Islamic market still underserved

Advisors might not be comfortable discussing religion with clients, but when that religion dictates how those clients invest, it’s not something that can be ignored. Yet that’s precisely what’s happening, and it could be preventing as many as 600,000 Canadians from seeking financial advice.

While every religion has its own set of values that must be considered when investing, arguably none is as strict as some interpretations of Islam, which may stipulate, among other things, that its followers will not invest in alcohol, tobacco, pork-related products, conventional financial services (banking, insurance), weapons and defence, entertainment (hotels, casinos/gambling, cinema, pornography, music, etc.) or any interest-paying instruments frequently used by mutual funds as overnight or temporary investments.

Although Statistics Canada lists Islam as the fourth largest religion in Canada by population, few financial institutions have embraced this demographic and have thereby left its financial needs unmet. Advisors and clients alike are not informed about the options that are available. And many of the products that have been offered in an attempt to serve this market have fizzled.

Those within the Muslim community believe there is a multi-million-dollar opportunity for the one that can make it work. Asif Khan is among them. Khan is the chairman and CEO of FrontierAlt Investment Management, a company he formed in 2003. Two years later he took over the mutual fund family run by Orbit Mutual Funds Management Ltd. and renamed it FrontierAlt Funds Management, which is run as a subsidiary company to FrontierAlt Investment.

Then, in 2006, the company spun off another subsidiary called FrontierAlt Oasis Funds Management to cater to the Muslim community. The first two offerings, rolled out in November of last year, are the FrontierAlt Oasis Canada Fund and the FrontierAlt Oasis World Fund.

So far, the funds are off to a slow start, at least when compared to more traditional funds. Oasis World currently has about $5 million in assets under management while Oasis Canada has AUM of about $3 million.

The funds’ holdings are based on the companies included in the Dow Jones Islamic Indices, in which companies are pre-screened by a committee to make sure they comply with Islam’s Shari’ah law.

Khan has been here before. In 1999, he started up the Navigator SAMI (Socially Acceptable Market Investment) Fund, which later became the Dynamic SAMI Fund, but the product barely made it off the ground. After floundering for years, that fund was wound down last August. The fund failed to inspire investors, topping out at between $8 million and $9 million in assets.

Theories abound as to why the fund never took off: lack of awareness of the product within Muslim communities; the lack of a Shari’ah investment committee overseeing the fund’s holdings; and, in its final days at least, a lack of marketing of the fund from the sponsoring company.

The attitudes of the advisor community didn’t help.

“When we were marketing this fund to the investment advisors across the country, we found that because the advisors didn’t understand the product and they didn’t understand the community, there was a lack of effort marketing to the community because most of their efforts went for the low-hanging fruit,” says Khan. “This, in fact, is a low-hanging fruit if you are able to penetrate and spend the time to educate yourself.”

This time around, Khan is focusing his attention on community leaders rather than trying to market his funds through more conventional means.

If the experience of Saturna Capital, based in Bellingham, Wash., is any indication, it’s a painstaking approach, but it has merit. Saturna runs a number of funds, including several under the Amana brand, which caters to the Islamic investor. So far, company officials have visited over 300 mosques and Islamic centres across the States, often preaching to rooms of about 35 people, to educate Muslims about their investment options. The payoff is in the numbers: assets under management grew to $650 million from $40 million in 2003.

Although Saturna is minuscule next to other U.S. funds, Failaka Advisors, a corporation based in Dubai, United Arab Emirates, that was set up to monitor advancements in the field of Islamic investment funds, recognizes it for running the highest-returning Islamic fund focusing on U.S. equities.

“Our story has been the returns on the funds,” says Monem Salam, director and vice-president of Islamic investing at Saturna. Annual returns have been so strong that advisors are selling the fund, irrespective of the fund’s Islamic affiliation, simply based on performance. Lipper lists it as one of the best large cap value funds or growth funds in the U.S.

Recently, Salam says he’s been fielding more calls from advisors who want to come on board, as Muslim clients are asking more questions about the availability of products that comply with their faith.

Currently, according to Imtiyaz Ahmad, vice-president of Islamic markets with FrontierAlt, a large number of the Muslims who immigrate to Canada remain confused about investing. Many simply put all of their money into purchasing a home, for lack of another perceivable alternative — which, in some ways, could be construed as the modern-day equivalent to putting money under the mattress.

The arrival of a new Canadian option for Islamic investors has not gone unnoticed. In the April edition of “The Monthly Advisory,” a newsletter TD Waterhouse sends out to its private client business, the bank offers a brief introduction to the two new funds and encourages “clients wishing to gain investment exposure that is congruent with their faith” to consult their investment advisors about the potential of these new funds.

Dilk Dhanapala, a CFP, is not Muslim, but he is aware of their value system. “My job as an advisor is to understand our clients’ goals and wishes, and their value system, not necessarily to answer questions but to be able to provide them choices,” says the branch manager and advisor with Life Wealth Planners at RBC Dominion Securities.

This isn’t an issue for advisors right now, he says, because until recently, there wasn’t any option for Muslim investors, but it will become an issue as more products come to market and clients become aware of their choices.

As in any religion, there are degrees to the Muslim faith. Many Muslims likely aren’t even aware that they might be contradicting Shari’ah law, but Dhanapala believes many Muslim clients would make changes to their investments if they learned that was the case.

“If they had a vehicle to help them, they would do it,” he says, adding that those advisors who are aware of the questions to ask will be further ahead.

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(04/20/07)

Mark Brown