Introduction
Over the last 10 years Shariah compliant funds have seen significant growth, both in terms of the number of funds as well as assets under management (AuM). Rapid developments in the Islamic finance industry, have led to an increasing number of Shariah compliant funds employing different strategies and investing across new asset classes, representing the progress and advances made in the Islamic finance sector. In this report we discuss the key trends observed in the Islamic funds industry since 2000.
The primary goal of Islamic funds is to engage in 'ethical investing' into products and companies compliant with Islamic guidelines. As such, Islamic funds are wealth management vehicles catering to investors wanting exposure to capital markets inside a Shariah framework; the key distinguishing factor from other conventional funds.
Currently, the total number of Shariah-compliant investment vehicles is estimated to be 717, with assets standing just over US$77 billion.
Figure 1: Industry growth since 2000
The Islamic fund sector underwent strong growth in 2007 witnessed by the launch of 180 funds however subsequent years have seen a decline in launch activity. Despite a slow growth rate, it is notable that the number of funds did not decrease. Islamic funds mostly invest in asset-backed securities and do not apply leverage, therefore limiting performance-based losses. Additionally, existing funds have further consolidated their positions in 2009 and 2010. As at end-July 2011, the Eurekahedge Islamic Funds Index was up 38.9% since February 2009.
New launches in 2009 to 2011 although comparatively small in number, represent increasing diversity in the industry in terms of asset classes and industry segments as well as geographies and investors. The sector has adjusted to the changed landscape post-financial crisis and has attracted attention from various quarters including western banks and investors. Sukuk issuances have picked up substantially, even from companies such as General Electric, while new Islamic funds have launched in places like Australia.
Head office locations
Malaysia and Saudi Arabia remain the most popular Islamic fund centres, boasting the most dynamic Islamic finance industry and the greatest number of investors. Saudi Arabia has recently increased its share as the fund centre of choice due to the growing popularity of retail funds among consumers as well as further strengthening of the sukuk market in the country.
One of the early movers in the industry, Malaysia launched Islamic funds early in the 1970s and further cemented its place as the leading fund centre throughout the 2000s. A liberalised Islamic banking sector with Shariah framework established in the 1980s proved to be a conducive environment for growth in the industry. In the last two years, Malaysia further strengthened its place by issuing more licenses to foreign banks, a policy that is set to continue and as such the country looks set to maintain its position as the leading Islamic fund centre in the coming years.
Figure 2: Head office locations by number of funds
Geographic mandates
While 43% of Islamic fund assets are invested in Middle East and Africa - primarily because the region holds the greatest number of companies that are Shariah-compliant - the distribution of assets across various geographic investment mandates have witnessed some significant changes over the last few years. As seen in figure 3, the Middle East/Africa mandate still accounts for the largest share of assets among the distribution of Islamic fund assets across different geographies, though this share has been declining steadily – five years ago 63% of Islamic fund assets were invested in this region. The main reasons for this decline can be attributed to the strong growth witnessed in the Islamic finance sector in other regions and the trend of diversification among Islamic funds.
Figure 3: Geographic mandates by AuM
Fund types
Figure 4 shows the breakdown by fund types in the Islamic fund industry. The majority of Islamic funds are structured as mutual funds catering to retail investors and many of the funds are overseen by well-established Shariah regulations such as the Securities Commission of Malaysia, who help to ensure that managers abide to rules designed to safeguard retail investors.
Alternative investments such as hedge funds and private equity are deemed to be risky products and only make up 10% of the fund population. However, the Islamic asset management sector has become more sophisticated over the years as investors have been exploring increased investing into real assets with a lesser focus into financial assets. As such, there is a large opportunity for Islamic institutions to explore more offerings into index tracker funds, commodity funds and other alternative funds. Commodity funds in particular are said to be well placed for Islamic investors as they comply easily with Shariah policies.
Figure 4: Fund types by number of funds
Asset classes
Equity investments account for 40% of Islamic fund assets primarily because allocating to Shariah-compliant companies (becoming shareholders) forms the easiest method of Islamic investment. Furthermore, equities have been the best performing asset class in the last 40 years and continue to be the most popular among investors who also find it easier to understand as compared with other more complicated Islamic finance instruments. While fixed income investments account for 14% of the assets, only 7% of the funds employ a fixed income mandate, showing that there are very few but large Islamic funds focused on sukuk investments. Other asset classes are however, becoming increasingly popular as the sector develops to encompass other investments.
Figure 5: Asset classes by AuM
Performance
Over the years, Islamic funds have delivered greater and more consistent performance as opposed to other comparable investments. The Eurekahedge Islamic Funds Index has gained 35.56%[1] since its inception in December 1999. Comparatively, the DJ Sustainability Index gained 10.29% over the same period of time while the MSCI World Index lost 8.09%.
Figure 6 displays the Eurekahedge Islamic Funds Index mapped out against the DJ Sustainability Index and the MSCI World Index since December 1999, clearly showing that Islamic funds have not only outperformed, but have also delivered returns with significantly less volatility and better downturn protection. For example, in 2008 the MSCI World Index declined by 41.12% and the DJ Sustainability Index was down 42.98% while Islamic funds lost 28.53%.
Figure 6: Performance of Islamic funds vs. stock market indices
Figure 7: Performance of Islamic funds by geographic mandates
In 2011 Islamic funds investing in Europe have so far delivered the best returns, however it should be noted that very few Islamic funds employ a European mandate and all of them are invested in equities. Similarly a handful of North American Islamic funds achieved the best return in 2010. The performance of these funds was helped by positive movements in the equity markets in 2010 and also by high commodity prices, as almost half of the Islamic funds investing in North America are focused on the basic materials sector.
Islamic funds investing in the Asia Pacific region delivered the strongest performance over the past three years as a large proportion of Asia Pacific Islamic funds are invested in the Malaysian and Indonesian markets which saw remarkable growth in 2009 and 2010. The FTSE Bursa Malaysia Stock index jumped 42.31% in 2009 and 19.34% in 2010 while the Jakarta Composite Index has gained nearly 70% in the last three years.
Table 1: Performance of Islamic funds by geographic mandates
EH Asia Pacific Islamic Fund Index
|
EH Europe Islamic Fund Index
|
EH Global Islamic Fund Index
|
EH Middle East/Africa Islamic Fund Index
|
EH North America Islamic Fund Index
| |
2011 YTD returns
|
1.59%
|
4.57%
|
2.29%
|
-2.86%
|
3.26%
|
2010 returns
|
11.23%
|
4.13%
|
8.23%
|
7.28%
|
12.11%
|
3 year annualised returns
|
7.13%
|
-1.28%
|
1.92%
|
-8.90%
|
0.58%
|
Source: Eurekahedge
Figure 8: Performance of Islamic funds by asset classes
Equity investing Islamic funds witnessed the strongest returns in 2010 primarily through excellent returns posted by underlying equity markets. In the three year annualised returns measure, Islamic fund managers who were partially or fully invested in fixed income instruments registered healthy gains as they did not suffer as much as equity investing funds during the financial crisis and the Eurekahedge Islamic Fixed Income Fund Index lost only 0.85% in 2008.
Table 2: Performance of Islamic funds by asset classes
Eurekahedge Islamic Fund Balanced Index
|
Eurekahedge Islamic Fund Equity Index
|
Eurekahedge Islamic Fund Fixed Income Index
|
Eurekahedge Islamic Fund Real Estate Index
|
Eurekahedge Islamic Fund Money Market Index
| |
2011 YTD returns
|
0.07%
|
0.01%
|
2.04%
|
4.75%
|
0.26%
|
2010 returns
|
7.97%
|
12.21%
|
4.20%
|
-0.58%
|
1.14%
|
3 year annualised returns
|
2.67%
|
-0.84%
|
4.40%
|
-3.86%
|
0.60%
|
Source: Eurekahedge
