With Muslims forming a quarter of the world’s population, global Islamic finance assets made of Islamic banking, Sukuk, Takaful and Islamic funds, are projected to breach the US$2 trillion mark by the end of 2015. In the 2014 Key Trends in Islamic Funds report (as at April 2014), Eurekahedge, the world’s largest alternative investment funds research house, conducts a thorough analysis on the Shariah compliant funds sector. The report is geared towards investors looking for insights into Shariah compliant investment vehicles and for fund managers interested in raising capital for their Islamic funds.
Shariah compliant funds have close to US$100 billion in assets under management (AUM) and are estimated at less than 5% of the global Islamic finance industry. While small, this sector has almost doubled its asset base since 2007 despite a lukewarm reception from its predominantly Muslim investors, who remain unfamiliar with the key tenets of Shariah compliant investing.
In the absence of a central body to advise on contentious Shariah rulings, coupled with a lack of marketing, financial education and political unrest in the Muslim world, the growth prospects for this industry remain mired in challenges. A lack of innovation in fund offerings and the additional Shariah compliance costs associated with screening ‘Halal’ investments have also dented the attractiveness of Islamic funds.
As a consequence, the majority of potential investors for Islamic fund vehicles rely on traditional mutual funds and savings accounts to grow their wealth, thereby stunting the sector’s development among retail investors.
Despite these obstacles, the global Shariah compliant asset management industry has experienced strong and steady growth over the past seven years, with the growth in assets under management of the industry averaging 9.17% year-on-year since 2007, while the total number of funds has concurrently increased by 401. This is representative of certain stability and trust among investors and fund managers despite the recent political challenges encountered in the aftermath of the Arab Spring.
Adding to this optimism is the strong performance by Shariah compliant funds. Their conservative approach towards investing, such as avoiding highly leveraged companies and derivatives, has worked to their favor and has ensured that it is too early to dismiss the potential of the Islamic offerings.
Moreover, the new Islamic funds launches post-2008 have increased their diversity in the industry in terms of asset classes, industry segments, geographies and investors which make them more competitive to regional hedge funds. Equity investments account for 43%, fixed income investments constitute another 19% of the assets, while commodities are the third-largest asset class by AUM with a total of 17% of Islamic fund assets. Malaysia and Saudi Arabia remain the most popular Islamic fund centers as they boast the most dynamic Islamic finance industry and the greatest number of investors, while Islamic funds investing in North America have delivered the strongest performance over the past three years, with three-year annualized returns of 8.66%.
Shariah compliant funds have adjusted to the landscape changes and are present in non-Muslim countries. In 2014, 9% of Islamic funds have their head office located in North America, 4% in Asia and 3% in Europe and have attracted attention from various quarters including western banks and investors. Attracting more institutional investors and growing their asset base should be a priority for fund managers and would be a crucial determinant for the development and maturity of the Islamic funds sector in the long run.
The full Eurekahedge Key Trends in Islamic Hedge Funds report is available to all IFN subscribers. Complete with data, graphs and commentary, it provides an in-depth analysis of the Islamic funds sector covering the following: historical growth of Islamic funds, asset flows into the industry, fund performances across regional and strategic mandates, indications on head offices and fund domicile locations, yearly comparison of management fees, geographic mandates, asset classes and fund size.