According to the 5th annual Ernst & Young Islamic Funds & Investments Report (IFIR 2011) released at the World Islamic Funds and Capital Markets Conference, global Islamic fund assets under management (AuM) grew by 7.6% to $58 billion in 2010, up from $53.9 billion in 2009. The growth was largely due to market performance and partially on account of new money inflows. Concentration in equities remains, as they account for 39% of the $58billion AuM, but bringing new money into equities is challenging. Fixed income, commodities and alternatives did well in 2010, which was a record year for Sukuk with issuance of $50 billion.
As the industry continues to realign itself, 23 new Islamic funds were launched in 2010 while 46 were liquidated. The Islamic funds universe comprises of some 100 fund managers and 800 Islamic funds but represents only 5.6% of the $1 trillion Islamic financial services industry. The addressable universe for Islamic fund managers is in excess of $ 500 billion, growing by 10-15% annually. In the GCC, liquid wealth of Shari'ah sensitive investors is expected to add more than $70 billion to Islamic funds by 2013.
According to Ashar Nazim, MENA Head of Ernst & Young's Islamic Finance Services, "Growth in 2010 is welcome given the industry's flat performance since 2007. Looking ahead, the challenging times are by no means over. There are serious concerns about the increasing likelihood of sovereign debt crisis in Europe and a double dip recession in the US. Both these factors will continue to influence conventional and Islamic asset managers through 2012."
Three priorities for the industry
As part of its trend-spotting in cooperation with leading Islamic fund managers, the IFIR 2011 has predicted three top priorities for the industry. The first lies in origination and structuring. Fund managers are faced with limited availability of quality Shari'ah-compliant assets and fewer products to invest in. Improving levels of investor and industry trust in their brand and track record will favor established and larger players in origination.
The second priority is to continue to attract institutional and affluent client fund flows. Over dependence on a few institutional funds that made up two-thirds of the total new funds launched in 2010 is a key structural weakness in Islamic markets in all regions except Malaysia. Institutional funds make up 67% of global Islamic funds' AuM while retail funds make up 33%. Access to affluent investors and institutional clients like Waqf, family businesses and takaful operators is central to future growth. Fund distribution models will place more emphasis on alliances to attract institutional and affluent funds over the next few years.
The third priority for the industry is to increase operational efficiency. The 30% fee compression over recent years will force a re-look at the revenue and cost strategy, operating model and most importantly, the risk infrastructure for sustainable growth.
"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. The growth performance will be difficult to repeat this year as the Islamic funds industry had benefited from performing markets in 2010, which may be hindered going forward by global economic uncertainty risks," adds Ashar.
Investor uncertainty heightens
"Even though stock prices in the MENA region are near 2004 levels today, investors are not confident about their rise even in 2012. They remember that equity markets were flat for years before the spike began in 2005. The global economic scenario, investors' risk aversion and the aftermath of the Arab Spring are the top three risks for Islamic fund managers. The economic situation in Europe and the US is the single biggest concern for future market performance as no region or market will be immune to a double dip recession," concludes Ashar.
About Author
IFS is a specialist group within Ernst & Young that caters to the specific needs of both Islamic and conventional financial institutions requiring Islamic financial advisory services. The MENA practice of Ernst & Young has been operating in the region since 1923. Ernst & Young is a global leader in assurance, tax, transaction and advisory services.
© Business Islamica 2011
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