2020 will be remembered for the spread of a global pandemic that infected hundreds of millions and for an unprecedented halting of most economic activity. The economic and market impacts will long remain topics of research as will the extraordinary ensuing interventions by global central banks. In less than four months during 2020, greater stimuli were injected than during the decade after 2008. As authorities resuscitated economies, the Shariah compliant asset management industry had probably its best year ever.
Review of 2020
After a decline in 2018, 2019 saw assets under management (AuM) of global Islamic funds grow more than 20% to exceed US$105 billion. By mid-November 2020, this number had risen above US$165 billion (all data is from Bloomberg); doubly impressive given the backdrop of turmoil and uncertainty.
Given a lack of global data, estimates in this article only relate to regulated funds — listed and unlisted — thus excluding segregated mandates. We estimate US$40–50 billion of Islamic AuM outside regulated funds, with a large proportion of these assets in the Gulf.
Within the overall Islamic AuM, unlisted funds accounted for almost US$65 billion, while US$105 billion was in exchange-traded funds (ETFs). About US$104 billion of the ETF AuM was in 12 precious metal ETFs. These precious metal ETFs are dominated by physically-backed gold ETFs, and gold ETFs are in turn dominated by State Street’s US$75 billion SPDR Gold Shares ETF (GLD) and the US$14 billion Invesco Physical Gold ETF (SGLD). GLD alone represents 45% of all Islamic AuM in regulated funds.
The ‘flight to safety’ triggered by COVID-19 fueled panic gold-buying and a 25% price surge between the start of 2020 and mid-November. It was impressive then that GLD’s AuM jumped 72% (+US$31 billion) and SGLD’s soared 90% (+US$7 billion). While a higher gold price helped increase their assets, the two ETFs were boosted by US$25 billion of net inflows; GLD and SGLD together added US$40 billion in assets in the year to November 2020.
The most prolific Islamic ETF issuer is Wisdom Tree with its suite of six physically backed precious metal ETFs enjoying AuM of US$15 billion. Interestingly, all six were launched between 2007 and 2009, during a decade when the price of gold jumped eight-fold.
Money market funds, often structured as commodity Mudarabah products, dominate Saudi Arabia’s asset management landscape. Globally, AuM of this asset class rose from approximately US$23 billion to almost US$30 billion during 2020. The COVID-19-related collapse in global interest rates pushed investors toward these highly liquid, return-enhancing funds.
The largest Shariah compliant equity mutual fund in 2020 was US-based Saturna Capital’s US$2.6 billion Amana Growth Fund. The fund, which was launched in 1994, focuses on global growth large-caps which meet ESG criteria. The runner-up equity mutual fund is also managed by Saturna Capital, the US$1.4 billion Amana Income Fund which invests in global, ESG-compliant large cap, value stocks; the fund was launched in 1986. Some distance behind is the US$530 million Al Raed Saudi Equity Fund managed by Samba Capital. The spot on the podium for the largest Sukuk fund is claimed by Azimut Investment’s US$498 million Global Sukuk Fund. This is followed by the US$455 million Maybank Malaysia Sukuk Fund.
Preview of 2021
After such a tumultuous year, but one where many pockets of the Islamic asset management industry thrived, what lies ahead? In terms of market backdrop, as long as US interest rates remain at or around current record low levels, central banks globally, especially in developing economies, would be able to maintain a very loose monetary policy. This would be a positive backdrop for risk assets such as Sukuk and equities.
However, given the resurgence of COVID-19 cases in Europe and the US, there is a risk the virus will spread rapidly again during the Northern Hemisphere’s winter with authorities clamping down aggressively on mobility and economic activity. This is a concern for equity and commodity investors but would again be bullish for gold and Sukuk.
There is a need for most Islamic asset managers to broaden their distribution capabilities, especially outside their home market. Tying in with this, in a post-COVID-19 world, the ability to acquire customers entirely online takes on even greater importance. Additionally, global private bank assets continue to grow steadily, providing enormous pools of wealth for asset managers to tap into.
As we have mentioned in the past, the Islamic asset management industry is in an enviable place: given the size of the global Muslim population alone, there is no shortage of demand for Shariah compliant investment products and services. 2020 was an example of the industry catching up with this appetite. The onus is on the industry to invest in building trusted regional and global brands, to launch innovative and relevant products, to offer consumers sufficient choice across asset classes and to focus on increasing the industry’s current very low penetration, especially with its most captive client base. It is important for Islamic asset managers to always aim for their products and services to be comparable, or even better, than similar non-Islamic strategies; restaurants that serve Halal food are not satisfied if their customers are only Muslims.
ESG and passive investing are not just short-term fads; they will shape the industry for decades to come. To not be left behind, Islamic investment managers must embrace these features during product development and ideally combine both. There is an urgent requirement for ESG and Shariah compliant REITs and equity products as well as green Sukuk; these can be structured as funds or, preferably, as ETFs. With opportunities abound, the challenge for Islamic managers is to capitalize on them before traditional global investment managers sweep up their market.