ISLAMIC FUNDS MARKET HIGHLIGHTS - Q1-2013

ISLAMIC FUNDS MARKET HIGHLIGHTS - Q1-2013 MAY 2013

AUTHORS:

Detlef Glow

Head of Lipper EMEA Research

+49-69-7565-3518

[email protected]

Karim Arafa

Fund Analyst

+973-39996241

[email protected]

ISLAMIC FINANCE GATEWAY – GCC BONDS & SUKUK MARKET SURVEY

2

OVERVIEW

.

40

66

59

49

0

10

20

30

40

50

60

70

2009 2010 2011 2012

Number of Fund Launches--YoY The Islamic fund universe has come a long way in the last 20

years. In 1993 there were only ten Islamic funds available.

Today, there are 626. Starting with the financial crisis in 2008,

Islamic funds experienced a trend of increasing launches each

year. However, it seems this growth pattern has halted and is

now on a downward trend; only 49 new funds were launched

for 2012.

While the reduction in number of new launches may be a

regular market fluctuation, sukuk issuance has increased

exponentially over the past few years. This surge shows sukuk

is a preferred investment option, possibly affecting the already

low demand for Islamic funds.

The concentration of Islamic funds is seen mainly in the Gulf

Council Countries (GCC) and the Malaysian markets, which

together account for over 80% of all Islamic funds. Only 36

Islamic funds are registered for sale in Europe and 10 funds in

the Americas. Moreover, domicile concentration follows the

same pattern; the 49 newly launched funds are concentrated in

Malaysia and Saudi Arabia, with 23% and 21%. Luxemburg

and the Cayman Islands are next, with 18% and 10%.

Malaysia 23%

Saudi Arabia 21%

Luxembourg 18% Cayman

Islands 10%

Indonesia 8%

Other * 20%

Newly Launched Funds--Domicile Concentration by Country (2012)

Source: Lipper, a Thomson Reuters company


As of December 31, 2012, the number of primary, active mutual funds amounted to 570 funds. The aforementioned universe shows

that fund managers favored equity funds, representing 52% of the universe. Mixed-asset funds, with 16%, were the second asset

favored by asset managers. Money market, bond, and “other” funds represent the remainder of the universe, with 14%, 13%, and 5%,

respectively


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The 49 funds launched in 2012 closely follow this general breakdown of asset types. Equity funds with 25 funds (51%) remained the

favorite asset class in 2012. Bond funds, with ten funds, took the second highest proportion of fund launches (21%), followed by seven

money market funds (14%). The remaining categories are illustrated in the figure above.

The predominance of Islamic funds in the GCC correlates with the concentration of wealth in the region. Since the Asia-Pacific region has

the largest Muslim population, the high number of Islamic funds registered for sale in the region is not surprising. And, according to the

World Islamic Competitiveness Report by Ernst & Young, the Islamic finance infrastructure is relatively developed in only a few countries,

mainly in the GCC and Malaysia, further explaining the concentration of Islamic funds.

Since Islamic investors have a limited scope of products in which they can invest, they often resort to Islamic products such as sukuk and

fixed-term deposits as well as real estate investments. These investors need access to other products such as mutual funds if they want to

diversify their portfolios. This demand is shown by a number of surveys that have concluded that Muslims living in Western countries

complain about the lack of Islamic products offered in their countries. This demand is creating opportunities for Islamic fund managers, who

currently concentrate their activities only in large markets for Islamic funds, such as Malaysia and the GCC.

Equity 52%

Mixed Assets

16%

Money Market

14%

Bond 13%

Other 5%

Islamic Fund Concentration by Asset Type (2012)

Equity 51%

Bond 21%

Money Market

14% Mixed Assets

6%

Real Estate 6%

Other 2%

Newly Launched Fund Concentration (2012, Asset Type)


FUND FLOWS

In terms of assets under management Sharia-compliant funds (US$ 39.16 billion as of March 30, 2013) make up only a small part of the

global fund industry at the moment, but this does not mean the industry is in bad shape. Rather, the opposite is the case; the sector is

showing, in general, a healthy growth pattern, with net inflows of US$911.9 million for first quarter 2013.

The asset mix of the net fund flows shows that Islamic investors are looking for safe havens, since equity funds showed net outflows and

money market products enjoyed the majority of the net inflows (+US$860.5 million), followed by mixed-asset funds (+US$186.2 million),

and bond funds received US$ 87.2 million. Funds from the “other” segment showed inflows of US$33.7 million, while funds investing in

equities had net outflows of US$255.6 million. To avoid double counting we have separated funds of funds, which grew US$6.2 million net,

from this statistic.

With US$609.9 million net, 66% of these inflows came from the GCC. With regard to wealth distribution in the region, it is no surprise that

the majority of these flows came from Saudi Arabia (+US$625 million net), followed by the United Arab Emirates (UAE) (+US$28.1 million

net), Kuwait (+US$5.9 million net), and Qatar (+US$0.5 million net), while there were net outflows in Bahrain (-US$33.6 million) and Oman

(-US$16.1 million).

87.2

-255.6

186.2

860.5

33.7 6.2

-400.0

-200.0

-

200.0

400.0

600.0

800.0

1,000.0

Bond Equity Mixed Assets Money Market Others Funds of funds

Net Flows in Shariah-Compliant Funds by Asset Type in US$ Million (Q1 2013)


One lesson fund promoters can learn from the past is that Islamic funds did not seem to be efficient enough to entice conventional

investors to tap into the Islamic fund market. Some of these funds didn‟t show competitive performance and/or transparency. In 2010

Cologne-based Meridio AG launched its Luxembourg-domiciled Islamic mutual fund, but it was liquidated a year later because of lack of

demand. The third largest German bank at the time—Commerzbank—liquidated its fund in 2005 for the same reason.

-33.6

5.9

-16.1

0.5

625.0

28.1

-50.0

50.0

150.0

250.0

350.0

450.0

550.0

650.0

Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates

Distribution of Net Fund Flows in the GCC by Country (Q1 2013)


One example of an asset management company that has realised the opportunity for Shariah-compliant products in Europe is the

Kuala Lumpur-based CIMB-Principal Islamic Asset Management. CIMB-Principal is a joint venture between the CIMB Group and

Principal Global Investors (PGI). CIMB-Principal launched three UCITS-compliant Islamic equity funds in Ireland, a European funds

hub for cross-border distribution.

According to the European UCITS law, CIMB-Principal can now passport its funds to other European countries and distribute them

without running them through a complete new registration process. Even though it is too early to evaluate whether this initiative has

been a success, this move shows that the asset management industry has identified growth potential for Islamic funds in Western

countries.

In January 2013 four Luxembourg-based firms (KBL European Private Bankers, Adepa Asset Management, Amanie Advisors, and

Theisen Law) announced they have teamed up for the launch of the “Alliance for Luxembourg Islamic Finance,” a Shariah-

compliant custody and administration platform to service the growing number of Islamic funds domiciled in the Grand Duchy.

According to the announcement, the platform will provide full Shariah monitoring and supervision as well as compliance monitoring

and assistance with the launch of investment products.

This initiative means the funds service industry does see the potential of Shariah-compliant funds within the Western markets and

wants to participate in the potential growth of this sector. It also means that promoters of Islamic funds can build their business on

the knowledge of local advisors who are focused on this topic.

OUTLOOK

In our opinion it will be crucial for the success of the Islamic asset management industry in Western countries to create and launch funds

that have a clear focus. In addition, the performance of these funds needs to be in line with the expectations of investors. It is important that

these funds are comparable with other funds sold in the markets, meaning Islamic funds need to have the same level of sophistication and

transparency.

Fund management companies need to bring their processes, especially their reporting standards, into line with the general market

standards of the Western asset management industry in order to attract investors in these markets.

The crash in the real estate markets of the past few years has shown that the focus of Islamic money on real estate markets has added a

risk to investors‟ portfolios (according to the latest Ernst & Young world Islamic report of assets invested in this sector). This risk could have

been avoided by broader diversification. With regard to these experiences, investors have learned their lesson and now search for more

diversified products. This demand for diversification in Shariah-compliant mutual funds could become a key driver for the growth of Islamic

funds all over the world.

From our point of view a well-managed and transparent Shariah-compliant fund has the potential to attract not only Islamic

investors but also other types of investors, provided the fund shows competitive returns. The views expressed are the

personal opinion of the authors and are not necessarily the views of Thomson Reuters.


© Thomson Reuters 2012. All rights reserved.

Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. „Thomson Reuters‟ and the Thomson Reuters logo are registered trademarks and trademarks of Thomson Reuters and its affiliated companies.

ISLAMIC FUNDS MARKET HIGHLIGHTS - Q1-2013

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