Monday, February 11, 2013

The development of sukuk investment options for retail investors

The Turkish pension system is making changes to allow participants to invest a portion of their assets in sukuk, alongside the existing investments which include local currency government bonds, foreign currency government bonds, stocks, and international investments. Turkish newspaper Hurriyet explains:

Some 75 percent of the pension fund provided by the state can be invested in debt instruments issued by the Treasury, revenue sharing certificates, or sukuks. The remaining 25 percent can be managed in investment instruments such as government bonds, treasury bonds, as well as sukuks, according to the new pension system that has been in effect since Jan. 1.

These changes come on top of other changes that modified the incentive provided to contributions shifting from tax deductibility to government matching of contributions, which went into effect at the beginning of 2013.  As of the end of 2012, the pension fund held assets for 3.1 million participants valued at TL 20 billion ($11.3 billion) according to the Pension Monitoring Center (EGM).  Of these pensions, 2.6 million were individual pension contracts, which now allow investment in sukuk, representing TL11.6 billion ($6.5 billion) in assets.

For investors in Turkey, this opens up investments in sukuk beyond the traditional investor universe of institutions.  There are few opportunities for retail investors to invest in sukuk except through a scant number of sukuk funds, most of which have investment minimums that are accessible for high-net worth individuals but not for a wider market.  

Recently, the first retail sukuk was offered in Malaysia (with minimum investment size of RM1,000 ($324) for DanaInfra Nasional Bhd, a unit of the Ministry of Finance.  The retail component of the sukuk from DanaInfra was oversubscribed by 61%, but not before the Ministry of Finance extended the offering period by a week and hiked the yield from 3.75% to 4% potentially signaling weak demand.  

This represents a significant shift for the sukuk market that has been largely dominated by institutional investors due to the high minimums (often $100,000 or higher).  The challenge to expand this beyond the Turkish pension system (with the exception of Malaysia) remains the low liquidity in secondary markets since a retail investor base outside of the sukuk investments through pension funds will be more likely to need liquidity.  

However, expanding the offering of incorporating sukuk investments into pension systems that allow self-directed investments could be replicated in other countries where the government is a regular issuer of sukuk, where a similar pension plan has been established.  The next step would be to provide a way for self-directed pension plans to have exposure to corporate sukuk and foreign country sovereign sukuk.  This may have to wait until sukuk issuers are required to have sukuk rated, to limit the universe of sukuk that can be included in self-directed pension plans to only those with an investment-grade rating, for example. 

No comments: