Islamic funds grow, but is the future bleak?

Islamic funds grow, but is the future bleak?
11 October 2011

INVESTMENT in Islamic funds is on the up, following flat performance since 2007, but challenges remain for future performance, recent research has shown.

Global Islamic funds under management grew to $58 billion in 2010, up 7.6% on a figure of $53.9bn in 2009, according to the Ernst & Young Islamic Funds & Investments Report 2011.

The fifth annual report of its kind, unveiled last month at the World Islamic Funds and Capital Markets Conference, attributed the growth largely to market performance and partially to new money inflows.

Equities accounted for 39% of assets under management (AuM), but 2010 was a tough year for attracting new investment. Fixed income, commodities and alternative investments did well during the 12 months – a record year for Sukuk with issuance of $50bn.

Huge potential

The Islamic funds universe comprises some 100 fund managers and 800 Islamic funds. Last year, 23 new Islamic funds were launched, while 46 were liquidated.

However, the sector still represents just 5.6% of the $1 trillion Islamic financial services industry. The addressable universe for Islamic fund managers is in excess of $500bn, and is growing by 10-15% annually. In the GCC, liquid wealth of Sharia sensitive investors is expected to add more than $70bn to Islamic funds by 2013.

Industry priorities

The report identified three priorities for the industry: to improve investor and industry trust; to continue to attract institutional and affluent client fund flows (to avoid over-dependence on the few institutional funds that made up two-thirds of the total new funds launched in 2010); and to increase operational efficiency.

Ashar Nazim, MENA head of Islamic finance services at Ernst & Young, says: “Achieving scale is even more critical to ensure long term sustainability. Over 70% of funds fall below estimated break-even AuM level of $100 million, while the top 10 have 80% market share. The big will get bigger as the going gets tougher to win investors’ trust.”

Challenges ahead

Nazim concedes that the growth performance seen in 2010 will be difficult to repeat this year. “The Islamic funds industry had benefited from performing markets in 2010, which may be hindered going forward by global economic uncertainty risks,” he adds.

“There are serious concerns about the increasing likelihood of sovereign debt crisis in Europe and a double dip [or W-shaped] recession in the US. Both these factors will continue to influence conventional and Islamic asset managers through 2012.”

Indeed, Jahangir Aka, senior executive officer at asset management firm SEI Investments, told Kipp Report that growth of the global Islamic asset management industry will likely halt or reverse this year as the industry struggles with poor sentiment in financial markets and lacklustre interest among Islamic institutional investors.

Pic credit: rconicusso/

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