditions and level of demand. We are looking at more than one fund. As the market is very volatile, we really need to see the sort of demand and the price level in store next year.

Can you elaborate on the type of funds?
We do not want to offer products that are already plenty in the market — plain vanilla actively managed equity portfolio may not be well received by the market because there are so many competitive funds out there. So, we are looking at ideas and themes that have not been explored or still very few in the market as this can create some differentiation. It could be based on geographical sectoral themes.

Will the funds be offered overseas?
It is very likely that the funds will be offered out of Malaysia but they could be investing in the regional markets. Conventional investors could also be a part of our target market.

Being Shariah compliant products does not mean excluding conventional investors. As a service provider, if we want to reach a certain target market, we have to offer something that they want.

When will these funds be launched?
We hope to launch them next year. Currently, our focus is on the national ETF and we are working on the follow-up tranches. At the same time, we are commencing efforts in the non-national ETF space.

How is the development of Islamic fund management in Malaysia?
I believe the Shariah fund management industry is still at an early growth stage. This is reflected by the ETF that we launched, which is the first Shariah ETF in Asia.

There have been many ETFs launched in Asia but this is the first Shariah ETF. It just shows how much potential there is for growth in Shariah compliant investment.

The industry still has a long way to go and there will be developments along the way in terms of what is Shariah or is not Shariah. Eventually, if it meets the requirements of Shariah investors or investors seeking to invest in Shariah instruments, and is in line with Shariah principles, I think that is all that matters.

From our perspective as a service provider, we want to focus on services that meet the requirements of Shariah investors. As long as our product specifications meet their requirements and Shariah principles, I feel that is fine with us. I think Islamic asset management should enjoy above-average growth relative to conventional asset management. There has been a growing demand for Shariah compliant products, both in banking and finance as well as investment.

I think we also need to remember that Shariah compliant instruments are not only for Shariah investors, so demand is not only coming from Muslim investors or the GCC market or Muslim-populated countries. It can be from conventional investors as well, as long as it offers an attractive investment and good-value proposition.

For example, there are concerns on the financial services industry globally and, by definition, Shariah compliant funds do not invest in conventional finance companies or banks.

Islamic funds have generally outperformed the conventional index and if non-Muslim investors are concerned about the current health of the financial sector globally, they will invest in Shariah compliant funds, so the demand could come from the conventional segment as well and this will add to growth.

On top of that, for Malaysia specifically, the country and the government have embarked on initiatives — such as the Malaysia International Islamic Financial Centre (MIFC) — to turn Malaysia into a global Islamic financial center.

For example, the recent roadshow in Kuwait and Riyadh spearheaded by MIFC introduced Malaysia as an Islamic finance center to the world. These are things that will help spur the growth of the Islamic finance and investment industry in Malaysia.

What are your plans for the company?
We will venture into services other than the national ETF. The general business objective is to make i-VCAP a premier fund management company that focuses on Shariah compliant products and services. We are looking at venturing into regional markets, we are not confining ourselves to Malaysia.In the next five years, we hope to have established some regional presence, not only by investing in regional markets but also to source for funds from regional investors.

I think beyond that, we will look at international markets and try to establish a more global presence but we will take one step at a time. The five-year horizon will hopefully see i-VCAP achieving its vision to be a premier regional Islamic fund management company. For a start, there is still a segment of the investing public who have not heard of i-VCAP. We want to change that through the launch of our fund and our marketing initiatives. We plan to bring the i-VCAP name to the world.In achieving our objectives, as a new fund management company, the first element that we must have is investment performance.

We will need a good investment track record because if investors want to appoint a fund management company or invest in a fund, they will first look at the track record of the manager.

Secondly, our product offerings have to be attractive and competitive. There are so many similar funds around, so we are looking at something more innovative and creative.

We also have to build up a sound and strong team internally, both from the investment and marketing sides. Our products need to be made known to the investing public and we must build a good distribution channel.

On the operations side, hopefully as we grow we can ensure that we meet the requirements of our back-office operations so that the process is efficient and there is no disruption. These are our key strategies.