Crisis-hit Islamic funds set for recovery
Dubai, September 27, 2010
The asset management side of Islamic finance, which has been at a virtual standstill in the $1 trillion industry, is set to break out of its rut as demand rises for investment products catering to Muslim laws.
Consultants Ernst & Young estimate that between $360 billion and $480 billion of individual and institutional savings are available to the Islamic fund industry, making its growth potential hard to ignore for asset managers.
The global Islamic funds industry still only has about $50 billion of assets under management (AUM), compared with conventional global mutual funds with assets of $22 trillion, underlying the potential the industry has to grow.
"The wealth management business is going to grow faster than overall Islamic finance growth," said Shahzad Wairach, vice president of global wealth management at HSBC Amanah. "We could see 20 per cent growth over the next three to five years."
But to reach that target, the industry has to offer more diverse products and asset classes while overcoming misperceptions that Islamic funds are plagued by poor returns and exorbitant fees.
There are signs that investment managers are slowly moving to tap demand for Islamic products. Qatar First Investment Bank and Gulfmena Alternative Investments last week unveiled plans for a sharia-compliant asset management firm.
"The Islamic wealth management industry has to grow because it works," said Jahangir Aka, senior executive officer at wealth manager SEI.
"It is a viable investment approach that just happens to be sharia compliant and emotionally acceptable to Muslims."
The funds industry has largely focused on institutional investors rather than increasingly affluent Muslim population in the region.
According to consultancy Deloitte, $600 billion of the $1 trillion Islamic finance industry comes from GCC, which has more potential for retail growth because of its affluence.
Islamic investment products are commonly perceived to underperform conventional asset classes due to restrictions on investment avenues and the overall conservatism of portfolios.
But the MSCI World Islamic Index has managed to outperform the conventional MSCI World Index over the last 13 quarters due to its focus on low-debt companies and non-financial stocks.
And hefty management fees of up to 5 per cent - which were often charged to cover costs such as sharia boards and compliance audits - have also dropped sharply to about 1.15 per cent, more in line with conventional fees.
Still, Islamic funds have struggled to make a mark. Fund sizes are negligible, with 70 per cent of Islamic funds holding less than $100 million in assets as of the first quarter of 2010, according to Ernst & Young.
"Islamic management was very much a poor cousin of Islamic banking," said Shehzad Janab, head of asset management and advisory at Daman Investments. "Margins, growth, volumes were mainly on the banking side and asset management was almost an afterthought in its initial phases."
The global financial crisis added risk aversion to the mix, with institutions becoming shy about investing in new funds.
Launching a large fund without a guarantee of support is too risky a proposition in the current market environment, keeping the industry fund sizes small, experts said.
According to Ernst & Young, Islamic funds require $80 million to $100 million to break even based on average management fees.
Many funds in 2009 were unable to meet that break-even mark, creating a period of consolidation for the industry. Twenty-nine funds launched last year but that growth was offset by 27 liquidations.
Still, consolidation may have done the industry a favour by weeding out poor performers and upstart funds, leaving the playing field wide open for remaining funds to innovate beyond the traditional equity investments.
"Islamic funds are well placed to participate in private equity and infrastructure products so growth in this demand will be beneficial to Islamic funds," said Craig Roberts, chief executive of fund administrator Apex Fund Services in Dubai.
"Any products which ease access to markets such as ETFs should be reasonably attractive."
The trend is towards income-producing products such as commodity murabaha, fixed-income funds, savings plans and exchange-traded-funds (ETFs), HSBC's Wairach said.
"You need more issuances to come up and more asset classes," said Daman Investments' Janab. "There has been a dearth of sukuk issuances and we need to see more benchmark issues."
"This is a classic evolution cycle within the industry," he said, adding "People need to differentiate themselves."-Reuters