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Interview with Akber Khan, Senior Director at AI Rayan Investment

Akber Khan is Senior Director at Asset Management at Al Rayan Investment. After launching the business in 2010, ARI's assets under management have grown to more than $1.3 billion, the majority of which are segregated mandates from institutional clients. Akber personally manages some portfolios and oversees all the others.

Can you give us an introduction to yourself and your professional background?

I've been involved in the investment industry for over 20 years. I currently work at Al Rayan Investment, in Doha, where I’ve been since early 2009. I look after asset management. Prior to Qatar, I was in London and worked for Deutsche Bank for over 11 years. I started off in UK equities, then moved to European equities and latterly in emerging market equities. I had roles in both trading and research.

Can you tell us about Al Rayan and your role specifically?

I was effectively the first employee within asset management. It was a start-up when I joined and now, we manage around $1.3 billion of assets. Al Rayan Investment is a subsidiary of a Qatari bank, Masraf Al Rayan. It is an Islamic bank, so all investments within asset management are Sharia-compliant. We focus primarily on two asset classes, public equities (across the Gulf) and global fixed income. Sharia compliant bonds are called Sukuk which is what we invest in. 

As in any small business, I have a number of roles that entail part-portfolio manager, part-CIO, part-people manager, part-head of the business. Apart from the day-to-day focus on investments and investing, I get involved in a number of areas from finance to legal, marketing to compliance. In the earlier years, it was critical to rapidly institutionalise the business. We now have sufficient resources with clear delineation of roles which allows me to concentrate on managing and growing our human and financial assets.

What is meant by Sharia compliance? And how do these funds differ, overlap, and even go further than ESG investing when it comes to risk?

I'll start with trying to demystify what Sharia compliance means.

“In our universe -- fixed income and equities -- a security is Sharia-compliant or not. There is no grey area where it sort of is.”

The primary difference between us and a conventional asset manager is that we have a defined universe of compliant securities based on our Sharia criteria. Screening our universe for companies that fit our ethical and sustainable criteria is part of our DNA; managers that have begun to use ESG screening in recent years will find this familiar. Otherwise, our investment processes, risk management, portfolio construction and management, client engagement, communication, and so on are broadly the same.

The terminology for our screened fixed income universe is relatively straight forward: we only invest in Sukuk, these are essentially asset-based bonds.

In equites, we screen for Sharia-compliance based on two criteria:

  1. Sources of revenues: Here lies considerable overlap with the ‘S’ part of ESG, being socially responsible. Businesses involved in “undesirable” activities, such as the production of weapons, tobacco, pornography, gambling, alcohol, etc are excluded.
  2. Balance sheet ratios: There are balance sheet ratios that must be met for a company to be deemed compliant; ‘excessive’ debt or ‘excessive’ cash would rule out a security.

Effectively, Sharia compliant investing formalises a risk management framework for an investor to work with.

Within an economic cycle, as an economy accelerates out of a slowdown, the strongest investment returns generally come from companies with the highest leverage. However, these companies are also most vulnerable to negative shocks and as the cycle turns, they are at greatest risk.

“Instead of relying on a fund manager to time when to buy and sell these higher risk companies, this framework prevents any of these from being purchased in the first place.”

Data has shown that over the long term, and in aggregate, Sharia compliant companies outperform conventional ones. A significant proportion of our investors are not Sharia sensitive; they come to us for performance and the quality of service they receive. We just happen to invest based on certain ethical principles in companies that are managed in a more sustainable manner.

What types of specific disclosure does Al Rayan require from companies to be shariah-compliant?

For equities, we require information on sources of revenues as well as various balance sheet disclosures including cash and debt. The information we look for partially overlaps with ESG requirements.

 “We find there's often a high correlation between companies that are Sharia compliant and those with good ESG scores.”

How do hydrocarbon producing countries fit into tackling climate change?

Hydrocarbons are a commodity, and if some producers suddenly halt production, the gap will be filled elsewhere. If Gulf governments decide to cut 15% of their oil and gas production every year, and do it in isolation, these reductions will simply be met by higher output in other parts of the world.

But what if all producers agreed to halt production immediately? Prices would double and triple, at least, and the global economy would come to its knees.

 “The primary onus is not on commodity producers to reduce output, it’s on consumers to change their habits and stop consuming.”

What is needed to ensure that companies in the Gulf are not harmed in an asset allocation process based on ESG criteria?

For companies in the Gulf, one of the biggest impediments to securing better ESG scores is that, on average, they have poor disclosure. Some regional companies are relatively good ESG stakeholders, the issue is more to do with the ‘G’ part of ESG -- transparency and disclosure.

Uniformity in ESG standards would reduce the noise and allow management teams to focus on trying to improve their ESG scores. But the first step is to improve overall disclosure. That said, some companies in the Gulf do have world class disclosure, ESG or otherwise and boast some of the highest ESG ratings in the world for their sectors. 

What is needed for companies to start thinking about and acting on climate change?

There's an overarching discussion on whether governments should make changes mandatory or wait for the private sector to take the lead. It’s a discussion that differs across countries. One of the interesting takeaways from COP26 was governments seemed to shift emphasis from themselves to the private sector.

I think Gulf economies will focus far more on efficiency, carbon offsetting, and productivity gains to reduce carbon intensity and wastage of their extraction and transportation process, rather than focusing on ending the extraction process itself.

What excites you most about ESG?

We finally have a platform for a meaningful conversation about the negative effects of unbridled capitalism. It would be hoped ESG leads to an understanding of success that is not purely financial, and in the long term more sustainable. 

 “A more sustainable system requires less inequality. If we're able to have a more balanced conversation, that is what excites me about ESG.”

We are moving in the direction where global capital is more aware of the consequences of asset allocation. Now we are able to at least recognise the impact of what we do, that's the first step.

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