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How Indonesia’s hajj pilgrim fund will shift 6% of its assets

Indonesia's two year-old hajj savings fund wants to invest 70% of its assets outside of bank deposits by 2021; it's at 64% today. Its CIO tells AsianInvestor how it plans to do it.
How Indonesia’s hajj pilgrim fund will shift 6% of its assets

Indonesia’s hajj pilgrims fund has $583 million to invest, and not a lot of time to do it. By December, the fund needs to put 6% of its assets into sukuk, real assets, fund investments or gold.

Under regulations in force since February 2018, the IDR142.2 trillion ($9.72 billion) Hajj Pilgrims Sovereign Fund (known as Badan Pengelola Keuangan Haji) had three years to reduce the portion of total assets in deposits or placements with domestic banks from 100% to 30%. It has so far reduced that proportion to 36%, said Hurriyah El Islamy, executive board member for foreign investment and international relations, Indonesia Hajj Financial Management Agency (BPKH), which is responsible for its management.

Hurriyah El-Islamy

The majority of the 64% of assets that BPKH has so far shifted from bank deposits are now held in domestic sukuk, or Islamic-compliant bonds. These are split between Indonesian government sukuk, currently yielding between 6% and 7% after tax, plus a smaller allocation to Indonesian corporate sukuk that currently yield 8% to 9%.

That is largely in line with the annualised 8% that the fund has offered in returns since its inception in February 2018, although savers receive 6% after tax. Hurriya said the goal for foreign investment returns was 7%, although targets were in the process of being reassessed in view of the Covid pandemic.

Hurriyah told AsianInvestor the hajj investment fund is currently lobbying the government to secure an exemption from tax on all investment returns, and to increase the fee that pilgrims are required to deposit in the fund, which has not increased for five years.  

SEEKING DIVERSIFICATION

Hurriya declined to give further details of current investments but told AsianInvestor that the asset owner’s final target allocation is to have 65% of its assets under management in sukuk and another 20% for “direct investments” in real assets, the majority of which she expected to invest in property abroad.

Another 10% will be a broad investment category covering all other investments, with the only stipulation that they are sharia compliant. The final 5% will be invested in gold.

BPKH has identified a list of countries that will be the fund will likely target for investments, a large proportion of which are in Asia, but declined to give more details. All fund investments must be sharia-compliant and related in some way to hajj activities.

The Hajj Pilgrims Sovereign Fund has already placed $5 million in the Awqaf Properties Investment Fund (APIF), which is managed by the Islamic Development Bank. This fund focuses on commercial and residential properties that are devoted to charitable or philanthropic purposes but generate an income. Hurriya said her team had decided to place a small sum in this way to test the waters before it would allocate more.  

The focus on overseas real assets such as property is relatively ground-breaking for asset owners in Indonesia. Hurriya said her fund is the country’s first sovereign-linked entity to be allowed to do so.

“We are working to develop our investment infrastructure, with a focus on sukuk,” she said.

VARYING MANAGER DEMANDS

While the Hajj Pilgrims Fund intends to end up mostly invested in sukuk, it is set to reduce its current investments in the debt in the coming years in favour of a broader array of investments.

In addition, it wants to extend the areas into which it can invest beyond industry sectors related to the hajj  over the coming two to three years, such as food exported to Saudi Arabia or hospitality businesses supporting pilgrims there.

“Currently we must focus on [investments with] hajj-related activities but we are aware that other investments may give better returns,” said Hurriya, declining to say which sectors would be favoured.

Hurriya told AsianInvestor that only managers who focus exclusively on sharia-compliant investing are being considered. Ideally, eligible managers will have a proven track record, preferably reaching back at least five years, although she noted that may not be available in all asset classes.

In addition, all fund houses with a record of two consecutive years of losses will be excluded. And for domestic investment partners, the fund requires at least an A credit rating from a major international rating agency.

For its direct investments, BKHP favours partnering with local companies such as property developers over fund investments. With such investment partners, the criteria requirements would be lighter, said Hurriya.

In addition, the asset owner’s strict credit rating criteria are unlikely to be applied to all foreign investments. She pointed to Saudi Arabia, which has a high proportion of smaller family-owned businesses that may lack a credit rating but have track records often stretching back decades or even centuries.

Savers in the fund are required to provide an investment of just half the cost of hajj, with the other half generated by gains from the fund or provided by the government. The longest waiting period for a hajj pilgrimage is currently 40 years, said Hurriya.

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