Market volatility wiped out all of the asset gains made by the Islamic fund management industry in the year to September 2008, research and data provider Cerulli Associates said on Wednesday. Mutual funds and discretionary assets that comply with Shariah fell to $65 billion at the end of the third quarter, a figure well below the hundreds of billions of dollars typically associated with the market, according to research from Boston-based Cerulli Associates Inc. This drop in Islamic-oriented investment assets has occurred despite a doubling in the number of Shariah-compliant mutual funds in the last three years, according to the report. Shariah-compliant funds posted an 8 percent increase in the year to September 2008, due to new investments and returns on assets, Cerulli said, but will likely end 2008 close to or below their 2007 level, due to the global market turmoil, according to the report based on a sample of global asset managers said. Shariah-compliant fund managers had assets of $65 billion at the end of the third quarter 2008, including assets managed via discretionary mandates for institutions and high net-worth individuals and mutual funds. The Boston-based company said Islamic-compliant equity investments performed like their conventional counterparts, while Sukuk or Islamic bonds remain “rare” due to the illiquidity and scarcity of the underlying securities. Once markets stabilize this industry can potentially expand at a rate of above 10 percent a year, driven by the large amount of Islamic bank deposits and increased regulatory support from governments, the report said. Assets invested in Islamic-compliant mutual funds rose by 50 percent while the number of such funds doubled in the three years to 2008. Islamic mutual funds alone accounted for $35 billion - up from $23.2 billion gathered in 2005. These funds are offered mainly by domestic rather than international managers, Cerulli said, noting that Saudi Arabia is currently the largest domestic market for shariah investments. Malaysia has the largest number of registered mutual funds. “The majority of large international managers are yet to launch a Shariah-compliant mutual fund due to concerns regarding costs, the discrepancy in Shariah standards, and the lack of third-party distribution,” Cerulli said. Shariah compliance costs emerged as the most challenging aspect by the respondents on Cerulli's poll. Convincing investors of the fund manager's Shariah compliance was the second most challenging issue. Many large international managers have yet to launch a Shariah-compliant mutual fund because of concerns regarding costs, potential nonalignment with Islamic standards, and a lack of third-party distribution. “Assets in discretionary Shariah-compliant portfolios will continue to lag the retail market unless and until some large institutions, in particular the Middle East-based sovereign wealth funds, decide to invest in accordance with Shariah principles,” Shiv Taneja, managing director of Cerulli's international research practice, said in a statement. Assets in Shariah-compliant funds increased by 8 percent year-over-year as of September but will likely end 2008 close to or below their 2007 level, due to the global market turmoil, according to the report.
