Cover Story: Backed By Solid Gold

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on December 4, 2017 - December 10, 2017.

What we have in the market now are plain-vanilla compared with those in developed countries. There are smart beta, inverse, leveraged and synthetic ETFs, just to name a few. So, we have decided to come out with a commodity-based ETF. > Akmal

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The country’s first shariah-compliant exchange-traded fund (ETF) backed by physical gold will be listed on Bursa Malaysia on Dec 6. It will offer individuals a new way to invest in the precious metal.

Unlike conventional gold ETFs, the TradePlus Shariah Gold Tracker’s assets will be held in gold bars on behalf of the investors. According to Akmal Hassan, managing director of AIIMAN Asset Management Sdn Bhd, the fund’s external manager, investors can choose this route to invest in gold rather than in the precious metal itself as the performance should be the same.

“People have different reasons for buying gold, whether it is jewellery, gifts or collectables. However, if they decide to buy gold for investment, they can invest in the fund. And if they want to go back to physical gold, they can redeem their investment,” says Akmal.

He adds that a unique feature of the ETF is that individuals can redeem their investment in either cash or physical gold. “Unlike conventional gold ETFs, the fund’s assets have to be segregated and allocated. This means the fund can only be backed by physical gold. 

“That is why it is possible for investors to redeem the gold anytime they want. However, they have to travel to our vault in Singapore to get it. And there is a minimum amount (of 500,000 units, or about 5kg of gold) because if the amount is too small, it will be difficult to manage.”

The TradePlus Shariah Gold Tracker, launched by Affin Hwang Asset Management Bhd, will invest a minimum of 95% in gold bars while the rest is kept in Islamic money market instruments or fixed deposits. The ETF will track the LBMA Gold Price AM Index, widely regarded as the international standard and benchmark for daily gold prices. 

A unit in the fund will represent ownership of 0.01g of gold and cash. As the ETF is an Islamic product, the creation and redemption of the units must be on a spot basis and cannot have any deferment, either in payment or the delivery of gold. 

Affin Hwang and AIIMAN have undertaken to seed US$5 million for the initial creation of units for the fund. The proceeds are then used to purchase about 110kg of physical gold from LBMA-accredited refineries. The number of gold bars could increase or decrease in tandem with the size of the fund. 

However, the number of gold bars available in the vault does not limit the number of ETF shares for sale, says Akmal. “As the demand for the fund increases, new gold bars can be purchased and the number of shares available will increase. However, the purchase of new gold bars also depends on the gold supply in the market. If there are insufficient gold bars to be purchased, the fund may not be able to increase its gold holdings.”

The imminent launch of the ETF follows the introduction of the Shariah Gold Standard by the Accounting and Auditing Organization for Islamic Financial Institutions, World Gold Council and Amanie Advisors last December. The standard enables gold to be accepted as a shariah-compliant investment for the first time. According to Akmal, there has only been one other shariah-compliant fund backed by physical gold since the standard was introduced.

He says the introduction of the fund will pave the way for more innovative ETF products in the country, which have seen slow growth despite being available for 12 years. “The ETF market outside of Malaysia is huge. Globally, there are about 5,000 ETF products worth about US$4 trillion. This compares with only eight ETFs on Bursa worth about RM2 billion,” he adds.

“There is also a lack of innovative ETF products in the country. What we have in the market now are plain-vanilla compared with those in developed countries. There are smart beta, inverse, leveraged and synthetic ETFs, just to name a few. So, we have decided to come out with a commodity-based ETF. It is new in the Malaysian market and inclusive to all as it is shariah-compliant.”

The first ETF in the country was the ABF Malaysia Bond Index Fund, which was listed in July 2005. It is the only fixed-income ETF in Malaysia. Other types of funds were subsequently introduced. 

The conventional equity ETFs currently listed on Bursa are the FBM KLCI ETF, CIMB FTSE Asean 40 Malaysia and CIMB FTSE China 50. The shariah-compliant equity ETFs are MyETF Dow Jones Islamic Market Malaysia Titans 25, MyETF MSCI Malaysia Islamic Dividend, MyETF MSCI South East Asia Islamic Dividend and MyETF Thomson Reuters Asia Pacific Ex-Japan Islamic Agribusiness. 


Gold investments are timely now as prices are expected to rise in the future, says Akmal. “We are not in a bear market now, but you never know. Historically, gold outperforms equities in bear markets. It remains resilient, having performed better than the S&P 500 index during the 1973/74 market crash, the oil crisis of the mid-1980s, the crisis of the new millennium combined with the tax bubble in the 1990s and the global financial crisis in 2008.

“Meanwhile, based on the technical analysis as at July, gold is at the US$1,200 level and the market consensus seems to be that asset prices are bottoming out, which is why there is a strong ‘buy’ call on the commodity. That is why we advise people to invest in gold — because the market view is that prices will go up in the next 12 months.”

He maintains a neutral to slightly positive outlook on gold for the next 12 months. “We think that the gold price has bottomed out and may likely trade range-bound in 2018. Currently, the markets have not priced in any geopolitical flare-ups. And if those take place, we would likely see the gold prices inch higher, given its safe-haven status. 

“We think prices will be well supported, given the improvement in demand in key buying nations such as India and China and some demand from using gold to hedge against the soaring performance of equities. However, if US interest rates rise too much and too quickly, it may weigh down gold’s performance, although it is quite unlikely given the Federal Reserve’s guarded view on inflation.” 

Gold has traditionally been seen as a safe-haven asset. Its reputation as a hedging tool remains intact, as evidenced by the rising demand for the precious metal, which jumped 14% in 2015 compared with just 2% in 2010, according to Akmal.

Apart from having a low correlation with most assets, including US and Asian equities and bonds, gold also has an inverse correlation with the US dollar. “The falling dollar increases the value of other currencies. When this happens, investors all around the world will look for alternative investments to store their value, and gold is one of them,” says Akmal.

“Subsequently, this rise in demand will help increase the price of gold. From a Malaysian perspective, it is actually good to use gold to hedge against a weak ringgit. In fact, in US dollar terms, gold has been depreciating in the last five years. But the ringgit has allowed investors to gain 6%.” 

Gold can be used to reduce portfolio volatility and minimise losses during extreme market conditions. Akmal says that out of seven bear markets — the Gulf War, the long-term capital management crisis, the dotcom bust, Sept 11, the global financial crisis, sovereign debt crisis and 2012 recession — the precious metal stands out, having not lost as much as the other asset classes. So, having gold in your portfolio is a good way to mitigate risks. 

“However, gold is not very suitable for those seeking total returns. It is always good for diversification, hedging and mitigating risk, especially during weak periods of the market. According to a World Gold Council study, holding 2% to 10% in gold can improve your portfolio performance,” says Akmal. 

To prove this scenario, Affin Hwang performed back-testing with the suggested portfolio allocation and found that over a long-term investment horizon, the portfolio with an allocation to gold performed better than the pure Malaysian equity portfolio. “In one year, the gold portfolio provided lower returns than the equity portfolio. However, over a three-year period, during which the market was bearish, the equity portfolio saw negative returns while the gold portfolio made money,” says Akmal. 

“Over a five-year period, the equity portfolio had lower returns than the portfolio with gold. And over a 10-year period, it was clear that the portfolio with gold did a lot better than the Malaysian equity portfolio.” 

Realising that a gold fund would be a good addition to the list of ETFs in the country, the fund house initially planned to launch a conventional gold ETF. However, it decided to structure a shariah-compliant version instead, after seeing the initiatives taken by the regulators to introduce shariah guidelines that would facilitate new types of ETFs. 

“When we started the project two years ago, there were already a lot of conventional gold ETFs, but none was shariah-compliant,” says Akmal. 

The fund house is planning to charge an annual management fee of up to 0.5%, but aims to charge a lower amount when the fund stabilises. “We do not intend to charge higher than that because ETFs are meant to be a low-cost alternative to unit trusts. We have to look at the management and expense ratio and manage from there. But it will be close to the existing fee in the market, which is 0.3% to 0.4%, making us competitive,” says Akmal. 

Back then, Affin Hwang’s ambition was to introduce the first shariah-compliant gold ETF in the world. However, following the introduction of the shariah gold standard, Singapore-based State Street Global Advisors announced that its ETF backed by physical gold had been certified by Amanie Advisors as fully compliant with the standard. 

“However, the advantage we have over other funds is that our fund is purely shariah-compliant from the get go, whereas the others are modified funds,” says Akmal. 

“We ensure that the confidence is there and we believe in our product. That is why we managed to get approval from our shareholders to provide the RM20 million seed money for the fund. We are also getting positive feedback for [future] funding from institutional investors. Hopefully, we will be able to secure some within the next six months to grow the fund.”


Among the reasons the gold-backed ETF was made shariah-compliant was to leverage the growing global interest in socially responsible investing (SRI), says Akmal.

According to the Securities Commission Malaysia’s Islamic Wealth Blueprint released in January, Asia’s SRI market grew 32% to US$53 billion in 2014 compared with just US$40 billion in 2012 due to the strength of the country’s Islamic finance industry. Malaysia has the largest SRI market in Asia, with assets under management (AUM) of US$15 billion, accounting for 34% of the total Asian AUM. 

“SRI has got a lot of momentum from major investors and pension funds that subscribe to its value propositions. The Employees Provident Fund (EPF) is one of them. Now, they are moving a step forward by making a certain amount of their assets shariah-compliant with the introduction of its Simpanan Shariah,” says Akmal.

“Additionally, we think that if members have the option to choose our gold ETF to invest money from their Account 1, it would provide the members with good diversification as it would give them the opportunity to leverage the benefits of the commodity.”

A wholly-owned subsidiary of Affin Hwang, AIIMAN is the external fund manager of 14 of the former’s shariah-compliant funds — 10 retail and four wholesale funds. AUM stood at RM13.29 billion as at Oct 31. In terms of asset classes, about 60% to 70% is held in money-market funds while the other 30% to 40% is held equally in equities and fixed income. AIIMAN was previously known as Asian Islamic Investment Management Sdn Bhd.

Year to date, the funds managed by AIIMAN have delivered positive returns. Those of the Malaysian equity funds ranged from 12% to 18% while the Asia-Pacific ex-Japan equity fund saw a return of 16%. The fixed-income funds that AIIMAN manages have returned about 5% to 6%. Akmal is optimistic that it will be able to meet expectations in the years to come and is looking to venture into new opportunities. 

After eight years in operation, AIIMAN has RM13.3 billion under management (as at Oct 31). Over the years, the firm has been managing private mandates. But now, it sees the opportunity to expand its business via the retail segment. 

“In 3Q2017, we received approval from the SC to enter the retail distribution space. We are now awaiting the approval for our registration with the Federation of Investment Managers Malaysia before we commence our plans,” says Akmal.

“Going forward, we are planning to seek regulatory approval that will allow AIIMAN to be a producer of unit trusts for the mass market. These initiatives augur well for our vision of becoming a one-stop shariah-compliant investment solution provider, serving both retail and institutional investors, that is ultimately aligned with the group’s overall strategy to become a distinguished investment management player in the industry.” 

Despite having a similar structure as Affin Hwang, the two firms will not be competing with each other when it comes to product offerings, says Akmal. Affin Hwang will continue to offer funds to the broader market while AIIMAN will introduce funds aimed at specific target markets. 

“For instance, if we want to enter the equity space, we will structure a high-risk, high-return fund that will only be available to the high-risk profile segment of investors. Of course, all of our products will be shariah-compliant,” he says. 

Affin Hwang and AIIMAN are pushing for more innovative investment products in the country. Akmal says the ETF is only the first product in the pipeline.

However, he is concerned about the lack of awareness of such products among Malaysians. “We find that investors here are not well-versed when it comes to ETFs, how they work and what kind of returns they can provide. For small players such as Affin Hwang, there is only so much we can do to educate investors. We believe it has to involve all parties, including the regulators and authorities. 

“Additionally, there is the challenge of marketing the products. When it comes to distribution, those who can market ETFs are the dealers or stockbroking companies, not the unit trust agents who cater for retail investors. Perhaps a relaxation [of the regulations] can be considered because if unit trust agents are encouraged to sell ETFs, it will definitely help get the word out to investors,” says Akmal. 

In developed markets, ETFs are more popular than unit trusts because they are one of the common strategies taken by active fund managers to diversify and deliver alpha. In some countries, tax incentives are even given to ETF providers. Locally, things are looking up, with the regulators announcing new varieties of ETF products and taking steps to relax the requirements for developing this asset class. 

“Previously, providers needed to have RM10 million in capital to come up with an ETF product. But this has since been reduced to RM2 million. Managers are no longer required to go through principal advisers to submit their applications for new ETF issuances and the transaction fees for stockbroking companies have been waived for ETF products,” says Akmal.

“Hopefully, other players will come up with their own innovative ETF products. We welcome competition as it is healthy. It will help the industry grow, so we look forward to seeing some momentum in the country.” 

Market observers say one of the risks of investing in a physical gold-backed ETF is counterparty risk in its chain of custody, ranging from the trustworthiness of the custodian or vault operator to having adequate insurance protection and concerns that the fund may front-run investors. Akmal says steps have been taken to address these concerns. “Indeed, these risks are unavoidable. However, we have taken steps to mitigate such risks. 

“Before selecting the counterparties and launching the fund, we have performed the necessary due diligence and site visit. To protect investor interest, we have taken steps to ensure that there is sufficient insurance coverage on the assets of the fund while annual and ad-hoc audits will be conducted to ensure that the gold bars are accounted for and safeguarded.”