The Islamic asset management industry involves managed funds investing in equities, Sukuk, leased assets, commodities and real estate, as well as private client portfolios. Shariah compliant equity funds focused on European, North American and east and South-East Asian markets have enjoyed an excellent year, but those focused on the Gulf have performed badly, largely reflecting adverse stock market developments. Values in the Gulf are now much more realistic, however, so prospects for the coming year are more promising, although it might be more sensible for investors to move gradually back in, rather than concentrating too many assets in these markets. Sukuk, leased assets and commodity funds have produced steady income in line with investor expectations, but there are few capital gains upside, or indeed downside with these funds. Real estate funds which largely focus on commercial property have experienced widely varying performances. Those heavily invested in North America have not done well, reflecting the problems in the US sub-prime mortgage market and dollar weakness. Those invested in continental Europe have fared much better, especially those focused on Germany. Expect good upside potential in France following the election of Sarkozy, as the new President pledged to pursue more business-friendly policies. Caution in Asian real estate markets is advisable, but there is upside potential with property in prime locations in Singapore, Kuala Lumpur, Hong Kong and major Chinese cities. The supply overhang in Dubai will dampen upward movements in the coming year, but longer term the outlook remains positive.
PROFESSOR RODNEY WILSON
In the context of Pakistan, a recent but emerging player in the Islamic financial industry since the inception of the first Islamic mutual fund in August 2002, the industry’s growth is worth noting. At present there are five asset management companies managing eight Shariah compliant funds with total assets of over PKR11 billion (US$181.43 million) under their control. Out of these eight funds, two funds are closed-end and six are open-ended. In Pakistan, Al Meezan Asset Management enjoys around 60% of the Islamic mutual fund market share, with four Islamic funds. During the last 12 months, the local market has seen the entry of three new players and has shown a growth of around 25%. The current capitalization of Shariah compliant funds has also grown to 5.4% of the total market size. The market performance of these funds remains attractive for investors, with an average return ranging from 10% to 22%. For the Pakistani market, the outlook for the next 12 months is positive and encouraging. With an expected growth rate of around 25%, several major players are ready to launch Shariah compliant funds. The market depth in terms of different product offerings and types of Shariah compliant funds is also expected to increase with the introduction of income funds, pension funds, real estate funds and hybrid funds. Similar trends are expected in the global scenario of Islamic finance worldwide. AHMED ALI SIDDIQUI Vice-President and Manager, Product Development and Shariah Compliance, Meezan Bank
Without a doubt 2006 proved to be an opportune time to diversify: Middle East Islamic funds were down 9.63%, while Asia-Pacific and global mandates fared better (up 8.61% and 8.08% respectively). However, the Middle East Islamic fund index is outshining other mandates thus far in 2007, posting 9.94% annualized returns as of May (Asian and global mandates returned 3.52% and 1.8% respectively). 1. This return profile has encouraged the search for new products: the last 12 months have seen more than 90 new Islamic funds launching, with the investable universe now well past the 450 mark (500 being an achievable milestone within 2007). 2. The search for manager skill continues: global investment banks have taken the hint, exemplified by new launches from Deutsche Bank, Credit Suisse, Société Générale and others, hoping to transfer experience and success from their conventional product ranges. 3. New launches are breaking with convention: Asia-Pacific mandates have led the way, accounting for 37% of new products (with the Middle East at 26% and global at 23%), but more than half of these are non-Malaysian. Focus has shifted to either pan-Asian or country-specific exposures (i.e. Japan, India, China, etc). Similarly, 30% of all new launches are domiciled offshore to cater to various investor jurisdictions. 4. The advent of multi-manager products: with global portfolios requiring due diligence and manager selection expertise (especially with limited track records and unfamiliar names). Funds of funds can be positioned as key intermediation vehicles to fill this gap. 5. The importance of market validation: enthralled by mega deals, the industry seems to be overlooking developments in markets such as Egypt, Pakistan and Indonesia (together representing 17% of all new launches). Funds are being originated not from global banks or leading Islamic institutions, but from local players tapping into local asset pools (first their retail base, then their high net worth network and eventually at the institutional level). These represent un-biased measures of industry growth and long-term sustainability. BERNARDO VIZCAINO Head of Islamic Funds Research, Eurekahedge
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