In tandem with greater financial market integration and improved information access in the advent of information technology, these obstacles have significantly diminished over the decades. The recent financial turmoil however, has ignited a debate on whether the benefit of portfolio diversification is overstated considering the relatively low idiosyncratic risk vis-a-vis systemic risk in times of high volatility, and prevalent correlation breakdowns that occurred among asset classes, especially at the height of the financial crisis. In my view, the emergence of such findings does not question the desirability of diversification, but rather, heightens the need for new and expanded methods to fine-tune the traditional portfolio optimisation approach. A growing class of investors are steering away from the traditional portfolio theory’s emphasis on a normal bell-curve distribution and choosing instead to embrace the “Black Swan” idea expounded by author Nassim Taleb or the “New Normal” proposition by PIMCO, in which the distribution of outcomes are flatter with fatter tails. The idea basically characterises higher likelihood of outlier events following the observed major structural breaks from historical trends. To my mind, such non-normal distribution even further underscores the importance of diversification strategies to attain a reasonably stable return and the necessity for investors to be nimble in the face of uncertainty. ii)  Diversification by regional central banks and institutional investors  Central banks reserves continue to serve as an important safety buffer for the country and reflect the strength of the economy.

The most recent significant development was the establishment of International Islamic Liquidity Management Corporation in Kuala Lumpur. This corporation will act as a conduit to issue highly rated short-term  4  BIS Review 162/2010  Islamic instruments to enhance cross-border liquidity management and provide Islamic financial institutions with an additional avenue to manage their short-term liquidity. Complemented by other initiatives under the “Malaysian as an Islamic Financial Centre”, I am quite confident that Islamic financial markets in Malaysia, for both ringgit and foreign currency, is set to thrive in the coming years. Recently, we have allocated a small portion of funds to be disbursed to prospective and existing Islamic Fund Management Companies to invest primarily in foreign currency sukuk. This will provide a platform for fledgling fund managers to build track records and spur their growth of asset under management, besides broadening the sukuk market in Malaysia. In parallel, this initiative is also expected to catalyse the development of end-to-end value chain capabilities, encompassing the areas of secondary market trading and supporting infrastructures. Conclusion I would like to end my remarks by concluding that in the current global economic environment, uncertainties loom large and we have to be mindful of the challenges ahead, either as an investor or policymaker. This conference is indeed very timely to encourage open discussions on key themes in global investing, and hopefully we can all gain new insights in managing the exciting and challenging times ahead. Thank you for your kind attention. BIS Review 162/2010  5