We have been traversing unknown ground for the past two years. The COVID-19 pandemic is still making news around the world with the identification of new variants. Notwithstanding the tremendous discoveries of vaccines and antiviral medications, the world is still gripped by fear and holding its breath for the next wave. As a result, we continue to experience brief and sometimes protracted lockdowns, even in countries with high immunization rates.
Interestingly, despite the fact that the global real economy contracted in 2020 and only moderately recovered in the first three quarters of 2021, the global assets under management (AuM) are showing rapid recovery and will nearly double in size by 2025.
According to PwC’s research, AuM will expand at a compound annual growth rate of 6.2% from US$84.9 trillion in 2016 to US$145.4 trillion in 2025. A continued optimism in market value simply indicates a shift in global economic and financial strategy from a valuation standpoint.
This is because COVID-19 exemplifies the structural flaws in our economy and poses a threat to the long-term viability of human life on this planet. As a result, market attitudes have been sparked by new inventions, technological discoveries and redirecting investments to priority sectors in order to support inclusiveness, promote impact and improve access to medical and basic services.
Furthermore, the investment management business has benefited from a greater focus on health insurance and retirement security. In addition, a growing number of countries are diversifying their economies and establishing sovereign wealth funds to cushion the impact of future economic crises on their fiscal capability.
Thus, the global altering trend is on the verge of ushering us to a new age, and as a result, there is renewed hope and excitement for the industry’s performance. With double-digit growth in North America, Europe, Asia Pacific and the Middle East and Africa in 2020, the sector has emerged from the global pandemic in a strong position.
Review of 2021
A report by Boston Consulting Group estimates the total value of global AuM at US$103 trillion by the end of 2020, an 11% increase from US$93 trillion in 2019. Similarly, Islamic fund management is also benefiting from the revived enthusiasm. The asset value of Islamic funds has risen from US$146 billion in 2019 to US$178 billion in 2020, a 22% growth, with Islamic funds representing about 5% of the total global Islamic finance assets.
Despite the fact that its market share is still in the single digits, the growth is being fueled by a variety of factors. The rise of high-net-worth individuals, the establishment of strong economies like Indonesia and GCC countries, the rising commodity prices and the launch of new Islamic funds in Saudi Arabia, Pakistan, Malaysia and Indonesia are just a few examples.
Institutional investors’ roles are undeniably important in navigating these turbulent times, particularly when dealing with financial market pendulum swings. Moreover, market risk is growing more complicated as the globe transitions to a new economy, and the threat is changing from economic to climatic and social hazards.
Nonetheless, a crisis presents opportunities and as a result, institutional investors’ roles, particularly in the Islamic fund management business, are becoming increasingly important. This is mostly owing to the fact that the market is still in its infancy, and big firms’ leadership is essential to pave the way for smaller and retail investors.
As a result, the performance of Islamic institutional asset management has always been scrutinized, and it has become a barometer of the industry’s success. Stakeholders clearly expect Islamic funds to grow and obtain a larger market share than their conventional counterparts, either through conversion or by increasing the value of their existing assets. Therefore, their performance throughout the pandemic is critical in determining the industry’s success and gauging investor confidence.
We have examined the performance of many important indices and selected funds to indicate the success of Islamic funds. The goal is to get a sense of overall performance over the previous two years. Investors’ bullish attitude is reflected in the overall trend. In line with global financial market performance, the majority of the major indices are trending upward.
Clearly, investors are benefiting from increased expectations generated by some of the reform initiatives implemented during the pandemic, including liquidity injections to cushion the impact of the economic downturn and low interest rates, which cut the cost of capital. Technology advancements and fast digitization further boost the value of technology enterprises that, in most circumstances, meet Shariah standards.
Preview of 2022
We predict that, in the coming years, the total performance of Islamic funds will be similar to that of their conventional equivalents, as Islamic funds are still a small fraction of the investment universe. A report by Refinitiv estimates Islamic funds’ AuM to grow at US$329 billion in 2025, an increase of 85% compared with 2020.
The recent surge in optimism should not be mistaken for irrational exuberance, but rather a fresh hope for a brighter future. Institutional investors need to keep setting the tone and disseminating information for smaller investors to follow.
The key dilemma is how to take advantage of this upbeat sentiment and turn it into actual economic growth in the Muslim world. Some of the most important factors for long-term economic success are wealth generation and preservation.
Investors must continue to monitor the performance of the enterprises in which they have invested, demand a greater degree of governance, embrace responsible investing and participate in the value creation process.
The following are some of our ideas for the industry to consider. Our suggestions were grouped into three categories: a new perspective, product innovation and leveraging on technological advancements.
First and foremost, a fresh perspective necessitates a reimagined narrative. Islamic investing must go above and beyond religious requirements. We cannot help but be envious of the environmental, social, and governance (ESG) investing’s success. The combination of fear and hope managed to pique the interest of investors. The fear of climate change and an aspiration for a better world resonate with humanity’s needs.
Oddly enough, these are in fact similar to Islamic financial narratives or the elements of Maqasid, which is intriguing. Regrettably, the size of an Islamic fund pales in comparison to ESG investing.
In fact, many of the Muslim world’s sovereign wealth funds are heavily invested in ESG factors. So the real question is whether we are seeing convergence or there is a need to reintroduce Islamic investing with a more compelling narrative.
Second, product development should be more focused on impact and solution. Although the requirement to include impact as part of an investment decision has thrown a wrench in the investment frontier’s efficiency, to meet the demands and expectations of investors, the traditional risk–return trade-off is no longer sufficient.
Non-monetary expectations are becoming increasingly important in investor decisions. Institutional fund companies are creating impact reporting to inform their stakeholders about sustainable investing. Although this may result in inefficient investment based on the standard frontier, the benefit may be evident in increased trust and the reduction of asymmetric information. This is not a novel recommendation for Islamic investing. In reality, any business transaction’s goal should include the concept of impact.
The concepts of Halal and Tayyib should be extensively promoted in order to pique investors’ interest in investing in Islamic funds. Indeed, there are countless Islamic finance success stories that may be used as a cover story.
Furthermore, when combined with a wide range of social finance tools such as Waqf and Zakat, Islamic investing can do a lot more to address the climatic and social dangers that are inevitably growing more significant. In fact, and according to a recent report by Refinitv, Islamic funds with sustainability mandates grew to US$542.3 million by the end of 2020 and a similar trend can be observed in Waqf investment funds. We expect this trend to continue given the increasing awareness about sustainability challenges, the post-pandemic recovery mobilization and the growing appetite for green and sustainable Sukuk.
Last but not the least, we believe that Islamic investing should leverage from digital transformation and technological advancements. Artificial Intelligence and blockchain are no longer just buzzwords; they are reshaping the investment landscape. Moreover, digital transformation can enhance investor experience and accelerate the integration of ESG factors in investment portfolios.
One of the most important factors in survival will be the cost of doing business. Management fees are steadily dropping, and many fund management firms’ future is dependent on their ability to quickly adapt to new technology.
COVID-19 has not only disrupted established business practices, but it has also sparked creative destruction, allowing the industry to transition to a new era. It is now up to the industry to figure out how to capitalize on this disruption and make the world a better place for humanity.
To conclude, Islamic fund management is an important aspect of the ecosystem, and the growth of Islamic finance will have a favorable impact on AuM growth. Islamic finance is predicted to reach estimated total global assets of US$4.9 trillion by 2025, according to the latest Refinitiv study. The fact that Islamic finance now has such a small market share shows its potential and upside. Regardless of the potential, we do not want the expansion to be centered only on Islamic banking and Sukuk and as a result, curtailing risk dissipation and the ability of managing systemic risk. Therefore, rather than just riding the wave, Islamic institutional asset management firms should take a more active role in shaping the new economy, managing risk and adding value to investors.
Dr Mohamed Eskandar Shah is the associate professor of the Islamic Finance College of Islamic Studies, Hamad bin Khalifa University and a member of the Qatar Foundation. He can be contacted at [email protected]
Dr Dalal Aassouli is the assistant professor of Islamic finance at the College of Islamic Studies, Hamad bin Khalifa University and a member of the Qatar Foundation. She can be contacted at [email protected]