Shariah sensitive investable assets in 2008 in the GCC and Asia touched $736 billion as compared to $267 billion in 2007 (in computing the total asset size this year, the 3rd annual Ernst & Young Islamic Funds & Investments Report (IFIR 2009), released on Monday at the World Islamic Funds and Capital Markets Conference showed. The report included Awqaf and Endowments, Takaful operators in Malaysia, SWFs in the MENA region and Asia, and the markets of Pakistan and Southeast Asia - all of which where not included in last year's figures. This translates into a potential annual revenue pool of $3.86 billion for the Islamic asset management industry. Fund sizes however, remain small, with over 50 percent having assets under management of $20 million or less. Twenty five Islamic funds were liquidated in 2008 and first quarter of 2009. Eighteen were liquidated in all of 2006 and 2007 combined. The number of new funds launched has dropped from 271 in the years 2006 and 2007 to only 89 in the year 2008 and first quarter of 2009. This mirrors the severe market correction shown by a 50 percent decline in the MSCI Index for the period of November 2007 to March 2009 compared to a 40 percent return in the period May 2005 to November 2007. The largest concentration of Islamic funds remains in the Middle East and equity funds lead the field for choice of asset type. Nineteen percent and 23 percent of Islamic funds are domiciled in Saudi Arabia and Malaysia respectively. Saudi Arabia holds $19.28 billion in total assets under management for Islamic funds. Malaysia holds $4.579 billion in assets. The untapped markets in Asia and MENA are a source of growth for the Islamic funds industry due to their inherently large Muslim populations. These markets, where Islamic finance is still in its infancy, include Indonesia (207 million), Pakistan (161 million), India (150 million), Bangladesh (132 million), Turkey (71 million) and Iran and Nigeria (both at 64 million). Islamic indices have performed poorly worldwide - we see the average return from Islamic equity funds fall to minus 39 percent in 2008 as compared to a 23 percent return in 2007. In the first quarter of 2009, the average return stood at minus 3.7 percent. Average Islamic fixed income fund return dropped from 3 percent in 2007 to 1 percent in 2008 and first quarter of 2009. Commodity prices declined during the second half of 2008, but signs of recovery in this asset class are emerging and in Q1 2009, average return of commodity funds stood at 10 percent, a substantial increase from the minus 20.01 percent experienced in 2008. Islamic cash funds remained constant, providing an average return of 3.9 percent in 2008 as compared to 3.4 percent in 2007. In Q1 2009, average returns are at 0.7 percent. Average returns from real estate funds dropped from 8 percent in 2007 to minus 11 percent in 2008 and minus 5% in Q1 2009. Sukuk issuance has slowed as spreads widen - sukuks worth $15.5 billion were issued in 2008 as compared to $47.1 billion in 2007. Ernst & Young's IFIR 2009 report estimates that sukuks around the value of $27.5 billion will be issued in 2009. Sameer Abdi, head of Ernst & Young's Islamic Finance Services Group, said “last year, we highlighted the phenomenal rate of growth experienced in the Islamic asset management industry. The landscape has changed significantly now, yet the fundamentals of the Islamic fund industry remain strong. With almost $50 billion in fund assets under management and a large, expanding and untapped Muslim population, there are likely to be considerable opportunities in the future. This is a time when strategic choices have to be made and market participants have to adapt to survive.” Touching upon the risks faced by Islamic asset managers as outlined in IFIR 2009, Omar Bitar, managing partner, Middle East Advisory Services at Ernst & Young Middle East, said “two-thirds of all players manage less than $100 million each in Islamic assets - the global competitive landscape is fragmented and a shakeout appears likely. Firms will need to select a product and distribution platform that is aligned with its strategy and position themselves as alpha-seekers or asset gatherers to set their fee structure. Pressure on fund managers to consider a lean and efficient corporate structure through the outsourcing of non-core business activities is now more than ever.” Commenting on the key risks facing the Islamic funds industry, Sameer said “the business risks landscape for Islamic asset management has changed substantially since 2008. Revisions of expected returns have caused some investors to withdraw capital and previously robust business models have struggled to cope with extreme market events. The economic downturn, a reduction in investor risk appetite and unclear valuations will be the most pressing business risks in 2009.” While IFIR 2008 explored ways in which a burgeoning Islamic asset management industry exploited opportunities and met challenges in a growth market, the 2009 edition reflects on measures that leading industry players are taking as they seek to strengthen their market positions and renew growth strategies in the backdrop of the global economic downturn. Notwithstanding the present situation of international financial markets, opportunities continue to exist for Islamic investments and the Shariah-compliant funds industry can catalyze the next phase of growth. It provides industry leaders with new insights as they seek to renew their business strategies in a challenging global economic climate. __
