The 4th annual Ernst & Young Islamic Funds & Investment Report (IFIR 2010) released today at the World Islamic Funds and Capital Markets Conference states that global Islamic fund assets stagnated at US$ 52.3 Bn in 2009, remaining at almost the same level as the US$ 51.4 Bn posted in 2008. In contrast, the global conventional mutual fund assets under management (AuM) exhibited signs of recovery from their lows of US$ 19 trillion in 2008, reaching $22 trillion in 2009.
According to Sameer Abdi, Middle East Head of Ernst & Young's Islamic Financial Services Group, "This trend is reflective of a distinct shift in investors' preferences, and requires Islamic fund managers to adapt their strategies and operating models accordingly to meet the new levels of expectations."
The research reveals that only 29 new Islamic funds were launched in 2009, almost offsetting the 27 Islamic funds that were liquidated during the same period. New Islamic funds launched were at their highest number ever at 173 in 2007. Since then, this number has declined dramatically.
The overall Islamic asset management industry, which includes funds and Islamic investment accounts, touched US$ 292 Bn or 31.1% of the total industry assets. This also underlines the predominance of investor deposits with banks, said Abdi.
Islamic wealth pool still growing
The silver lining for the industry is the continued strong growth in the overall Shari'a sensitive investable assets. Ashar Nazim, Director at Ernst & Young's Islamic Financial Services team in Bahrain says: "Shari'a compliant investable wealth pool grew by 20% to reach US$ 480 Bn in 2009. In 2008, this was US$ 400 Bn. The GCC remains the single biggest contributor to this growing wealth pool. It clearly represents substantial untapped opportunities for local and international players who can understand and respond to their investors' evolving needs.
Shifting investor preferences
During 2009, there was a shift away from fund investments in traditional asset classes, such as equities and real estate funds, as a number of new alternative asset classes including Shari'a compliant ETFs and hedge funds were launched. No real estate focused funds were launched in 2009 compared to 10 in 2008, and 18 in 2007. Also, the lack of investor confidence led to placing higher proportion of deposits with banks, rather than investing in funds.
Half of all Islamic funds may not be profitable
The report revealed that almost 70% of Islamic fund managers are struggling to build scale and have under US$ 75 Mn in AuM, while 55% have less than US$ 50 Mn AuM. On the other hand, average fee charged by Islamic fund managers have dropped by almost 25% since 2006, and are expected to continue at this level for the foreseeable future.
"Profitability remains under tremendous pressure especially for smaller fund managers. Clearly, shake-outs and consolidations are the way ahead and will be in the best interest of the industry's long term prospects," says Ashar.
Stronger players that have critical AuM volume and are flexible enough to adapt to investors' evolving financial needs stand to capture a more dominant market share.
Back to strategy
Most leading Islamic fund managers are re-focusing on understanding their investors' appetite post-crises. "Rebuilding investors' trust is of paramount importance and has moved up the priority list for fund managers," adds Ashar. Several investor segments are showing early signs of recovery, also reflected by choice of riskier asset classes. Allocation to cash and money market products decreased in 2009 and there is a clear preference for larger, more established brands in the market.
As fund managers try to re-discover the investors' preferences, they are focusing on enhancing the quality of their offering, moving away from transaction-only approach to comprehensive wealth management solutions. There has been substantial investment in enhancing risk infrastructure, adopting flexible business models, segmented approach to accessing new customers as well as dramatic changes in fee and cost structures including more transparency and incentive based remuneration. All this also feeds into building stronger brands.
"The fact that the Shari'a sensitive wealth pool is still showing strong growth, the opportunity is really for the fund managers who can quickly adapt their strategies to address clients' requirements who are smarter and more demanding than what we saw earlier in the decade," concludes Ashar.
Ernst & Young's Islamic Funds & Investment Report builds on more than 400 unique insights from key players in all major financial markets. A better understanding of these strategies can clearly help fund managers articulate new strategies for post-crises era.