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Islamic funds hit $58bn, but ‘challenges remain’

Manama, September 26, 2011

Global Islamic fund assets under management (AuM) grew 7.6 per cent to $58 billion in 2010, with concentration in equities accounting for 39 per cent of the assets, but bringing new money into equities is challenging, a report said.

The growth, up from $53.9 billion in 2009, was largely due to market performance and partially on account of new money inflows, according to the fifth annual Ernst & Young Islamic Funds & Investments Report (IFIR 2011) released today (September 26) at the World Islamic Funds and Capital Markets Conference.

Fixed income, commodities and alternatives did well in 2010, which was a record year for Sukuk with issuance of $50 billion.

As the industry continues to realign itself, 23 new Islamic funds were launched in 2010 while 46 were liquidated. The Islamic funds universe comprises of some 100 fund managers and 800 Islamic funds but represents only 5.6 per cent of the $1 trillion Islamic financial services industry, said the report.

The addressable universe for Islamic fund managers is in excess of $500 billion, growing by 10-15 per cent annually. In the GCC, liquid wealth of Shari’a sensitive investors is expected to add more than $70 billion to Islamic funds by 2013.

“Growth in 2010 is welcome given the industry’s flat performance since 2007. Looking ahead, the challenging times are by no means over,” said Ashar Nazim, Mena head of Ernst & Young’s Islamic Finance Services.

“There are serious concerns about the increasing likelihood of sovereign debt crisis in Europe and a double dip recession in the US. Both these factors will continue to influence conventional and Islamic asset managers through 2012.”

Three priorities for the industry

As part of its trend-spotting in cooperation with leading Islamic fund managers, the IFIR 2011 has predicted three top priorities for the industry.

The first lies in origination and structuring. Fund managers are faced with limited availability of quality Shari’a compliant assets and fewer products to invest in. Improving levels of investor and industry trust in their brand and track record will favor established and larger players in origination.

The second priority is to continue to attract institutional and affluent client fund flows. Over dependence on a few institutional funds that made up two-thirds of the total new funds launched in 2010 is a key structural weakness in Islamic markets in all regions except Malaysia.

Institutional funds make up 67 per cent of global Islamic funds’ AuM while retail funds make up 33 per cent. Access to affluent investors and institutional clients like Waqf, family businesses and takaful operators is central to future growth. Fund distribution models will place more emphasis on alliances to attract institutional and affluent funds over the next few years.

The third priority for the industry is to increase operational efficiency. The 30 per cent fee compression over recent years will force a re-look at the revenue and cost strategy, operating model and most importantly, the risk infrastructure for sustainable growth.

“Achieving scale is even more critical to ensure long term sustainability. Over 70 per cent of funds fall below estimated break-even AuM level of $100 million, while the top 10 have 80 per cent market share,” said Nazim.

“The big will get bigger as the going gets tougher to win investors’ trust. The growth performance will be difficult to repeat this year as the Islamic funds industry had benefited from performing markets in 2010, which may be hindered going forward by global economic uncertainty risks.”

Investor uncertainty heightens

“Even though stock prices in the MENA region are near 2004 levels today, investors are not confident about their rise even in 2012. They remember that equity markets were flat for years before the spike began in 2005,” Nazim continued.

“The global economic scenario, investors’ risk aversion and the aftermath of the Arab Spring are the top three risks for Islamic fund managers. The economic situation in Europe and the US is the single biggest concern for future market performance as no region or market will be immune to a double dip recession,” he concluded. – TradeArabia News Service

Tags: Ernst & Young | Islamic Funds | equities | Assets under Management |

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