Islamic asset management is one of the pillars of Islamic finance and as the industry grows, will become increasingly important. Well-developed asset management products will be essential for the Takaful and pension markets as they develop. In 2014, assets under management grew by 5.3% and the number of funds increased by 11%. MARC NORDEN explores.
While managers of Islamic listed equity products are still able to select from a wide universe of securities, even after financial and ethical filters have been applied to ensure compliance with Shariah principles, those managers focused on fixed income products will also require the Islamic capital markets to develop in tandem with the demand for Islamic investment products.
Review of 2015
There has been a slowing of Sukuk issuance during 2015 and global Islamic finance assets have shrunk by 8.5% (The Banker, Top Islamic Financial Institutions Report, 2015). In spite of the disappointing levels of Sukuk issuance during 2015, there have been some interesting new names in the market. In particular, there has been an increase in ethical deals, with two issuers this year affiliated to the World Bank: the International Finance Facility for Immunisation, which funds vaccinations and the International Finance Corporation, which helps private sector development in developing countries. This connection between Shariah compliance and ethical finance is important and will hopefully become increasingly evident as the industry promotes the similarities.
2015 has also seen innovation in the Sukuk market. The Emirates Airline Sukuk was significant as it was the first Sukuk to be backed by an export credit agency (ECA), namely the UK Export Finance. ECA-backed structures allow issuers with a low or no credit rating to receive a credit enhancement therefore lowering their borrowing costs.
In addition to the core, liquid asset classes of equities and fixed income, asset classes that are deemed ‘alternative’ in the conventional world will continue to play a major role in Islamic asset management. Asset-backed investments such as real estate, leasing and trade finance are ideal in delivering the principles of Shariah investing while providing investors with excellent diversification both geographically and through their low correlation with equities.
Preview of 2016
Although it has been a slower year, there are signs of a pick-up in Sukuk issuance during the last quarter of 2015 which is likely to continue into 2016 as oil-exporting nations look for a bottom in the oil price weakness, at which point an increase in capital expenditure could be warranted. It is also important to note local rates in the GCC have been slowly increasing which will lead to issuers diversifying their funding base and tapping the Sukuk market. As well as more issuance, there should be more clarity surrounding monetary policy in the US which could increase trading volumes as directional views are implemented.
The Shariah compliant asset management industry itself remains fragmented and largely sub-scale. Half of the Islamic assets under management are held in funds smaller than US$10 million (Reuters, Islamic Asset Management Report, 2015). Funds below this threshold struggle to grow and achieve scale and often their management fees are disproportionally high. There is demand for good quality investments from Islamic asset managers and this disconnect between supply and demand is preventing asset managers from reaching scale. Consequently, a period of consolidation within the industry would be beneficial both for the manufacturers and the consumers.
Sukuk: Raising awareness
Sukuk investments form a part of many Shariah compliant funds and are a vital liquidity tool for all Islamic financial institutions. Sukuk remain the most recognized of the Islamic instruments and provide a gateway to the Islamic market for conventional institutions and sovereigns. For Sukuk to continue to drive growth and awareness of Islamic finance, both sovereigns and corporates need to recognize the benefits of issuing Sukuk. Regulators need to support the industry and help grow the supply by implementing a level-playing field for alternative finance providers and the standardization of products.
Women: An underserviced market
In the future, there will be a move toward services and products that target women specifically. On a global basis, and particularly in emerging markets, women have entered the workforce in larger numbers and continue to do so. Women are controlling an increasing amount of wealth and taking a more active interest in how that wealth is managed. Islamic financial institutions need to make sure that they have the expertise and products to service this demand.
A move to diversifying advisors and providers
We also expect to see, particularly in the GCC, wealthy clients moving away from a single relationship with one large multinational bank that services all their financial requirements to accessing experts such as local providers, sector specialists (eg property financiers) or Islamic specialists. We see this often in GCC clients approaching us to access the UK real estate market either as a direct purchase or through a fund investment.