KUALA LUMPUR: Global investment management group Franklin Templeton sees greater optimism among investors for sukuk issued by the Malaysian corporate sector as compared to government bonds such as Malaysian Government Securities (MGS) and Government Investment Issues (GIIs).

The group’s Malaysian Islamic fund management unit Franklin Templeton GSC Asset Management Sdn Bhd is positive about corporate sukuk issuances this year as they are deemed to be less volatile compared with government bonds.

“We are optimistic about corporate sukuk as the [yields] are higher than MGS, for instance,” said Nor Hanifah Hashim, the unit’s head of Malaysia fixed income and sukuk.

“There are higher credit risks involved when it comes to corporate sukuk, but given the fact that it promises a better return, we think that this supports the higher credit risk [attached] ,” she told The Edge Financial Daily.

For government bonds, Nor Hanifah sees some volatility due to external events such as US Federal Reserve rate hikes, President Donald Trump’s policies, and developments in the eurozone and China.

Sukuk issuance has become a popular method of raising money in the Malaysian corporate world. The latest to do so include telecommunications giant DiGi.Com Bhd which has come out with two Murabahah sukuk programmes to be used for capital expenditure, carrying a combined limit of RM5 billion in nominal value.

RAM Rating Services Bhd, in its January sukuk snapshot report, said Malaysian sukuk issuance stood at RM129.4 billion as at end-2016, of which 50.1% consisted of corporate sukuk, followed by government papers at 34.4%.

Nor Hanifah said another factor contributing to the volatility of government bonds is the high foreign holdings of MGS and GIIs.

According to Bank Negara Malaysia’s (BNM) data, total foreign holdings in Malaysia’s conventional and sukuk space totalled some RM215.63 billion at the end of last year.

“Foreigners held some 47% of MGS as at December 2016, and 9.2% of GIIs in the same period. In comparison, foreigners hold less than 5% of corporate sukuk, hence there is more stability for corporate sukuk when it comes to events that may trigger outflows,” said Nor Hanifah.

Among corporate sukuk, the asset management firm’s preference is infrastructure sukuk.

“The sector that we like is [infrastructure] due to the ongoing construction jobs. We are ‘neutral’ on the banking sector as we feel that banks are somewhat affected by the [general] slowdown in the market,” said Nor Hanifah.

“For [Franklin Templeton], we have a credit equity model, which looks at the corporates’ cash flow and ability to refinance,” she said. “And [the model] is also able to project any potential deterioration of credit … due to this thorough analysis, we have never experienced any incidences of defaults [on credit] by corporates.”

Nor Hanifah is in charge of the Franklin Malaysia Sukuk fund, which was set up on Dec 8, 2015 as the firm’s first retail fund in Malaysia. Its asset size as at Dec 31, 2016 was RM22.5 million.

“The types of funds that we invest in are syariah-compliant. Predominantly, we invest in Malaysian ringgit sukuk. We do have the flexibility to invest up to 20% of our funds in non-ringgit-denominated sukuk but at the moment we choose to invest in only ringgit-denominated sukuk. It was a conscious decision given the volatility of [the ringgit against the US dollar] last year,” she said.

Nor Hanifah said 80% of the firm’s investments are in corporate sukuk and the rest in government bonds. “As for the tenure of investments, we prefer the medium term, with a tenure of three to 10 years,” she said.

The fund achieved a gross return of 5.67% since its inception up until last year.

“For 2017, our target gross returns are [lower at] 4.5% to 5% as last year we had quite a few unexpected events that worked in favour of the sukuk market such as the lowering of the statutory reserve requirement in January, Brexit in June and the overnight policy rate cut by BNM in July [that resulted in the lowering of fixed deposit rates].

“It was a good year up to November when the US presidential elections happened, but we were fortunate as we traded out of the government bond market just in time and were able to protect our funds. We are hoping for the same kind of gross return of 5.67%, but our target is kept at 4.5% to 5%,” she said.

Nor Hanifah said a differentiating factor of the fund compared to other offerings is its quarterly dividend payment.

“Our target clients are depositors who are looking at the not-too-volatile kind of fund performance, and who seek better returns than what they can get from fixed deposits,” she said.

The fund has two share classes, namely a retail share class and an institutional share class. The minimum investments for the two classes are RM1,000 and RM1 million respectively.