“Morgan Stanley is confident that its Al-Thimar Fund will grow significantly over the next two years, and stresses that it has seen ‘significant interest’ not only from clients in the Gulf states, but also in South and East Asia.”

LONDON, 5 May 2003 — US-owned Morgan Stanley has launched its first Islamic investment fund, the Al-Thimar Global Equity Fund, and expects it to grow quickly. Al-Thimar was actually soft-launched in January but due to the Iraq crisis, active marketing was delayed.

The House of Morgan is not the only Western institution to launch its first Islamic fund. German bank WestLB and international fund manager Tricon Ltd. have teamed up with Dubai-based Hilal Financial Services to launch the WestLB Tricon Murabaha Forfeiting Fund, which is the first of its kind in the Islamic finance sector. Similarly, the Shariah Funds Inc., a division of Meyer Capital Partners, a US-based investment management firm, is also about to launch what it claims to be “the first Islamic fund of hedge funds”.

The challenges of post-war reconstruction and the installation of a transition administration in Iraq has not dampened market sentiments about and in the region. On the contrary, several factors have recently helped to boost market outlook, including, the publishing last week by the Bush administration of the long-awaited road map for the resolution of the Israeli-Palestinian conflict, even though fraught with seemingly impossible hurdles; falling oil prices; the passing by the Kuwaiti Parliament of a long-awaited Islamic banking law; and the more optimistic view that the bear market in global equities ended in mid-March following a sharp bounce.

Not surprisingly Morgan Stanley is confident that its Al-Thimar Fund will grow significantly over the next two years, and stresses that it has seen “significant interest” not only from clients in the Gulf states, but also in South and East Asia, especially Singapore, Hong Kong, Malaysia, Indonesia and Brunei. “As part of our coverage of the Middle East in particular over recent years,” explained Tarek Mooro, Managing Director, Middle East & Turkey Group, at Morgan Stanley & Co. International in London, “we have had increasing demand from our clients and from prospective clients for Islamic pooled investment products. This is a relatively new niche for Morgan Stanley, and we decided the best route to entry was through a ‘plain vanilla’ approach, which is a long-only global equity fund which complies with Shariah investment principles. The aim is to expand our range of Islamic products over time.” Mooro acknowledges that Morgan Stanley’s name will open many doors, but ultimately what is going to drive demand for Al Thimar is performance. “We believe that given our expertise in this (equity) sector, we are very optimistic that we will deliver,” he added. Mooro’s colleague Dermot Whelan, who co-manages the fund, stressed that the fund has been given a high profile internally and got a lot of attention within senior management. “It has the resources dedicated to it in order to make it a substantial fund. As, such we expect to enter the top league of Shariah-compliant global equity managers,” he predicted.

The largest single Islamic global equity fund is the Al-Ahli Global Trading Equity Fund of Saudi Arabia’s National Commercial Bank (NCB), which was launched in January 1995 and which was the first Islamic global equity fund to be launched. The fund at its peak two years ago had assets totaling almost $800 million, but thanks to the troubled equities market in the last two years, this shrunk to its current level of $350 million.

Another Saudi investment house, SEDCO (Saudi Economic & Development Company), together with US investment bank Worms & Co., sponsor the second largest Islamic global equity fund, the AlFanar Investment Holdings with current assets under management just under $160 million. The remaining 33 or so Islamic global equity funds hover between $5 million to $50 million of assets under management.

While it may be true that Islamic finance post-9/11 has been perceivedly unfairly targeted by certain quarters, especially relating to “terrorist financing”, Morgan Stanley stresses that post-9/11 the overall compliance environment has changed not only for Islamic finance, but also for financial services in general. Morgan Stanley insists that it has the same approach for carrying out its due diligence process for money laundering or other regulatory requirements; and does a very rigorous job of “knowing your client”, which is the first priority in running a successful financial services company, and which applies equally to its conventional and Islamic products.

The launching of Al Thimar is yet another reminder that Islamic finance remains a magnet for conventional blue-chip financial institutions. This attraction is ironically driven by Muslim investors themselves. The Islamic equity market needs more competition.

The fact that there are only two Islamic global equity funds worth their name, suggests that the sector is hyped out of proportion.

Perhaps Al-Thimar will not only bring fruits to its investors, but also to the development of the Islamic global equity sector.