“The Islamic fund industry needs to evaluate new strategies to restimulate growth. Islamic fund assets remained flat in 2009 at $52 billion, whereas the potential wealth pool grew by 20 percent, now estimated at $480 billion,” concludes the Islamic Funds & Investments Report (IFIR) 2010 which was published by international auditing and advisory firm Ernst & Young in September 2010.
The other key messages from the IFIR similarly are stark — the sector needs to achieve scale to ensure its long-term sustainability; the priority over the next two years is to rebuild investor trust through staying close to the investor base and to have transparency in cost and revenue structures.
The Islamic fund industry, the report rightly stresses remains fragmented with over 70 percent of investment managers having under $100 million in assets under management (AuM) with less than 10 percent in excess of $1 billion. Putting it this way, adds a positive spin to the ordinary state of the Islamic funds industry.
Most of the Islamic funds have assets ranging from $15 million to $100 million. No single Islamic fund at current values has assets in excess of $1 billion save the Al-Ahli Global Trading Equity Fund of NCB Capital which at the end of August 2010 had net asset value of $1.426 billion. There are those which have aggregated AuMs which in some cases are well over $1 billion. Many Muslim markets including populous countries had no or very little market penetration in terms of Islamic funds including pension products — both retail and institutional. These markets include Turkey, Iran, Indonesia, Egypt, Morocco, Algeria, Nigeria, Bangladesh, Pakistan and Yemen.
What is disappointing about the IFIR, with the 2010 no exception, is that it does not even begin to explore the reasons why this should be the case. Instead it suffices to analyze second-hand information and data produced by the likes of Datamonitor, Eurkahedge, Zawya, IFIS, World Takaful Report, World Wealth Report and the Sovereign Wealth Fund Institute.
Datamonitor, for instance, in the recent past used to blurt out outrageous potential figures for the UK Islamic mortgage industry which was based largely on extrapolation of the conventional mortgage figures and the Asian-and-Arabic-sounding names in the UK census (hence the assumption was that these people are Muslim). The UK census of course is not done on a religious or ethnicity basis although respondents are free to indicate if they are Muslim or Christian or whatever.
The Shariah sensitivity bars in the data for the asset allocation strategies of sovereign wealth funds, mass affluent investors and high networth investors based on data from the Sovereign Wealth Fund Institute and the World Wealth Report 2009, are once again "pie-in-the-sky-stuff" and meaningless. This is for the simple reason that the base data do not consider religion or Islamic finance as an assumption or methodological factor, and that investing and accessing Islamic finance is a very complex dynamic for Muslims (especially) high networth Muslims and is fraught with cynicism about Islamic finance, moral ambivalence (showing piety in some areas and ignoring the injunctions on the proscription on riba (interest), or a reluctant uptake of Islamic finance products more for the reasons of religiosity rather than confidence in such products. Of course there are the exceptions where the regulation and the products and the financial institutions are of a high caliber such as in Malaysia where consumers tend to have much more confidence in Islamic funds and products than elsewhere.
Ernst & Young is supposedly one of the Big Four auditing and advisory firms in the world. If it is serious about publishing the IFIR why not use its considerable in-house resources to do primary research and then analyze on that basis.
For instance, the three single largest Islamic funds markets by far are Saudi Arabia, Malaysia and Bahrain. They constitute over 75 percent of the global Islamic funds industry.
At end August 2010, according to the latest figures of Tadawul, the Saudi stock exchange, for instance, there are 153 Shariah-compliant funds registered in Saudi Arabia in 15 fund categories. In some of the categories such as international trade funds, local trade funds, real estate funds, local balanced funds, guarantee and security funds — all the offerings in the Kingdom are Shariah-compliant. In the international balanced funds, a majority 17 funds are Shariah-compliant. Surely those interested in the Islamic investment funds industry would like to know the reasons for the above developments, none of which the IFIR has even begun to capture.
Similarly, the latest figures from the Securities Commission Malaysia (SC) reveals that the market has 151 Islamic funds registered at end August 2010, of which 147 are in operation with a total net asset value of RM22.481 billion which constitutes just under 20 percent of the net asset value to Bursa Malaysia Market Capitalization. At the same time Bahrain, according to Central Bank of Bahrain (CBB) data, had 106 Islamic funds registered at end of August 2010.
It would have been more appropriate to base the report on these three markets where the basic information is reliable, accessible and complete and then to move on to the other markets. The SC data is by far the most comprehensive and aggregated at the regulator’s level. This compared to SAMA (Saudi Arabian Monetary Agency) and CBB, where the information is either scant or has to be extracted depending on the experience of the analysts or researcher.
IFIR 2010 gives the impression that it is a headline report bereft of any in-depth analysis not only of the performance of individual markets aimed at those executives, managers and employees with a short attention span, and based on assumptions some of which are either dubious or inaccurate, which in turn are based on extrapolations and data that are not rigorous enough to draw the seemingly specific conclusions on Islamic funds, investments and so-called Shariah sensitivity.
The report tells us that in 2009, the global Islamic fund management industry growth remained flat. With assets under management at an estimated $52 billion; that the number of new Islamic funds were offset by those that were liquidated; and that the majority of funds launched were targeted at institutional investors. Indeed, in 2009, 29 new Islamic funds were launched against 27 liquidated, although there is no further information about the geographic spread of these actions.
The report suggests that in 2009 there was a shift away from traditional asset classes such as equities and real estate funds with a number of new asset classes being introduced including Shariah-compliant ETFs and hedge funds. The launch of 2 or 3 Islamic ETFs and hedge funds hardly constitutes a shift away from vanilla equities or real estate or fixed income instruments. It would have been more pertinent had the report gone into the reasons why there are only about 5 Islamic ETFs in the world and even fewer Islamic hedge funds.
With the authors of IFIR 2010 confirming that the Islamic fund industry remains fragmented, they also stress that there is huge latent potential given that the Muslim populations are growing globally indicating future demand and that income levels in key Muslim countries are also growing which would provide new opportunities for Islamic fund managers.
The industry as such would in addition have much more room to grow if investors also invest directly into funds rather than through investments through bank accounts and products. At the same for Islamic funds to break even, they have to have assets under management of at least $80 million to $100 million.
The IFIR 2010 may serve a purpose to those interested in the Islamic funds industry. But it could have been much more useful if it had clarity in structure; concentration on the 3 major markets by far; in-depth analysis not only of the performances but also of the shortcomings — both regulatory, legal, management, investor knowledge, asset allocation etc; and above all a much more rigorous empirical approach in primary data collection which would have given the analysts at Ernst & Young to draw much more authoritative conclusions about the global Islamic fund and investment industry.
This is unfortunate because this remains a lost opportunity for Ernst & Young in a market segment that is notorious for its outrageous lack of serious and reliable independent information, data and analysis.
source : Arab News