• 8 months ago
2.1 Sukuk as on 210324
Transcript
00:00 Our guest today is the chief investment officer of Global Sukuk and MENA fixed income at Franklin-Templeton, Mr. Muhyiddin Khoromfil.
00:10 Pleasure to be here, first of all, and very nice to meet you.
00:13 Mr. Muhyiddin, can you please tell us the Sukuk part?
00:16 Yes. So, Sukuk is really interesting because Sukuk are basically Islamic finance's answer to bonds.
00:26 So, as you know, in Islamic finance, the payment or the receipt of interest is forbidden.
00:34 Now, and this is because in Islamic society or Islamic finance, the idea is that you want to discourage hoarding or saving,
00:45 and you want to encourage risk sharing and investing for the benefit of society.
00:51 So, you know, investing in companies or equities or investing in real estate, those lend themselves very easily to Islamic finance.
00:59 It gets a little bit more complicated for the fixed income returns, right?
01:04 So, Sharia compliant investors took them some time to figure out a way to give Sharia compliant investors that fixed income alternative.
01:15 And so the Sukuk market sort of developed about 20 years ago, really combining, if you want, modern finance or modern structured finance,
01:24 together with Islamic jurisprudence, which is 1,400 years old.
01:30 So, they take these really old contracts, ijara, musawama, mudaraba, musharaka, and so on.
01:37 They combine them with modern structured finance to come up basically with Sukuk instruments, which essentially have similar characteristics to bonds.
01:47 But they are, in fact, different.
01:50 They're different because there's typically an underlying asset.
01:55 The coupon payments are not interest payments, but rather they are lease or rental or profit payments.
02:01 And then at maturity, when you receive the bond, there's typically a purchase undertaking or some other mechanism.
02:07 So, it starts behaving very much like a bond, but it's structured in such a way that it is not a loan and it's not an interest bearing security.
02:18 How do we calculate?
02:20 You would evaluate it in a very similar fashion to the bond market because you're still dealing with these cash flows.
02:27 So, you're looking at a particular company or country and you're looking at its ability and willingness to pay you back.
02:34 You're looking at the actual instrument, so the Sukuk structure itself.
02:39 What is the asset there? Does it provide any credit enhancement? Is there any risk attached to it, etc.?
02:46 You consider the periodic payments and, you know, collectively...
02:52 If I may, just so the periodic payments, are they fixed?
02:56 I would say percentage rather than interest.
03:00 Yes, they're fixed percentage.
03:03 And that's a function of the interest rate environment generally and obviously how risky the borrower is.
03:11 Okay.
03:12 And so, basically, the Sukuk market has therefore, because it's been able to achieve these characteristics quite successfully,
03:20 it's gone through a rapid period of growth.
03:23 And so, we've gone from, you know, very humble beginnings 20 odd years ago into today becoming a almost $800 billion market,
03:31 which has been growing at about 15% a year and is now beginning to have representation from many pockets.
03:39 Obviously, the GCC is a very important market segment.
03:43 Southeast Asia, places like Malaysia, Indonesia are also very large issuers.
03:48 But increasingly, we're seeing other participants.
03:51 Recently, we had the Philippines, we had corporate issuers out of the US, Turkey, South Africa.
03:56 And the list, I think, will continue to grow as people get more comfortable with this form of finance.
04:03 I would suggest that you always have a safe alternative.
04:07 Right?
04:08 So, I'm a big advocate of having fixed income, particularly today.
04:11 Why today?
04:12 Because over the last year, year and a half, we've seen the Fed raise rates considerably, right?
04:18 So, we've gone from a zero or very low interest rate environment into one today where fixed income is back to assuming its more traditional role of providing real, you know, or attractive levels of income.
04:30 Okay.
04:31 Right?
04:32 So, when you have those savings, it's nice, especially for older investors or for investors that, you know, need their portfolios to provide some income to their needs or to their saving plans.
04:44 So, one, you get that, you get the high levels of income.
04:48 And then, two, we get the protection.
04:50 Because the valuations on equities or risk assets and, you know, coupled with some of the uncertainty we have across the globe, economically but also geopolitically, it's, I think, always prudent to have high quality fixed income.
05:05 And the Sukuk market would qualify as very high quality fixed income.
05:10 Where does that, you know, safety element or safety part come?
05:14 So, for instance, what is that body that governs or ensures that as an investor, you know, I'd get my return even if uncertainties happen to the market and whatnot?
05:25 That's a great question.
05:27 And, you know, it's always a relative answer.
05:30 But what I would tell you is that the standard across the globe are rating agencies.
05:36 So, you have these independent bodies that supposedly go out and attach a rating to these issuers.
05:44 You know, the best, you mentioned AAA, for example.
05:47 You know, the strongest, you know, most secure, you know, most reliable with the longest history, you know, those would be classified as sort of AAA.
05:56 And historically, they've, you know, really never defaulted.
05:59 And then the list goes down from AAA to AA to single A, triple B, and so on.
06:04 Basically, I mean, as long as you're in the investment grade category, or typically in that sort of triple B, single A level, you know, the risk of defaulting over five years is actually quite small.
06:15 But that can always change, especially in a world that is being continuously disrupted.
06:21 So, but that would be kind of the basic litmus test is you would want to have or you would want when making these investments, you want to be investing with an understanding of how risky these bonds or Sukuk's are.
06:36 The higher the rating, the less risk.
06:39 And the Sukuk market or most Sukuk, if you look at the Sukuk indices, or you look at most Sukuk portfolios, they tend to be of investment grade quality or higher.
06:53 There will be some high yield exposure in a fund, but the overall majority of the products, you know, would be pretty high quality.
07:01 It makes a lot of sense. And I understand what you said. But my perspective is, let's assume that even if I do invest in these triple A's and they default, okay, as an investor, maybe, or as a bond issuer, you know, it will be instead of triple A to double A, right?
07:19 Yeah.
07:20 However, would I still receive my money?
07:22 So, where is that thin line that would give me some sort of assurance? And over here, it's more or less that there will always be that risk factor.
07:34 There always would be, but, you know, I mean, I don't think it's ever happened where a triple A issuer defaulted in a short period of time.
07:45 Yeah, I mean, usually you would find that there's a sequence of events that needs to take place. So, they would go from triple A to double A, single A.
07:53 There, you could have situations where they get disrupted and they could move, you know, from, you know, single A and, you know, suddenly they find themselves in trouble.
08:02 And, you know, one incident that comes to mind, for example, is Lehman Brothers on the eve of the financial crisis.
08:09 You know, they were confirmed as, I think it was single A. And, you know, on the Monday, they were declared bankrupt.
08:16 And, you know, that triggered, obviously, the financial crisis. But you would need an event of that magnitude really to kind of start thinking about it.
08:24 But, you know, in most cases, or in 95 or 99% of instances, you can be quite comfortable that if you're investing in high quality fixed income, you're going to be getting your money back over, you know, five years or 10 years.
08:37 And this is also, I would say, not only interesting, you actually convinced me to look into Sukuk.
08:44 There you go.
08:45 Mr. Al-Muheddin.
08:46 Why Franklin Templeton?
08:48 Well, I mean, Franklin Templeton, I think, generally, is a large global organization that is very well resourced.
08:57 For example, we've been in the region now for over 20 years. You know, I, myself, have been with the firm for over 16 years.
09:03 We probably have one of the biggest teams, I think, dedicated to global Sukuk investing and focused on regional bond markets.
09:10 How diverse is your team?
09:13 In terms of gender or nationality?
09:17 Yes, it's pretty diverse. I mean, obviously, we're talking about teams that are sort of six to 10 people.
09:23 But yeah, we've got representation from Asia, representation from Europe, obviously, the Middle East.
09:32 We've got women, we've got men.
09:34 So, yeah, I would say the idea of promoting diversity so that we can have more diverse thoughts.
09:43 Cultural diversity.
09:44 Exactly. It's something that's actually quite fundamental from a value point of view for Franklin.
09:52 And so we try to live by that. And you see that across a lot of teams.
09:57 And so this team has been together also for quite a long time. So in addition to the depth, I think we have quite a bit of tenure.
10:04 So what it does is that it allows us to really, over time, you know, specialize, you know, make mistakes, learn from them.
10:11 And then also because our process is quite iterative in nature, it does mean that different people are developing expertise over different parts of the process over time.
10:22 So that also makes us quite resilient to changes because, you know, it's a fast moving industry.
10:30 It's an ever changing universe. And so you always want to be conscious about, you know, how things could change or how things may be different in the future.
10:39 And this can be witnessed from the track record.
10:42 So, yeah, the track record, I think, speaks for itself. I think we have one of the longest track records in global Sukuk investing.
10:48 We've won a number of awards over the years. I think just even this last this past year, I think we've done very well relative to our peers.
10:56 And that's the thing. I mean, we are, you know, pretty focused in terms of what our what our objectives are.
11:03 And all of us and when I say all of us, I mean, portfolio managers, research analysts, everyone that's involved in this process,
11:10 are really focused on trying to beat the benchmark and trying to beat or perform well relative to peers.
11:16 And so that kind of focus on putting clients first and being really outcome oriented is, again,
11:22 something that is culturally central to the way Franklin Templeton does things.
11:27 So really trying to do things with integrity and focusing on clients and then delivering quality outcomes.
11:33 I mean, those are the the basic building blocks of how we do business.
11:37 Amazing. Thank you. It's a pleasure.
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