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Allan Lane, Algo-Chain

Saudi based Alinma Investment stuns the market with their Sukuk Bond ETF launch


By Allan Lane, Algo-Chain – With all eyes on the Middle East as the stand-off between Saudi Arabia and Russia for the dominance of the world’s oil markets plays out, you could be forgiven if one of the biggest launches in the ETF space in many a year passed you by.

By Allan Lane, Algo-Chain – With all eyes on the Middle East as the stand-off between Saudi Arabia and Russia for the dominance of the world’s oil markets plays out, you could be forgiven if one of the biggest launches in the ETF space in many a year passed you by.

The ETF under the spotlight this week is the Alinma Short Maturity Sukuk Bond ETF, which listed on the Tadawul Exchange in Saudi Arabia at the back end of February. With an initial seed in excess of USD300 million, it is fair to say the institution behind this ETF means business and adds to the steady flow of innovative products recently launched in the Fixed Income ETF arena.  Coming with a management fee of 0.25 per cent per year, this is considerably cheaper than the 0.65 per cent fee charged by SP Funds which launched a rival Sukuk Bond ETF a few weeks earlier.

In the same way that High Yield Bond ETFs have become the poster child of the investing community, it has been long speculated that the Sukuk Bond market would follow suit.  Issues with limited liquidity have been quelled with the increasingly common view that the ETF wrapper itself provides a mechanism that enables an orderly functioning of the market in times of distress.

For those readers not familiar with Sukuk Bonds, think of them as financial securities that are compliant with Shariah Law by paying profits, which by their nature are not guaranteed, unlike interest payments which are. The Saudi Sukuk Bond market is approximately USD55 billion with 33 listings. It is nowhere near as big as the US Treasuries market, but what has not gone unnoticed is the size of the potential target audience which can only invest in products that meet the standards of what is otherwise known as Halal investing. With the target market stretching from Indonesia to Saudi Arabia, to the US, and all stops in between, it is clearly a prize worth fighting for.

Perhaps less appreciated is the realisation that ESG investing principles have much in common with the investment philosophy behind Halal investing, so timing wise, this ETF launch is very much in tune with the sentiments that are currently dominating the Western economies. These funds must adhere to the principles of the Muslim religion, and with ESG funds, exclude investments in firms which derive a majority of their income from the sale of alcohol, pornography, gambling, military equipment or weapons.

As for the construction of the ETF, it has been designed to track the iBoxx Tadawul SAR Government Sukuk 0-5 Index, which was Tadawul’s initiate and iBoxx was selected as a partner to develop such index who’s ambition is to become the key benchmark provider in this space. Given the many years of experience that iBoxx has in designing Government Bond Indices, there’s the wealth of accompanying research collateral that the team at Alinma Investment will be able to benefit from as they look to gain the attention of institutional investors.  This index tracks Sukuk Bonds denominated in the local currency of Saudi Riyals, with currency symbol SAR.

One of the key messages coming out of Alinma’s headquarters in Riyadh is that this ETF has been launched to provide a low risk investment vehicle for the end investor. As good timing goes, the arrival of what is essentially a short-dated Government Bond fund is somewhat prescient.  The world is currently awash with volatility and very few investors will have enjoyed being fully invested in the equity markets.  There has never been a better time to reap the benefits of a well-diversified multi-asset model portfolio.  With over USD4 trillion in assets in these popular pre-packaged investments solutions, it’s surprising how many finance professionals are unfamiliar with this eco-system.  As a fund provider, if your fund is not embedded in a distributor’s Model Portfolio, you will be missing out on much future business.

While many higher risk Model Portfolios delivered a poor performance in February, it will have not gone unnoticed that on a one to 10 scale, the first four risk categories all provided a positive return during the month. Until the recent launches of Sukuk Bond ETFs, it had proven very difficult to construct a Model Portfolio for GCC based investors, but this is no longer the case and it is not out of the question that this opening up of the Saudi Arabia Government Bond market could prove a key step going forward for other investors outside of the region.

Over the last year, an increasingly positive message has been emanating from the GCC region regarding their plans to modernise the infrastructure to enhance their reputation on the world’s financial markets stage by embracing the ideas and benefits of the FinTech revolution. At an event held at the CISI offices in London last year, I had the honour of hearing the ambitious vision of Abdullah Albusairi, who is the Director at Kuwait & Middle East Financial Investment Company, who were the sponsors behind the launch of the KMEFIC FTSE Kuwait Equity UCITS ETF.  To this we can now add Alimna’s stunning ETF launch, with more than a USD300 million in seed, this fund is already large enough to be used by institutional investors across the globe.

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