Islamic funds lose their lustre

Sharia-compliant funds’ asset base dropped by more than 10 per cent last year as the Islamic finance industry struggled to win over institutional investors.

Islamic funds, which cannot invest in companies that profit from areas such as the sale of alcohol, pork, pornography, or gambling, suffered $10 billion of outflows last year, according to figures from Eurekahedge, the data provider.

This is a sharp reversal on the $7 billion of inflows Islamic funds received in 2012, which were widely seen as a sign that the Islamic fund industry was beginning to take off.

Mohammad Hassan, an analyst at Eurekahedge, said that the popularity of many Islamic funds diminished after the US Federal Reserve’s tapering announcements last year.

‘Significant outflows’

This triggered widespread volatility in emerging markets, which many Islamic funds are heavily exposed to. “We saw significant outflows for that reason,” he said.

Hassan added that Islamic fund managers “have not been successful in hammering home their value proposition”.

He points out that assets in the wider Islamic finance industry are on course to double to $1.6 trillion by 2018, Ernst & Young, the consultancy, has predicted.

Islamic funds only represent 5 per cent of this total as they have largely failed to get institutional investors on board. “In my opinion there is still a lot of ground for these guys to cover,” Hassan said.

Sayd Farook, global head of Islamic capital markets at Thomson Reuters, said: “Despite the fact that Islamic mutual funds saw the highest fund launches and lowest liquidations [last] year, their assets have fallen. The lack of scale, stricter regulations, as well as stagnant markets, have taken their toll.”

Many investors remain sceptical about sharia-compliant funds, which are more expensive due to extra layers of research involved in assessing their investment universe, such as hiring Islamic scholars.

The belief is that some of those costs could be mitigated if the Islamic fund industry came up with central reporting guidelines that made it clearer what can be invested in.

The two headquarters for the industry — the Gulf region and Asia-Pacific — also need to work together better to promote their offering, Hassan said.

“The [two regions] are almost in competition with each other — Muslims would like to see some kind of consensus between these guys,” he said.

“A lot of Muslims remain sceptical about these products, which is why they are more comfortable keeping their money in bank accounts or normal mutual funds.”

Tom Brown, head of global head of investment management at KPMG, the consultancy, agreed that lowering the cost of Sharia-compliant investing is crucial to the growth of this sector.

He said: “I think the demand is there, but the industry needs to get better at making these products deliver for the right costs.”

The rapid growth of the middle class in countries with large Muslim populations, such as Indonesia, could help drive investment into Islamic funds, according to Brown.

Hassan added that the development of social welfare and pension fund systems in countries such as Iraq and Saudi Arabia could open up new channels of institutional investment.

— Financial Times