California-based Franklin Templeton is building its Malaysian presence with a view to boosting its investor base for equity and fixed-income asset management, particularly on the Islamic funds side.
Having launched its first two institutional sharia-compliant strategies in September – one global equity and one Asia ex-Japan equity – the asset manager plans to launch a global sukuk (Islamic bond) product in first quarter of 2011.
The two newly launched strategies are initially available only on a segregated basis for institutions, but the firm will roll them out at some point as pooled vehicles or retail funds.
That may happen any time in the next nine to 24 months, says Stephen Grundlingh, head of Southeast Asia at Franklin Templeton in Singapore. “But there are a number of factors that may bring the date forward or delay it,” he adds.
Launching retail funds, for example, can present operational challenges, such as over where to domicile funds, says Grundlingh. “We may look at establishing a Luxembourg Sicav, although this will ultimately depend on where and how we want to distribute these products,” he adds.
“We’re confident we should be able to deliver sharia products that are competitive in terms of performance relative to conventional funds. Having said that, it’s still early days, and so far we’ve not had any particular difficulties finding sufficient [sharia-compliant] opportunities.” (He is referring to the fact that Islamic law places restraints on the types of stocks that can be included in a portfolio.)
For the time being, Franklin Templeton is managing its Asian and global sharia equity strategies out of both Kuala Lumpur and Singapore. Over time, Grundlingh expects the management of its sharia portfolios to take place almost entirely out of Malaysia, as the firm builds capacity there.
With regard to the planned sukuk strategy, Franklin Templeton is adding to its global sukuk investment team, and is also making hires to support its conventional and sharia business in Kuala Lumpur. For example, Aznul Kamal Khalid joined in October as head of business development from Malaysian firm RHB Investment Management, and the firm is also seeking a sukuk investment manager.
Following Franklin Templeton's Malaysia office opening in early 2009, there are now seven staff there, and the next hires are likely to be in fixed income. “As we grow our assets and add more strategies, it’s conceivable we will increase the number of staff over the next six to 12 months,” says Grundlingh, adding that the office has capacity for a 20-plus headcount.
It is also likely to transfer some of its team from the Middle East to Kuala Lumpur or at least work very closely with the Middle East team. Grundlingh says this is in line with the firm’s aim to make Malaysia its global sharia hub and reflects its commitment to the Malaysia International Islamic Financial Centre initiative. Moreover, most of the operational support is provided out of Singapore and elsewhere, but over time more of these functions may be transferred to Malaysia.
Grundlingh says he expects fixed-income assets to grow particularly strongly over the next year, based on the current business pipeline, both on the sukuk and conventional side. He adds that the firm has experienced significant growth in its equity assets over the past year.
That said, while sharia assets are expected to grow substantially, they are unlikely to constitute more than a third of conventional assets, says Grundlingh. (The firm has some $1 billion in Malaysia-sourced assets, of which less than 10% is in fixed income, close to 15% is in sharia-compliant investments and the balance is in conventional equity strategies.)
An increasing number of sharia mandates are being awarded this year because a lot of institutions that had planned to give out sharia mandates in 2009 held back – hence the backlog is now being cleared, says Sandeep Singh, Franklin Templeton’s country head for Malaysia.
On the retail side, the firm’s conventional asset-management licence doesn't allow it to offer retail funds, says Grundlingh, whereas its Islamic licence allows for the sale of retail sharia funds.
“The conventional retail funds market in Malaysia is still very closed and dominated by local players, a few of which have tie-ups with international firms,” he adds. “Over time we hope to see the market open up to allow more foreign players to come in directly.”