LONDON: The launch a few weeks ago of the Daiwa ETF (exchange traded fund) marks a further boost for the global Islamic capital markets and the increasing involvement of Japanese financial services companies in the sector. For the Daiwa ETF is a Shariah-compliant fund based on the FTSE Shariah Japan 100 Index, which was launched in April this year.
The Daiwa ETF, which is seeded at $20 million, is promoted by Daiwa Asset Management, the second largest asset manager in Japan after Nomura Asset Management, with funds under management of $96.34 billion at end February 2008. Daiwa, which has a strong relationship with FTSE and the Singapore Stock Exchange (SGX), decided to list on the SGX because of its strong transparency and its aggressive ambition of becoming an international Islamic capital markets hub.
Daiwa, explained Jun Murofushi, managing director, and Seiichiro Iwai, marketing executive, of Daiwa Asset Management (Europe) Ltd., respectively, is expanding its global activities. “We have fund management activities in North America, London, Singapore and China. At the same time Islamic finance is increasing at a phenomenal growth rate. We hear about the funds under management in the sector between $1 to $2 trillion. We have a good relationship with SGX in Singapore and an equally strong connection with FTSE, which first proposed the idea of a Shariah-compliant ETF to us. SGX is very keen on developing its role in Islamic finance, especially capital markets and wealth management. SGX has a very transparent regulation and infrastructure, say compared to Tokyo Stock Exchange. As such we listed the Daiwa ETF on the SGX on May 27, 2008.”
The objective of the Daiwa ETF is to closely track the performance of the FTSE Shariah Japan 100 Index, which is comprised of the largest and most liquid Shariah-compliant companies in Japan, based on the FTSE Global Equity Index Series. Constituents are screened using London-based Yasaar Ltd.’s Shariah Compliance Investment Guidelines.
According to Iwai, this is the first Shariah-compliant ETF in the Japanese market and based on Japanese stocks off an equity index. “The demand for ETF is growing worldwide,” explained Iwai.
“The cost of structuring an ETF is relatively low compared to other equity products and they are easy to trade. We hope that the ETF will play an important role to become a nexus for Japanese international investors in the future. But for this fund, we are focusing primarily Islamic investors in the GCC countries and in Southeast Asia. We are already in advance negotiations with several potential partners and investors in the GCC and South East Asia through our offices in Dubai and Singapore,” he added.
The advantages of ETF are manifold. According to Daiwa Asset Management, they are transparent and the Daiwa ETF aims to closely correspond to the performance of the FTSE Shariah Japan 100 Index. In fact, on a backdated basis, the FTSE Shariah Japan 100 Index has outperformed the FTSE Japan Index since June 2006.
An ETF is basically an index that is listed on a stock exchange, and trades like a stock throughout the day. So, if investors are trading in Toyota or Cannon or Nintendo, they can get coverage or exposure to the total particular market through the ETF vehicle, which is tradable like a stock. According to Dow Jones Indexes, an ETF is a stable trading vehicle, which fits nicely with the investor profile in the GCC countries, especially for those who like to trade.
The first Shariah-compliant ETF was launched in Turkey in 2006 off the Dow Jones Islamic market (DJIM) Turkey Index and which is listed on the Istanbul Stock Exchange. This was a small ETF with funds of about $20 million under management. The second Islamic ETF was launched in January 2008 by ValueCap Berhad, an investment vehicle of the Malaysian Ministry of Finance, off the DJIM Malaysia Titans 25 Index and is listed on the Bursa Malaysia. This fund was seeded at $250 million and hopes to reach $1 billion by the end of the year.
Daiwa Asset Management, in contrast, is coy about its target funds under management for the first next year, stressing that it is difficult to assess the future size given the current market as a result of the global credit crunch. However, the ETF expects to attract as much investment and investors as possible. The ETF may also consider crosslisting on other stock exchanges such as in Hong Kong, Tokyo, Dubai and Kuala Lumpur.
However, both Murofushi and Iwai are confident that the timing of the launch is right despite the credit crunch and uncertainty in the financial markets. The GCC and Malaysian banks have had minimal exposure to the US subprime mortgage debt market and as such have been relatively unaffected by the credit crunch. There is also huge liquidity in the two regions thanks to the rising and record price of crude oil.
Similarly, the Tokyo stock market has been relatively stable over the last few months in the midst of the credit crunch also because Japanese banks have had little exposure to the subprime debt market. The Shanghai Stock Exchange has been most affected — down by 50 percent; compared to the Mumbai Stock Exchange by 30 percent; the New York Stock Exchange by 14 percent; the London Stock Exchange by 14 percent and the Tokyo Stock Exchange by 13 percent. Daiwa expects the market to recover by end 2008 or early 2009.
Daiwa opted to partner with the FTSE as opposed to Dow Jones, Standard & Poor’s or MSCI, simply because the FTSE and SGX were the most proactive and quickest to respond. “We did not wish to delay our plans any longer. This is our first fund to be listed on an overseas exchange,” maintained Iwai.
The Top 20 constituents of the FTSE Shariah Japan 100 Index reads like a ‘Who’s Who’ of Japanese corporates. They include Toyota, Canon, Nintendo, Matsushita Electric, Takedas Pharmaceutical, Komatsu, NTT DoCoMo, Mitsui & Co., Nippon Steel, and Mitsubishi Estate. The sector weighting is heavily in favor of industrial goods and services; followed by automobiles; household goods; technology and healthcare. The foreign sensitivity and size are high in the Barra Exposure of the total constituents of the FTSE Shariah Japan 100 Index, but the key indicators perform well if not better than the FTSE Japan Index.
Another major advantage of the Daiwa ETF is that it is an ultra-retail product with the basic unit size only 100 unit price as an initial issue price of only $10 per unit. As such the minimum entry is $1,000. The Investment Adviser to the ETF is Daiwa Asser management Co. Ltd. and the fund manager is Daiwa Asset management (Singapore) Ltd.
Daiwa Asser Management is charging a management fee of 0.75 percent per annum, although the company is coy, as its competitors are, about estimating the projected returns of the ETF.