Hong Kong: Hub for Islamic Asset Management?

Rushdi SiddiquiGlobal Director

DJIM Group

HKSAR CEO Donald Tsang

"Islamic finance offers huge potential for development. We should actively leverage on this new trend by developing an Islamic financial platform in Hong Kong," said (Donald) Tsang. …The Hong Kong Monetary Authority, in conjunction with the financial sector, has set up a dedicated team to study related issues and make recommendations for the early introduction of Islamic debt offerings in Hong Kong, he said. People’s Daily Online (Oct 10, 07)

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About Dow Jones Indexes

Number of Indexes: 130,000 plusLicensees: Over 800 offering over 19,000 products tied to DJ and DJSAssets: More than $2.1 Trillion tied to DJ & DJSPersonnel: More than 170Offices:

Asia: Beijing, Hong KongEurope: Frankfurt, London, Madrid, Paris, Stockholm, ZurichUnited States: Boston, Los Angeles, New York, PrincetonLatin America: Chile, Brazil, Mexico

Dow Jones Indexes Timeline: Key Dates

10/6/97-Cash options on DJIA begin trading on CBOE2/26/98-Dow Jones STOXX Indexes launch2/5/99-Dow Jones-AIG Commodity Index launch2/9/99-Dow Jones Islamic Market Indexes launch7/14/99-Dow Jones Global Titans Index launch9/7/99-Dow Jones Sustainability Group Indexes launch2/14/00-Dow Jones U.S. Total Market Index launch2/18/03-Dow Jones Indexes Islamic Blue-Chip Indexes launch11/3/03-Dow Jones Select Dividend Index launch11/30/05-Dow Jones Wilshire U.S. Industry Indexes launch1/23/06-Dow Jones Islamic Market Sustainability Index launch3/6/06-Announced launch of Dow Jones Citigroup SukukIndex5/31/06-Dow Jones Islamic market China Offshore Index launch6/7/06-Dow Jones BRIC 50 Index launchDow Jones Wilshire Global Index Family launch

Dow Jones Islamic Market Index Awards

Best Shariah Compliant Index Provider (Global Finance Magazine, US, 2008)Global Recognition in Islamic Finance for a Finance Institution (Dubai, IIFF 2008)Best Islamic Index Provider (Euromoney, London, 2008)Best Islamic Index Provider (Islamic Finance News, Malaysia, 2007)Best Islamic Index Provider (Terrapin, Singapore)- 2007Best Individual Contribution to Islamic Finance (Kuala Lumpur Islamic Finance Forum (KLIFF), Malaysia, 2007)American Muslim Achievement Award, Islamic Center of Southern California, USA (2006)Sh. Mohmmad Rashid Bin Makhtoum Award for Contribution by Western Institution to Islamic Finance (2006)Contribution to Islamic Capital Market Development, International Islamic Finance Forum, Singapore, 2006.Failka Award for Contribution & Development to Islamic Funds (2006) Deloitte/KLIFF Award for Special Contribution to Islamic Finance (2005)CERT (Malaysia) Award for Excellence in Islamic Finance (2004) Sh. Mohmmad Rashid Bin Makhtoum Award for Innovation in Islamic Finance (2003)

So, where are we?

ML

R

E

PEVC

Timeline/Products/Returns

ActivitiesRiskReward

IF

IFI

CF

CFIs

300 plus years

CFPsIFPs

S

Liquidity Impact, but ….Hubs: UK, Sing & HK: Transactional v. FoundationalSukuks- being bought by non-Islamic investors

Secondary mkt tradingConversion of Non-IFIs

Plus and another pendingNon-Islamic issuer (one off v. on-going program):

Saxony AnholtECGJBIC?, UK, etc.

Islamic hedgefund platformIslamic Mega banks- Noor & ihilal

Islamic PE playConsolidation?

Research reports on IF in GCC; Morgan Stanley

From Zone to Center of Excellence

Zone

Cluster

Center ofExcellence Hub

Refining

-SEZ-Regulations-Core Tenants

-Transaction-Deals

-Stakeholders-Malaysia

-Global go to Platform

DIFCQFCSINGHK

BahrainUK

DevelopmentCycle

-Wall Street-High Street-Frankfurt-Tokyo

DJIM ScreensDJIM Shariah Supervisory Board v Outsourcing ShariahPrimary Business

Negative Screens ~ Socially Responsible InvestingPositive Screens: DJIM Sustainability Index

Revenue AccountabilityFinancial Screens

Debt/MC <33%Cash + IBS/MC <33%Acc Rec/MC <33%

Debt Screen Impact:Enron (Deleted: 3Q’01), Worldcom (2Q’01), Tyco (1Q’02) & Global Crossings (2Q’01)

AAOIFI Standard (21): Product StandardDJ CitiGroup Sukuk Index: Standard Product

Price Only, Market Cap & Free Float Weighted IndexesPrice, Equal, MC and Fundamental Indexes

Low Debt/Non-Financial Social-Ethical Index Alpha Strategy

Screening Process

Dow Jones World

BusinessDescription Revenue Three Financial

Ratios

DJIMD/MC

C+IB/MC

AR/MC

95%

DJIM Screening

Primary BusinessImpermissible IncomeFinancial ratiosDJIM Universe

DJIM Regional Breakdown (2007)

0

10

20

30

40

50

60

US Jap Ma'sia

DJIMDJWI

UK Cana Indonesia

Oil & Gas17%

Technology17%Industrial

15%

Basic Materials13%

CS6%

Tele6%

Uti3%

Fin0%

Consumer Goods

8%Healthcare

15%

DJIM Sectors

DJIM Sector Breakdown (2007)

0

5

10

15

20

25

Oil/Gas HCR CG

DJIMDJWI

Tech Indust Financial

Credit & Impact on Financial

Hypothetical “Islamic Investor & Asset Manager” Dilemma?

Increased Volatility:Exclusion of prohibited industries that may be the current high-fliersExclusion of financial sectorExclusion of highly leveraged firmsExclusion of companies with high non-operating interest income

Bias: Technology, Healthcare & EnergyQuarterly Reviews (turnover)

DJIM Performance (2007)

0

5

10

15

20

25

30

35

40

World US Can EU A/P WorldDev

DJIMDJW

DJIM Performance (Q1 2008)

-12

-10

-8

-6

-4

-2

0

World US EU A/P Fin Oil/Gas

DJIMDJW

EconomicSectors

DJIM HKWeighting

DJ HKWeighting

DJIM China/HK Titans 30Weighting

Oil/gas 9.47% 4.53% 15.97%Basic Matl 4.09 2.25 9.44Indust 15.27 14.30 17.38Con Gds 11.24 8.33 7.62HCR .33 .22 ---Con Ser 12.06 8.79 10.34

Telecomm 36.53 16.50 24.67UTI 8.1 6.47 10.20Fin 1.97 35.34 ----Tec 5.94 3.27 4.37

2007

Index Comparison

Index CompCount

Float Adjst MC

2007Returns

Q1 2008Returns

DJIM HK 144 US$273B 51.1% -18%

DJ HK 334 US$585B 44.59 -20

DJIMChina/HK Titans 30

30 US$180B 52.04 -17

Sector DJ HK DJIM HK Q1 2008 Q1 2008Oil/Gas 75% 74% -15% -14%BM 28 72 -35 -36Indust 30 31 -20 -23CG 38 35 -20 -20HCR 22 8 -17 -19CS 31 42 -20 -17Telecom 78 97 -13 -15UTI 23 28 -.11 -6FIN 53 --- -24 -26TECH 14 8 -30 -28

DJ HK (-20) DJIM HK (-18)Sector Performance2007

51%(2007)

45%(2007)

Top 5 Comps (Q1 08)

DJIM HK DJ HK DJIM ChinaHK Titans 30

China Mobile China Mobile China Mobile

CNOOC CNOOC CNOOC

Esprit Hldgs Sun Hung Kai Esprit Hldgs

China Unicom Cheung Kong China Unicom

HK China Gas Co

HK Exchanges & Clearing

HK China Gas Co

HK Islamic China Index

HK Social-Ethical Funds?HK Islamic China Index Fund (Nov 07)Non-Muslim Investors

Islamic Mortgages by non-Muslims in MalaysiaAUMS: $55M (April 30)Going Forward:

Cross ListingETFs

Hong Kong: Islamic Asset Management Hub

VisionWillMeansLevel Playing FieldCritical MassOpportunityExpansionDevelopment