Financial hub goals 'in line with economic diversification'

BRUNEI DARUSSALAM is looking to becoming a vibrant investment hub, by creating a conducive business and investment environment for industry players.

The second Ministry of Finance, Pehin Orang Kaya Laila Setia Dato Seri Setia Hj Abd Rahman Hj Ibrahim, said the sultanate's financial hub goals were in line with the country's vision to boost the financial industry's contribution to economic growth and by making it a key feature of the country's economic diversification.

The minister said Brunei aims to enhance its status as a serious player in the field of investment on the first day of the Credit Agricole Asset Management Alternative Investments Forum 2008 at the Empire Hotel & Country Club yesterday.

"In line with our strategic focus to develop and promote Brunei as a Regional Islamic Financial Centre, the Brunei International Finance Centre (BIFC) offers a comprehensive suite of legislations and the relevant licenses to cater to the needs of global market players, particularly those active in Asia," he said.

Aimed at ensuring that Brunei stays responsive to the changing needs of the market and customers by providing high quality products necessary to become a world class international financial centre, the BIFC covers banking and finance, asset and fund management, insurance, international trusts and international company incorporation.

Pehin Dato Hj Abd Rahman pointed out several advantages of Brunei, namely its political stability, strategic location, strong and comprehensive legal and regulatory framework, modern infrastructures and the relatively low cost of doing business.

According to the minister, the conducive environment has already managed to attract an increasing number of international financial institutions to the BIFC.

"The effort by His Majesty's government to develop a strong and established capital market in the country aims to provide attractive investment avenues to ensure, at least, part of the excess liquidity will be efficiently circulated and remains within the domestic economic and financial system," he added.

"The Ministry of Finance's issuance of a series of Syariah-compliant government Sukuk Al-Ijrah amounting to a total value of more than $1 billion demonstrates its commitment in this regards."

Though challenging to manage, interest in alternative investments have significantly grown the past five to seven years as pointed out by Dr Hj Mohd Amin Liew Abdullah, Managing Director of the Brunei Investment Agency in a presentation on "Local Government Investments in Alternatives", one of the first presentations in the morning.

He attributed the momentum behind the increased interest on alternative investment products, especially from the institutional investors to increased volatility in the equity markets, low bond yields, huge increase in official reserves and investor sophistication.

Investors which have previously focused mainly on traditional investments, like equities and stocks, are increasingly looking for alternative sources of return that offer diversification, lower overall volatility in their portfolios, better risk-return payoff with higher risk adjusted return, long investment horizon and absolute return targets.

Dr Hj Mohd Amin Liew highlighted advantages of alternative investments such as small capital stocks, convertibles, warrants, event driven strategies, hedge funds and private equity, being that there is better utilisation of risk budget because of the lower correlation between alternative and traditional asset classes.

As alternative investments are relatively illiquid, some with long lock-up periods, investors are able to earn higher returns in the form of "illiquidity risk premium".

In terms of producing positive returns, the direction of the market is not managed relative to any benchmarks, but rather depends greatly on the skills of the alternative asset managers.

In the hopes of reaping the advantages of alternative investments, investors were urged to prepare to accept some drawbacks, which include higher fees, irregular and lumpy returns, lack of appropriate benchmarks, unreliable or even the lack of past performance data and infrequent valuations.

In the Brunei perspective, Dr Hj Mohd Amin Liew said that with alternative investments, there would be better risk-return payoff, portfolio diversification, the chance to learn and gain knowledge from the experience, improved value in traditional asset management, better chance of achieving long-term investment targets, and increase sophistication in the way investors manage the whole investment portfolio.

The challenge of delivering consistent returns over time will face asset managers responsible for the performance of funds managed by institutional investors as they get larger.

The managing director also warned that alternative investments may not suit every investor due to the complexity of the structure, level of risk, understanding of the market and long-time horizon.

"While much of the alternative investment activities may be outsourced, fund owners must set their risk tolerance clearly and retain control over the asset allocation decision and manager selection process," he said.

The Brunei Times