It has been a turbulent year for the Islamic funds industry, particularly in the Middle East. Prior to the Arab Spring however, the industry was abuzz with activity, with numerous launches particularly in the equity fund sector – an indication that economic conditions were improving.
According to one data provider, the worst performing asset class in the first half of 2011 in the GCC were the equity funds, while the best performers were trade finance and Islamic funds, followed by money markets and bonds. This was not surprising given the economic climate, particularly in the GCC region, which saw plunging stock markets on the back of fears that instability could spread to other parts of the region.
However, as the dust began to settle, the strong performance and growing popularity of Shariah compliant funds has led to numerous launches in recent months. In fact the data provider notes that nearly all funds launched in the GCC in the first half of 2011 were Shariah compliant. The funds launched were mainly domiciled in the UAE, Qatar and Saudi Arabia. In Asia, Malaysia continued to launch numerous Islamic funds of all asset classes while further down the globe, it is worth noting that Australia launched its first Islamic equity fund – Crescent Australian Equity Fund.
HSBC Amanah and CIMB Islamic also made headlines with the launch of their respective Islamic securities services. HSBC Amanah launched its global platform in April for conventional and Islamic investment managers managing Islamic funds, while CIMB Islamic Securities Services made its debut to institutions and individuals, both domestic and abroad, in October of this year. J.P. Morgan Worldwide Securities Services launched a similar Islamic fund servicing last year.
The Sukuk market reached unprecedented heights in 2011, with Sukuk funds worldwide providing a safe haven of sorts in the midst of volatile global markets. One research firm is of the view that GCC investors in particular have developed a strong preference for this asset class. Should the volatility continue, investors are more likely to place a high proportion of funds into fixed income.
The biggest merger that made headlines this year was the union of Nikko Asset Management (Nikko AM) and DBS Asset Management (DBSAM), completed at the end of September. The merger involved the acquisition of DBSAM by Nikko AM for SG$137 million (US$104 million). What made this transaction interesting to the Islamic space is that fact that Nikko AM has also acquired a 51% stake in Asian Islamic Investment Management (AIIMAN), which is a joint venture between Singapore’s DBSAM and Hwang-DBS (Malaysia) focused on Shariah compliant investment solutions. Despite having a new shareholder, no changes are expected to AIIMAN in terms of management personnel or direction of the company. This is Nikko AM’s maiden foray into the Islamic finance industry.
Although the performance of Islamic funds remains strong, with empirical evidence to prove better returns than the conventional, it still stands at an estimated US$58 billion. This represents a mere drop in the ocean of their potential, considering that Islamic funds currently account for less than 6% of the US$1 trillion global Islamic finance industry.
The problem, it seems, still lies with the challenge of attracting institutional investors – whether Islamic or conventional. Jahangir Aka, a senior executive officer at asset management firm SEI Investments, has warned the industry that poor sentiment in financial markets and lackluster interest among Islamic institutional investors will probably bring this year’s growth to a grinding halt or even signal a decrease.
According to Noripah Kamso, the chief executive officer of CIMB-Principal Islamic Asset Management, the Islamic asset management industry faces an additional hurdle – the problem of convincing conventional institutions that despite a smaller universe of investable assets, Islamic funds still have the ability to outperform the conventional.
The Islamic funds industry has overcome numerous adversities since the global financial crisis but the persistence from advocates of the industry will push it to the next level. This however, according to Noripah, can happen only if fund managers manage to move out of their comfort zone and start operating at an international level. Food for thought in the coming year. — RW