DUBAI: Growth of the global Islamic asset management industry will likely halt or reverse this year as the industry struggles with poor sentiment in financial markets and lackluster interest among Islamic institutional investors, said Jahangir Aka, senior executive officer at asset management firm SEI Investments.
Islamic funds’ assets grew 7.6 percent in 2010 to $58 billion, according to a report by consultancy Ernst & Young, much slower than growth of 35 percent experienced by conventional funds.
Aka said conventional funds benefited from stable inflows of new money related to pensions and US 401k investment plans — savings systems that generally have yet to be created in the Islamic world.
"Net-net we’re going to have a flat to down year for growth," Aka said in an interview with Reuters. "The market mood and a lack of a needs-based industry are the main drags."
There may be some tentative buying of Islamic assets in 2012 as investors look to deploy capital that was kept on the sidelines as the global economy took a turn for the worse this year. But until there is more institutional interest in investing in Islamic mutual funds, growth will be modest, he said.
"We have to develop a deeper institutional investor base," said Aka. "We have a couple of big families, a supranational bank and a few Islamic banks. But none of them are major investors in the mutual fund market."
SEI, based in Oaks, Pennsylvania, manages around $179 billion in assets, out of which Islamic funds account for less than 1 percent.
Pension and institutional funds in particular will be critical to the industry’s growth as they provide long-term, stable money, he said, but so far movement in that direction has been minor. Islamic funds currently make up just 5.6 percent of the nearly $1 trillion Islamic finance industry globally, according to the Ernst & Young report.
Institutions
Aka said institutional investors often looked at the size of an Islamic fund rather than its performance in deciding whether to invest. With 70 percent of the 800 Islamic funds globally falling short of $100 million in assets, that weighs on the industry.
"Islamic asset management is still a young industry," he said. "It’s like giving a three-year-old child a university test — they’re not going to pass it. Look at the performance instead of just the size of the products."
On a performance basis, the All Country World Islamic Index has outperformed its conventional counterpart this year to date, according to data from MSCI. The Islamic index fell 14.6 percent, compared with a 15.8 percent drop by the All Country World Standard Core Index.
But Islamic funds are having a tough time staying in business. In 2010, 46 Islamic funds were liquidated while only 23 were launched.
Aka said there had been some house cleaning among funds that were too aggressive or charged inflated fees that damaged the industry’s reputation, but that continued consolidation would ultimately hurt the industry.
"I would say please don’t liquidate these funds. We are a small market and cannot afford shrinkage in end-client choice."
