tr global-islamic-asset-mgmt-report-2014

Global IslamIc asset manaGement RepoRt 2014

ReuteRs / srdjan Zivulovic

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3GLOBAL ISLAMIC ASSET MANAGEMENT REPORT

contentsForward 1 .....................................................................................................................................5

Forward 2 ....................................................................................................................................7

Executive summary ....................................................................................................................9

overview .................................................................................................................................... 13

investor Preferences ..................................................................................................................27

Market outlook ........................................................................................................................ 35

The Key challenge ................................................................................................................... 43

solution 1: Pensions .................................................................................................................. 51

solution 2: socially responsible investment (sri) ................................................................ 63

solution 3: Passporting .............................................................................................................71

niche solution: Targeting Muslims in Western Markets ......................................................... 81

acknowledgment and copyright ............................................................................................ 86

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ReuteRs / Paul YEung

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Foreword

Thomson reuters brings you the first global islamic asset management report. This report provides a holistic look into the islamic asset management sector. as the industry has picked up and more players take steps to develop more sophisticated products, the report delivers critical information on the dynamics of the islamic asset management sector. With an objective to arm readers with on the ground information, the report is complemented by an asset management survey delivering insights, investor preferences and market outlook for 2014. The survey results will help investors, asset managers and regulators take informed decisions that could aid in the development and flourishing of the islamic fund space in the years to come.

sayd FaRookglobal Head islamic capital Markets

The islamic asset management sector has come a long way from the first islamic fund launch, over half a century ago. islamic fund assets are estimated at usd 62 Billion, mainly comprised of islamic mutual funds totalling usd 46 Billion.

despite the fact that islamic mutual funds saw the highest fund launches and lowest liquidations this year, their assets under management have fallen. The lack of scale, stricter regulations, as well as stagnant markets have taken their toll on islamic funds.

scale remains to be the biggest challenge for asset managers and will remain to be the case unless the retail investor dependence is overcome.. according to our research, attracting institutional investors is the most important objective for the survival of the industry. The conventional space enjoys a 70 percent contribution from the institutional sector while islamic funds a mere only 20 percent of institutional money within their portfolios.

With changing investor preference and behaviour, socially responsible investment has attracted the masses, providing an ideal opportunity for islamic funds to enter the space. socially responsible investment provides a natural crossover to islamic funds with a market boasting over usd 33 Trillion in assets. in addition pension assets, a main driver for assets under management on the conventional front could also provide a wealth of fund flows to the sector.

We would like to thank Basil Moftah, Managing director, Middle East, africa and russia, and russell Haworth, Managing director, Middle East and north africa, for their continued support and belief in the growth and value proposition of the islamic finance industry.

We would also like to thank lipper for providing us with the wealth of data used to formulate our findings and analysis.

With compliments

Sayd Farook

global Head islamic capital Markets

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ReuteRs / Kai PFaFFEnBacH

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Foreword

lipper, in collaboration with Thomson reuters, brings the first global islamic asset Management report. The report is complemented by an asset management survey delivering insights, preferences and expectations that will give readers insights into the trends in the islamic fund space for years to come. our findings reveal a mismatch of expectations between investors and asset managers with an indicative gap in communication and product promotion. The report aims to serve both fund managers and investors, as they take increasingly active roles to foster growth in the industry.

The report provides positive evidence for 2013, suggesting a more resilient market, but islamic asset managers still face traditional challenges of scale and distribution. For one, the market is highly concentrated with monochrome products. The three prominent markets; saudi arabia, Malaysia and luxembourg house 70% of global islamic funds. Funds across all asset classes seem to be ‘’one-size-fits-all’’ mass produced products, offering very little diversity among their rivals and below average premium to investors. above all, promotional and distributional efforts are nonexistent.

detleF GlowHead of lipper EMEa research

This report enables user to understand the current state of islamic asset management, as firms size up opportunities and contemplate strategies to capitalize on market expansion and identifies lucrative opportunities that can develop the islamic funds space. This could help break out of the existing fund concentration which has been dominated by the gcc and southeast asian markets. Fund setup has also changed, with a growing preference for funds being domiciled in offshore jurisdictions. This report takes a comprehensive look at the islamic funds industry, combining quantitative tools to measure the sector as well as qualitative insights from upcoming initiatives that could shape the market in the future.

The market is highly monopolized with the top ten funds amounting to almost half of total assets under management. it is clear as to why smaller asset managers given their indistinct products are unable to attract funds. our survey has identified the critical steps that these smaller asset managers need to survive, based exclusively on investor feedback.

We can all agree one major hindrance to growth of the islamic asset management sector – and that is scale. The industry is heavily reliant on the retail sector – 80 percent to be exact with a minor 20 percent contribution from institutional investors.

attracting institutional investors is key to for the survival of the industry and can aid in improving other sectors such as the Takaful and pension sector. creating products to suit the investment criteria and risk appetite will help attract institutional investors.

Blending islamic products with other branches such as socially responsible investment principals can help islamic products break out of the regional concentration. in doing so provides access to a usd 33 Trillion market that has seen growth of over 500 percent since 1995.

Passporting is another avenue available for islamic asset managers to branch out and widen their investor base. While some fund managers have explored this avenue, many have failed due to the lack of distribution and promotion which is key in developed markets.

This is an exciting time to be in the islamic asset management space, with the industry at a pivotal moment in its development. Will asset managers continue to struggle with issues of scale and profitability? or will they adopt an out of the box approach to dealing with these challenges? We feel that the industry will rise to the challenge and we will witness a period of strong growth over the next few years.

With that, it gives me great pleasure to welcome you to the islamic asset Management report – our analysis and insights into the islamic asset management industry.

With compliments

Detlef Glow

Head of lipper EMEa research

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ReuteRs / jason lEE

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9gloBal islaMic assET ManagEMEnT rEPorT

Executive summary

2013 could prove to be a seminal year for the islamic fund industry. This year saw the highest number of fund launches and lowest number of closures; resulting in a doubling of the number of mutual funds since 2007. However, assets under management remained stagnant.

The market for sharia-compliant funds has evolved significantly over the past decade. This year saw the launch of 94 new funds; the highest in the last three years. The number of liquidated funds this year was 22, the lowest for the last four years. in total the number of mutual funds topped 780 this year.

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However, assets under management have not grown in proportion with the number of funds. since 2007 auM has increased 24%, but 2013 saw a dip of 1.7%. The increased number of funds but with marginal growth in auM points to increasing competition among fund managers, and achieving scale remains the biggest challenge facing the industry.

geographically the sector remains concentrated within 3 dominant markets: saudi arabia, Malaysia and luxembourg; these 3 domiciles alone hold over 71% of total islamic funds.

investors remain conservative, allocating us$ 3.2 billion of fund flows to money market funds, making it the largest asset class this year. But asset managers are regaining confidence in emerging markets as we see less globally focused funds this year and more emerging market mandates. sukuk funds remained popular, doubling in size over the last four years, and supporting the increased demand for islamic fixed income products.

peRFoRmance and tRack RecoRd aRe the most impoRtant investment consideRation FoR investoRscontrary to common belief, our survey indicates that investors rate performance and a minimum 3-year track record as key considerations when making investment decisions, with little consideration given to the overall size of the fund or asset type.

allocation of portfolios towards funds remains small, a mere maximum 15% of most investment portfolios. This helps to explain why islamic funds are growing at a much slower rate compared to fixed income products.

investors also identified diversification as being the main purpose for investing in islamic funds, with performance being a secondary consideration. in order to see higher growth rates, asset managers must change the perception of islamic funds from simply being a tool for portfolio diversification to being a primary investment asset class.

executive summaRy

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10 gloBal islaMic assET ManagEMEnT rEPorT

Fund launches aRe expected to decline in 2014, with Focus RemaininG on southeast asia and the Gccsoutheast asian funds represented the bulk of funds issued this year, with 42% of funds originating from southeast asian countries. There were 17 indonesian funds launched this year, supporting increased government spending, sukuk and pilgrim funds.

The gcc, on the other hand, made up 20% of fund issuances with 19 funds launched this year. But the region enjoyed the largest funds flows due to excess liquidity in the region.

Based on our survey, we expect fewer fund launches next year with the majority being southeast asian funds with local/regional mandates.

achievinG scale Remains the cRitical challenGe holdinG back the GRowth and development oF the industRy, with only 80 Funds manaGinG oveR us$ 100 million in assets

The main reason for the lack of growth is the existing investor base of islamic funds. The sector is dependent on retail investors, which make up 80%, with only 20% contribution from institutional investors.

This is the direct inverse of the conventional sector where institutional investors make up 70% of the asset management sector with 30% coming from retail investors. insurance companies and pension funds are the largest institutional investors in the conventional sector, contributing 29% and 19% respectively.

attracting institutional investors is critical for the survival, development and sophistication of the islamic asset management industry.

the entRance oF pension Fund assets could bRinG up to us$36 billion oF aum, doublinG the size oF the industRyWe estimate pension assets in the gcc to be over us$ 180 billion, 6% of gdP. This is significantly lower than the pension assets of developed markets which represent over 100% of gdP, with 27% percent being diverted to the asset management industry.

There is significant room for the growth of pension assets in the gcc, and attracting 20% of existing assets could channel us$ 36 billion to the islamic asset management sector – over half of the total current auM.

Pension reforms that were initiated in the last few years are now bearing fruit, opening up an opportunity for larger fund flows into the sector. Tangible steps in Turkey, Pakistan, and Malaysia to facilitate islamic pension schemes are examples of countries involved in opening their markets. in the gcc, Bahrain has taken a step to modernize and improve its management of public pension assets by establishing a private company to manage sovereign assets, while other countries such as the uaE are exploring their options.

executive summaRy

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the socially Responsible investment industRy, woRth oveR us$33 tRillion, oFFeRs a natuRal cRossoveR appeal to shaRia pRinciples and should be taRGeted by Fund manaGeRssocially responsible investment (sri) is in the spotlight; globally the industry has grown over 500% since 1995. sri provides a natural crossover for sharia-compliant principles, creating a perfect opportunity to broaden the investor base of islamic products.

adopting economic, social and governance (Esg) factors to islamic funds can facilitate better uptake in Muslim minority markets as investment culture is becoming more and more conscious of environmental, social, humanitarian and corporate governance efforts. islamic fund managers need to integrate sharia and Esg principles to deliver more sophisticated products that can cater to a broader investor base.

jeddah-based sEdco capital is a pioneer in this area, coming out with its first islamic fund to incorporate an Esg filter. The performance of this fund could serve as a case study for other fund managers.

passpoRtinG is anotheR avenue which islamic manGeRs can utilize to bRoaden theiR investoR basePassporting allows local asset managers region-wide access and exposure as well as a medium to enter Muslim minority markets. While cross border gcc fund mobility remains a relatively distant reality, using established passporting channels such as the Eu’s uciTs, can provide opportunities for islamic funds.

executive summaRy

The enTrance oF penSion FunD aSSeTS coulD brinG up To uS$36 billion oF auM , DoublinG The Size oF The inDuSTry.

attRactinG institutional investoRs is cRitical FoR the suRvival, development and sophistication oF the islamic asset manaGement industRy.

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overviewislamic funds’ (auM) have significantly increased over the last five years, but remain a fraction of total islamic finance assets.

Malaysia, saudi arabia, and luxembourg are recognized as the leading hubs for islamic funds, collectively playing host to 71% of islamic funds globally.

sukuk funds greatly outperformed the benchmarks after the 2008 financial crisis. However, performance suffered post-2012 and has yet to recover.

ReuteRs / arnd WiEgMann

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gloBal islaMic assET ManagEMEnT rEPorT

islamic funds’ assets under management (auM) have significantly increased over the last five years, but they remain a fraction of total islamic finance assets.

despite a 10% increase in funds, auM has marginally declined since 2012, with managers of smaller funds exiting the sector.

in The nuMberS

1,065number of islamic funds

uS$56 billion Total islamic asset Management assets

4.7Percentage of global islamic assets

given that the islamic funds industry is experiencing growth and development, we should be seeing higher growth numbers and a higher increase in fund numbers. on a positive note, key markets have taken an active role in passing regulations and safeguarding investors, which is proving to be effective with the refinement of the market. We see this year as a positive step back in hopes of a more promising year in 2014.

Global iSlaMic FunDS

GLOBAL FINANCIAL CRISIS

DUBAI FINANCIAL CRISIS

ARAB SPRING

EURO-ZONE CRISIS

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GLOBAL ISLAMIC FUNDS

Dead Funds No. of Funds AUM

28 26

37

46 47

57 56

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f fun

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AU

M U

SD B

illio

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576645

702795

878971

1065

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The number of islamic mutual funds has more than doubled since 2007, with 786 active funds today.

However, market refinement and declining performance has seen auM fall, as witnessed in the overall islamic asset management industry.

islamic funds have come to the fore in the last decade, but the sector still represents a fraction of the global industry. The financial crisis took a toll on performance – industry screens limited exposure to leveraged names, but volatility remained as managers retained their legacy geographical focus. The strategy has remained unchanged, despite rebounding markets. Managers have taken a passive approach to asset allocation and for the most part remain on the conservative end. Many of these funds are beta funds; few are ready to be alpha funds.

in The nuMberS

786number of islamic Mutual Funds

uS$46 billion global islamic Mutual Funds auM

94Fund launches

22Fund closures

GLOBAL FINANCIAL CRISIS

DUBAI FINANCIAL CRISIS

ARAB SPRING

EURO-ZONE CRISIS 84

59

77

94

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Global Islamic Mutual Funds (2007 – Sep 2013)

AUM No of funds Dead Funds Launched

53

62

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397451

541

617

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84 59 53 77 62 54 94

-6 -18 -28 -43 -45 -38 -22

Global iSlaMic MuTual FunDS (2007 – SepTeMber 2013)

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16 gloBal islaMic assET ManagEMEnT rEPorT

Gcc witnessed the largest fund inflows in 2013, driven by the excess liquidity in the region.

gcc institutions launched 19 funds during the year (20% of the total launches), compared to 39 asian funds (42% of the total launches).

ggc and asian fund issuance increased over the last year. gcc fund launches increased to 19 funds this year, while asian fund issuance more than doubled – 39 asian funds YTd compared to 15 funds this time last year. on the other hand, the highest fund flows occurred in the gcc, supported by excess liquidity in the region. While auM has declined, the exit of underperforming and/or unviable asset managers means the state of the market can improve with a refined pool of asset managers, a more efficient market, and higher product sophistication.

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Assets Under Management Versus Number of Funds (September 2013)

AUM (USD Billions) No. of Funds

OtherIndiaUnited Arab Emirates

UKEgyptCanadaSouth AfricaKuwaitJerseyIrelandIndonesiaPakistanLuxembourgSaudi ArabiaMalaysia

aSSeTS unDer ManaGeMenT VerSuS nuMber oF FunDS (SepTeMber 2013)

Gulf and Asian funds tied in the last year, with 15 fund launches each

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Fund registration remains concentrated in a few jurisdictions, mainly because of the lack of active regulation in other developing markets.

Malaysia, saudi arabia, and luxembourg are recognized as the leading hubs for islamic funds, collectively playing host to 71% of islamic funds globally.

These three markets remain the most active in developing and regulating their fund sector. a series of recent initiatives across several markets in the gcc and asia has helped safeguard investors while ensuring appropriate expertise and adequate capital from fund managers to support their products.

DoMicile no. oF FunDS auM (uS$ Million)

malaysia 263 10,164

saudi arabia 163 6,056

luxembourg 111 3,401

pakistan 62 2,364

indonesia 53 2,157

ireland 53 1,742

Jersey 33 1,286

kuwait 26 705

south africa 21 663

canada 19 248

uk 12 248

united arab emirates 12 331

other* 91 248

*Bahrain, cayman islands, guernsey, singapore, usa, australia, india, Egypt, Qatar, Tunisia, isle of Man, Mauritius, Morocco, France, japan, oman, russia, switzerland, Turkey

Malaysia 263

Saudi Arabia 163

Luxembourg 111

Pakistan 62

Indonesia 53

Ireland 53

Jersey 33

Kuwait 26

South Africa 21

Canada 19Egypt 12

UK 12United Arab Emirates 12

India 11Other 68

iSlaMic FunDS – DoMicileS

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There has been increasing diversification in terms of geographic focus, with the share of Malaysia- and Saudi arabia-focused funds declining significantly since 2010.

indonesia, with 18% of all funds focusing on opportunities in indonesia launched in 2013 compared to just 6% in 2010, was the biggest winner.

launcheD FunDS – GeoGraphical FocuS (2013)

Malaysia – 29%

Global – 13%

Saudi Arabia –13%

Pakistan – 8%

Indonesia – 6%

GGC – 5%

Kuwait – 4%

MENA – 3%

USA– 3%

Asia Pacific – 4%

Other – 14%

Malaysia –12%

Global – 21%

Saudi Arabia–5%

Pakistan – 7%

Indonesia – 18%GGC – 6%

GMM –6%

Middle East– 7%

India – 6%

Asia Pacific – 4%Asia – 3%

MENA – 5%

launcheD FunDS – GeoGraphical FocuS (2010)

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asset managers seem to be regaining confidence in markets that were previously perceived as problematic or unstable. The focus of funds, though, remains within global mandates.

indonesia witnessed the most significant growth in terms of fund launches, driven by new infrastructure, Sukuk, and Pilgrim Funds. With a planned increase in government spending, we forecast more indonesian fund launches in 2014.

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With an increased risk-aversion culture among investors, money market funds have taken the forefront and have overtaken equity funds this year for the first time.

sukuk funds have also taken the frontline with regard to fund flows, since they offer investors a safe investment haven.

With the increased demand in sukuk, more and more sukuk-specific funds are being launched. The likelihood of more funds is linked to demand for the underlying assets as well as to supply in secondary markets.

iSlaMic MuTual FunDS – aSSeT Type breakDoWn (2010 – 2013)

FunD launcheS anD aSSeT Type breakDoWn (2009 –2013)

year no. of Funds bond equity mixed money market Real estate other*

2013 ( sep 31 ) 82 24 30 19 8 1 -

2012 54 9 23 9 6 3 4

2011 62 9 32 4 10 6 1

2010 77 19 34 12 7 4 1

2009 53 18 18 3 11 1 2

*includes other funds, commodity funds, and alternative Funds Source: Lipper

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Malaysia –12%

Global – 21%

Saudi Arabia–5%

Pakistan – 7%

Indonesia – 18%GGC – 6%

GMM –6%

Middle East– 7%

India – 6%

Asia Pacific – 4%Asia – 3%

MENA – 5%

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asset allocation has remained unchanged over the last four years, with heavy concentration in certain asset classes.

despite the increase in sukuk fund issuance, equity funds (51%) continue to dominate the islamic fund universe.

Global iSlaMic FunDS – aSSeT Type (2013)

Mixed Assets – 16%

Equity – 54%

Money Market –12%

Other – 6%

Bond – 12%

Mixed Assets – 16%

Equity – 54%

Money Market – 12%

Other – 1%

Bond – 15%

Real Estate – 2%Commodity – 3%

Global iSlaMic FunDS – aSSeT Type (2010)

Equity funds continue to represent half of the funds universe (51%). While equity funds outweigh money market funds in the number of funds, money market funds are the biggest contributor to auM this year. Sukuk funds gained a 3% share of the pie, amounting to 15% of funds.

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Sukuk funds greatly outperformed the benchmarks after the 2008 financial crisis. however, performance suffered post-2012 and has yet to recover.

investor risk appetite is increasing; we see more investors relocating funds from sukuk to equities.

Sukuk funds were able to recover after the financial crisis. average performance produced alpha returns throughout 2009; then the political uprising affected performance. despite the political situation, sukuk funds were resilient before taking a downward trend YTd. Sukuk issuance remains high, with 506 sukuk issues. However, the average issuance has dropped, and investors seem to have higher risk appetite. our study shows a reallocation from sukuk to equities.

Sukuk aVeraGe perForMance (2007-SepTeMber 2013)

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Sukuk Average Performance (2007-September 2013)

LIBOR USD 3 Months LIBOR USD 6 Months Sukuk Average

% C

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erfo

rman

ce

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Money market funds are the largest asset class within the islamic fund sector, boasting auM in excess of uS$20 billion and net inflows of uS$3.2 billion so far for 2013.

The performance of money market funds remains volatile compared to benchmarks.

Money market funds are the top pick for investors looking to offset volatility risk. Money market funds boast the highest net inflows (YTd) as well as for overall one-year inflows – us$3.2 billion. as shown below, islamic money market funds were able to deliver alpha returns over the benchmarks; however, they seem to have slumped YTd.

Money MarkeT FunDS aVeraGe perForMance (2007–SepTeMber 2013)

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2007 2008 2009 2010 2011 2012 Sep-13

Money Market Funds Average Performance (2007–September 2013)

Money Market Average LIBOR USD 3 Months LIBOR USD 6 Months

% c

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rfor

man

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Shariah-compliant equity funds were able to prevail after the 2008 financial crisis, proving that Sharia-compliant funds are competitive with conventional funds.

The arab spring has put a dent in equity fund performance, with performance not yet recovered.

despite a quick recovery and after achieving alpha post-crisis, regional volatility has hit geographically concentrated portfolios in recent years. The latter has resulted in underperformance of some equity funds. Equity funds still represent half of the fund universe; they have accentuated their decline in auM this year.

equiTy aVeraGe perForMance (2007-SepTeMber 2013)

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Equity Average Performance (2007-September 2013)

Equity Average S&P 500 Shariah TR S&P 500 TR

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Scale remains a critical factor holding back the islamic asset management sector.

retail investors represent 80% of investors in the islamic fund space. The growth of the institutional sector is critical to achieving the sought-after scale and profitability.

The majority of Sharia-compliant funds target retail investors, but collective fund pooling requires institutional investors as well. The latter could help propel fund flows as and when the market finds a breakthrough. Funds have yet to fully use existing distribution channels and promotions to reach target customers.

While the majority of Shariah-compliant funds target the retail investor, these investors tend to have a short-term trading mentality toward their fund holdings. attracting institutional investors could bring in higher volumes but more importantly reduce the volatility of assets. This could help the sustainability of fund managers in the long run.

Global iSlaMic FunD MarkeT breakDoWn

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Global Islamic Fund Market Breakdown

AUM (USD Million) No. of Funds

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6

reTail FunDS $59 billion – 80%

inSTiTuTional FunDS – 20%

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ReuteRs / THoMas MuKoYa

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ReuteRs / PETEr andrEWs

investor preferencesThe global islamic asset management survey was distributed to asset managers, promoters, investors, and traders.

diversification is the main purpose of investing in funds.

Majority of investors are only willing to invest a maximum of 15% in funds of total portfolio.

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investoR pReFeRences


DeMoGraphicS oF SurVey parTicipanTS

0%

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43.5%

21.0%

12.9%

6.5% 6.5% 6.5% 3.2%

Middle East & North Africa

Europe & Central Asia Southeast Asia North America South Asia Sub-Saharan Africa East Asia & Pacific

Demographics of Survey Participants

Location

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27.73%

11.65%

7.74% 7.3% 10.45%

Why Do You Invest In Mutual Funds

Diversification Performance To conform with asset allocation strategy

Preferable form of investment

Hedging Risk aversion

Res

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Global iSlaMic aSSeT ManaGeMenT SurVey

inVeSTorS/TraDerSof the 150 approached, 27 investors and 13 traders participated in the survey. The respondents represent the market, with a margin of error of +/-11.

populaTion anD SaMplinGThe global islamic asset management survey was distributed to asset managers (issuers), promoters, investors, and traders.

inVeSTorS/TraDerSinvestors were also targeted, based on their involvement in islamic funds and knowledge of asset managers as (1) investors or (2) professionals within the field.

9660766_V8.indd 28 19/11/2013 15:54

29



lack of scale in the asset management sector is inevitable, unless the investor culture is changed. according to the results below, funds are seen as a secondary means of investment–an accessory to diversify portfolios rather than a primary form of investment. Performance comes as a secondary reason to invest in funds, which explains why primary investment fund flows do not end within the islamic asset management sector.

Why Do you inVeST in MuTual FunDS

0%

10%

20%

30%

40%

50%

43.5%

21.0%

12.9%

6.5% 6.5% 6.5% 3.2%

Middle East & North Africa

Europe & Central Asia Southeast Asia North America South Asia Sub-Saharan Africa East Asia & Pacific

Demographics of Survey Participants

Location

Res

pons

e Pe

rcen

tage

0%

10%

20%

30%

40%

50%

35.14%

27.73%

11.65%

7.74% 7.3% 10.45%

Why Do You Invest In Mutual Funds

Diversification Performance To conform with asset allocation strategy

Preferable form of investment

Hedging Risk aversion

Res

pond

ant p

erce

ntag

e

investors mainly invest in mutual funds as a means of diversifying their investment portfolios.

Performance is the second most important factor motivating investors.

9660766_V8.indd 29 19/11/2013 15:54

30



66.8%

11.1%

6.7%

6.7%

8.9%

0 to 15 %

15 to 30 %

30% to 45 %

45% to 60%

60% and above

hoW Much oF your porTFolio iS inVeSTeD in MuTual FunDSbreakDoWn oF inVeSTorS

0%

10%

20%

30%

40%

50%

60%

70% 67 67

83

80%

90%

100%

0 to 15 % 15 to 30 % 30% to 45 % 45% to 60% 60% and above

Breakdown of Investors

Retail Financial Corporate

13

8

33

3 0 00 00 0

17

10

Per

cent

age

portfolio allocation to islamic funds ranges between 0% to 15% for the majority of investors.

This trend is consistent among retail, financial, and corporate investors, with few willing to allocate a greater proportion to islamic funds.

9660766_V8.indd 30 19/11/2013 15:54

66.8%

11.1%

6.7%

6.7%

8.9%

0 to 15 %

15 to 30 %

30% to 45 %

45% to 60%

60% and above

31



kinDly GraDe The beloW paraMeTerS For iMporTance When conSiDerinG inVeSTMenT in a FunD (1 To 8; 1 beinG MoST iMporTanT)

0% 5% 10% 15% 20% 25%

Friends and family

Media coverage about Fund Company

Stock market fluctuations

Opinion of professional financial advisers

Fund company

Personal experience with mutual funds

Current events in financial markets

Performance of fund investments 19%

16%

15%

15%

11%

10%

7%

7%

Percentage

Fund performance is the most important consideration for investors when they are considering investment in a fund.

Economic and financial factors are the next most important influence on investment decisions.

9660766_V8.indd 31 19/11/2013 15:54

32



0%

5%

10%

15%

20%

25%

30%

35%

40%

Investor Preference

% o

f Res

pond

ants

37.5

25

15.6 15.6

6.3

0 0

No preference $0 – $10 Million $10 Million – $50 Million

$50 Million –$100 Million

$100 Million –$500 Million

$500 Billion –$1 Billion

$1 Billion +

No track record

1 year

3 years

5 years

7 years

10 years

59%

19%

3%

9%

6%

3%

inVeSTor preFerence WhaT iS The MiniMuM Track recorD you require beFore inVeSTinG in a FunD?

investor preference indicates that fund size is not a key consideration when making investment decisions.

Most investors prefer to invest with fund managers who have a minimum track record of three years.

9660766_V8.indd 32 19/11/2013 15:54

No track record

1 year

3 years

5 years

7 years

10 years

59%

19%

3%

9%

6%

3%

33



WhaT iS The MiniMuM Track recorD you require beFore inVeSTinG in a FunD?

inVeSTor preFerence – aSSeT Type

0

20

40

60

80

100

120

140

160

180

200

Equity Funds Sukuk Funds Money Market Funds Real Estate Funds Mixed Asset Funds

Investor Preference – Asset Type

Freq

uenc

y of

Res

pons

es

investors do not have a particular preference regarding fund assets.

as indicated earlier, investors consider performance to be the main indicator for investment in funds.

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9660766_V8.indd 34 19/11/2013 15:54

Market outlookMarket opinion is divided, indicating distortion in the marketplace.

There is great opportunity for sector growth and sophistication.

2014 may see lower fund issuance, asia-focused funds will constitute the bulk of new funds in 2014.

9660766_V8.indd 35 19/11/2013 15:54

36

maRket outlook


populaTion anD SaMplinGThe global islamic asset management survey was distributed to asset managers (issuers), promoters, investors, and traders.

aSSeT ManaGerS/proMoTerSin determining asset managers and promoters, we contacted only those institutions that manage and/or invest in funds. a group of 50 institutions was targeted and extracted from Thomson reuter’s data sources as well as from lipper, a Thomson reuters company.

iSSuerS/proMoTerSa total of 28 issuers and 9 promoters responded to the survey of the total of 50 institutions we approached. The 37 respondents participated in the survey, with a margin of error of +/- 11.

Global iSlaMic aSSeT ManaGeMenT SurVey – MarkeT ouTlook

0%

10%

20%

30%

40%

50%

60%

70%

61.1%

55%

50%

5.6%

0%

21%

33.3%

45%

28%

Better than Anticipated As Anticipated Below Expectations

Investor / Trader Issuer Promoter

Res

pons

e P

erce

ntag

e

Response Options

Which oF The FolloWinG beST DeScribeS your coMpany/orGanizaTion?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Financial Corporate Retail

Which of the following best describes your company/organization?

Res

pons

e P

erce

ntag

e

Company/Organisation type

9660766_V8.indd 36 19/11/2013 15:54

maRket outlook


Market opinion is divided, indicating distortion in the marketplace.

investors and promoters were happy with current market conditions. issuers, however, anticipated better market uptake.

0%

10%

20%

30%

40%

50%

60%

70%

61.1%

55%

50%

5.6%

0%

21%

33.3%

45%

28%

Better than Anticipated As Anticipated Below Expectations

Investor / Trader Issuer Promoter

Res

pons

e P

erce

ntag

e

Response Options

40%Response Count – 19



As anticipated

Below expectations

Better than anticipated

hoW WoulD you DeFine The STaTe oF iSlaMic FunDS in The paST FiVe yearS (eFFiciency anD reTurn perSpecTiVe)?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Financial Corporate Retail

Which of the following best describes your company/organization?

Res

pons

e P

erce

ntag

e

Company/Organisation type

9660766_V8.indd 37 19/11/2013 15:54

0%

10%

20%

30%

40%

50%

60%

70%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

37.2%

62.8%

Yes No Sukuk Other Equity Money Market Real Estate Mixed Asset

Perc

enta

ge o

f div

isio

n

Asset Type

Res

pons

e Pe

rcen

tage

Plans of fund launches in the next 12 months

43.75%

37.50%

33.33%

14.58%

10.42% 8.33%

38

maRket outlook


Res

pons

e P

erce

ntag

e

Development Stage of Product Range

0

5%

10%

15%

20%

25%

30%

35%

40% 38.5%

30.8%

28.2%

2.6%

0.0%

Development Infancy Growth Maturity Saturation

76% ImprovingResponse Count – 29

12% DeterioratingResponse Count – 4

13% No changeResponse Count – 5

There is great opportunity for sector growth and sophistication.

The islamic fund sector is perceived to be in the early stages of development: infancy, growth, and development.

WhaT STaGe oF DeVelopMenT iS your oWn proDucT ranGe? Do you See ThiS iMproVinG or DeTerioraTinG in The nexT 12 MonThS?

9660766_V8.indd 38 19/11/2013 15:54

0%

10%

20%

30%

40%

50%

60%

70%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

37.2%

62.8%


Perc

enta

ge o

f div

isio

n

Asset Type

Res

pons

e Pe

rcen

tage


43.75%

37.50%

33.33%

14.58%

10.42% 8.33%

76% ImprovingResponse Count – 29

12% DeterioratingResponse Count – 4

13% No changeResponse Count – 5

39

maRket outlook


are you conSiDerinG launchinG oFFShore FunDS?

• Further analysis indicates that of the 37% with projected fund issuance, 50% of those funds will be local

• only 20% are forecasted to be registered offshore

Do you plan any FunD launcheS in The nexT 12 MonThS?

projecTeD FunD iSSuance 2014 – aSSeT Type

The year 2014 may see lower fund issuance, since 62% of the issuers do not plan to issue new funds.

Sukuk and equity funds are expected to make up the bulk of issuance in the next 12 months.

0%

10%

20%

30%

40%

50%

60%

70%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

37.2%

62.8%


Perc

enta

ge o

f div

isio

n

Asset Type

Res

pons

e Pe

rcen

tage


43.75%

37.50%

33.33%

14.58%

10.42% 8.33%

9660766_V8.indd 39 19/11/2013 15:54

40

maRket outlook


GeoGraphical FocuS oF projecTeD FunD launcheS in 2014

0

5

10

15

20

25

30

Asia Middle East Europe GCC Americas Africa

No.

of P

roje

cted

Fun

d La

unch

es

Geographical Area

25

1413

12

8

4

are you conSiDerinG launchinG oFFShore FunDS?

• Further analysis indicates that of the 37% with projected fund issuance, 50% of those funds will be local

• only 20% are forecasted to be registered offshore

asia-focused funds will constitute the bulk of new funds launched in 2014.

With offshore funds taking a backseat in 2014, we expect to see 2014 fund launches originate from asian asset managers.

9660766_V8.indd 40 19/11/2013 15:54

0

5

10

15

20

25

30

Asia Middle East Europe GCC Americas Africa

No.

of P

roje

cted

Fun

d La

unch

es

Geographical Area

25

1413

12

8

4

9660766_V8.indd 41 19/11/2013 15:54

9660766_V8.indd 42 19/11/2013 15:54

scale is the key challenge facing the islamic asset management industry, impacting both managers of large and smaller funds.

The islamic fund universe is dominated by a few large players.

it is critical for large asset managers to attract institutional investors.

in order to survive, smaller asset managers must establish a three year track record and deliver competitive fund performance.

The key challenge

ReuteRs / BEnoiT TEssiEr

9660766_V8.indd 43 19/11/2013 15:54

44

the key challenGe


asset managers of larger funds still dominate the Sharia-compliant fund space; diversification is lacking, since the same types of structures and mandates are launched–creating a monochrome market. This causes market concentration of products, with flows remaining with established names and with little differentiation. This practice impairs the sustainability of managers of small funds, even though the market still seeks more sophisticated products and broader product ranges. single product launches remain the modus operandi for most asset managers.

MarkeT Scale

0

50

100

150

200

250

300

350

400

< 10 M 10M - 49 M 50M - 99 M > 100 M

No.

of F

unds

No. of Funds

346

230

72 80

Fund Scale

Scale is the key challenge facing the islamic asset management industry, impacting both managers of large and smaller funds.

The lack of scale continues to keep pressure on the profitability of managers of larger funds, with the smaller players facing closure.

9660766_V8.indd 44 19/11/2013 15:54

45

the key challenGe


The larGeST Ten iSlaMic FunDS repreSenT 44% oF ToTal FunD auMstricter fund regulations across active markets are causing smaller asset managers to exit the market. unable to attract scale, smaller funds are forced to liquidate, since they are unable to break even. This confirms that the market is dominated by a few large asset managers.

despite what one would think, these managers of larger assets are not benefiting from economies of scale and are also striving to achieve the scale required to deliver competitive performance. comparatively, the ten top funds in the conventional fund space represent a mere 5% of the global fund auM.

FunD FunD ManaGer auM (uSD Millions)

ETFs Physical gold ETFs commodities sec ltd 4,968

alahli saudi riyal Trade ncB capital cjsc 4,130

al rajhi capital sar commodity al-rajhi capital co 3,152

international Trade Finance Fd (sunbullah sar) samba cap & invest Mgmt 2,773

amana growth Fund saturna capital corporation 2,136

alahli diversified saudi riyal Trade ncB capital cjsc 1,963

amana income Fund saturna capital corporation 1,475

Public ittikal Public Mutual Berhad 1,248

Public islamic dividend Public Mutual Berhad 1,185

ciMB islamic dali Equity growth ciMB-Principal asset Man 1,059

Total 24,000

The islamic fund universe is dominated by a few large players.

While larger players are able to benefit from limited economies of scale, smaller players are forced out of the market.

9660766_V8.indd 45 19/11/2013 15:54

46

the key challenGe


in terms of investor types the islamic funds industry is actually the inverse of the conventional funds industry.

on the conventional front 70% of the industry is represented by the institutional sector in the following percentages:

• Pension funds – 27%

• insurance companies – 42%

• Banks – 3 %

• other institutions – 28%

The same concept needs to be applied to the islamic funds industry. While the Takaful sector has yet to grow, access to pension assets, banks, and other institutions will undoubtedly aid in the growth of the Shariah funds industry.

in order to achieve scale and improve profitability, managers of larger assets need to focus on attracting institutional investors.

The industry needs to encourage pension funds, takaful operators, and banks to play a role as key investors, if it is to achieve profitability similar to the conventional funds industry.

islamic bankspension FundsTakaful companiesother institutions

Shariah-Compliant FundS induStry Conventional FundS induStry

reTail FunDS 80%

inSTiTuTional FunDS 20%

reTail FunDS 30%

inSTiTuTional FunDS 70%

long term goal would be to attract conventional funds

banks 3%pension Funds 27%insurance companies 42%other institutions 28%

9660766_V8.indd 46 19/11/2013 15:54

47

the key challenGe


kinDly GraDe The beloW paraMeTerS For iMporTance When conSiDerinG inVeSTMenT in a FunD

MiniMuM Track recorD requireD To inVeST in a FunD

Managers of smaller assets must take the next few years to build their reputation in the market. Fund managers need to limit tracking errors to prove their diligence. in our opinion this, in addition to obtaining a minimum track record of three years, will allow smaller asset managers to scale up with their larger competitors in the market.

0% 5% 10% 15% 20%

0.00.20.40.60.81.0

Friends and family

Media coverage about Fund Company

Stock market fluctuations

Opinion of professional financial advisers

Fund company

Personal experience with mutual funds

Current events in financial markets

Performance of fund investments

Managers of smaller funds are on the brink of extinction, and it is now a matter of survival.

To prevail in the market managers of small assets need to focus on survival, and their building a three-year performance track record is the key investment consideration for investors.

59%

19%

3%

3%

10%

6%

3 years

5 years

1 year

10 years +

No Track record

7 years

9660766_V8.indd 47 19/11/2013 15:54

48

the key challenGe


Scale iS The key challenGe FacinG The iSlaMic aSSeT ManaGeMenT inDuSTry

penSion FunDS

•access to vast liquidity of sovereigns

•access to institutional investors

•Ease of government reserves

•collective pooling

• improved payout ratio

paSSporTinG

•Broader market reach

•scale facilitation with minimum change to product structure

• increase return efficiency

Socially reSponSible inVeSTMenT

•complements Shariah principles

•allows wider reach beyond Shariah-compliant investors

•large market exceeding us$3 trillion in assets

•natural crossover

Solu

Tio

nS

9660766_V8.indd 48 19/11/2013 15:55

ReuteRs

9660766_V8.indd 49 19/11/2013 15:55

9660766_V8.indd 50 19/11/2013 15:55

a robust pension system is an indicator of a developed economy.

Pension assets represent well over 100% of gdP in developed markets; gcc pension assets represent a mere 5% of gdP.

allocation of 20% of pension assets in the gcc to the fund sector can pump us$26 billion into the fund sector.

Solution 1: pensions

ReuteRs / cHrisTian HarTMann

9660766_V8.indd 51 19/11/2013 15:55

52

solution 1: pensions


The poTenTial role oF penSion FunDS

The enTrance oF penSion FunD aSSeTS coulD brinG up To uS$36 billion oF auM, DoublinG The Size oF The inDuSTry.

Pension fund assets are a critical tool to add scale to the islamic asset management sector.

robust and efficient pension schemes are an indicator of developed economies and financial markets.

We estimate gcc pension assets at us$180 billion.

in developed markets such as the u.K. and the netherlands, pension assets represent over 100% of gdP.

gcc pension assets are a minor 5% at most of gdP.

investment restrictions are holding back the growth of pension assets.

diverting 20% of gcc pension assets can contribute us$36 billion to the islamic asset management sector.

reforms in Turkey increased pension contributions over 271% YTd, while the voluntary pension system in Pakistan grew pension assets over 500% since 2008.

Targeting pensions funds should be a key priority for the islamic asset management industry.

Pension funds play a key role in the conventional funds industry, and their entrance could resolve the issue of scale in the islamic asset management space.

9660766_V8.indd 52 19/11/2013 15:55

53



penSion ScheMeS-The SilVer lininG oF collecTiVe poolinGcan Sharia-compliant pension Schemes give a much-needed boost to the islamic asset Management sector?By Karim arafa–Funds analyst–Thomson reuters

Privately funded islamic pension systems are now in full-swing in countries such as Pakistan, Turkey, and Malaysia, while products have also appeared in the u.K. and australia.

Evidence from the rest of the world is promising: ever since chile introduced its privately managed pension scheme in 1981, over two dozen countries have followed suit. The decision marked a turning point for local asset managers in the south american country. The industry now has approximately us$40 billion in auM across 500 mutual funds. This means chile’s mutual fund industry by itself is close to two-thirds the size of the entire global islamic funds industry, an impressive growth that is mostly due to asset flows from its private pension scheme.

A number of studies and real-life examples prove that all developed and stable economies enjoy a well-established and systematic pension scheme.

But the experience from early-adopting countries also shows that these efforts require time; in Pakistan, Turkey, and Malaysia the market might need to wait a few more years for their systems to mature. Pakistan introduced its voluntary Pension scheme (vPs) only in 2005, Turkey’s reforms to its private pensions have kicked in only this year, and Malaysia’s Private retirement scheme (Prs) is just one year old.

it is perhaps from state-owned pensions that have existing (and substantial) auM that islamic fund managers could benefit the most. if these pensions would switch only a portion of their mandates into these fund managers, the flows could fast-track the sector.

counTry ToTal aSSeTS 2012 (uSD billion)

% GDp (local currency)

australia 1,555 101%

brazil 340 14%

canada 1,483 84%

France 168 7%

Germany 498 15%

hong kong 104 40%

ireland 113 55%

Japan 3,721 62%

netherlands 1,199 156%

south africa 252 64%

switzerland 732 118%

uk 2,736 112%

us 16,851 108%

Total 29,754 78%

While sovereign wealth funds and family offices hold significant assets in the gulf, these have barely found their way to local asset managers, much less to those that follow islamic investment principles. But private and publicly funded pension schemes could be more responsive to client requirements and thus more likely to direct some of their cash to islamic pension products and their fund managers.

9660766_V8.indd 53 19/11/2013 15:55

54



not all pension systems are created equal, but empirical evidence from the asian development bank institute shows that the more developed and stable an economy is, the more developed and systematic its pension scheme will be. another report by the city of london corporation showed how pension systems and insurance companies were involved in shaping and sustaining the financial markets of developed markets. in the u.K., for instance, pension assets grew from 20% to 80% of gdP, and insurance assets grew from 20% to 100% of gdP from the 1980s to the 2009 period. (The largest pension markets are in the u.s., japan, and the u.K. with 56.6%, 12.5%, and 9.2% of the total pension assets, respectively.)

some of these pensions have very generous payouts, but they are not exploiting investment options or outsourcing much of their mandates. This impacts their financial viability and similarly misses out on “recycling” those funds through local asset managers.

Thus, pension assets represent a mere 3% to 6% of gdP in gcc countries versus developed economies such as switzerland, the netherlands, and the u.K., with 118%, 114%, and 112%, respectively. The question is whether policymakers have made any active decision to raise these figures to bring them in line with the developed or emerging-market economies.

GCC pension assets are estimates to be US$180 billion; even a portion directed to the Islamic fund sector would have a major impact.

The islamic asset management space is held back mainly because of its inability to attract large funds (lack of scale). it would be sensible to divert pension fund assets or even a portion of them toward the sector, which might break the deadlock.

a 2010 report by ncB covered the role of institutional investors in the gulf region, identifying at least us$170 billion in auM held by government pension funds in the gcc. assuming a conservative growth rate of 2% per year, pension fund assets in the gcc could now stand at around us$180 billion or more.

Pension assets in the GCC represent a minor 3%–6% of GDP, compared to more developed economies such as the U.K. and the Netherlands with 112% and 114%, respectively.

Gcc counTrieS’ DeMoGraphicS (2012)

Population < 25

0

5

10

15

20

25

30

35

40

Bahrain Qatar Kuwait Oman United Arab Emirates Saudi Arabia

Pop

ulat

ion

(Mill

ion)

GCC Countries' Demographics (2012)

Population (Million)

0.4884 0.5075 0.8251.9229

2.8143

12.0768

1.11 1.452.5

2.87

4.77

23.68

9660766_V8.indd 54 19/11/2013 15:55

55



For the moment the dynamics of pension schemes in the gcc are “pay as you go,” meaning that nationals who are currently in retirement are paid for by current workforce contributions. With some of the highest payout ratios at 80%, this will not be sustainable, given the current and future demographics of the region. The case for external asset managers, especially islamic ones, is becoming more apparent every year.

Presently, the region’s population is relatively young; roughly 50% of the population is under 25. it is estimated that 2.5 million people will join saudi arabia’s workforce by 2014. This implies that the workforce will grow at an accelerated pace over the next decade, piling pressure on pension payouts as workers eventually retire. if the region continues to implement the pay-as-you-go system, it will place a large strain on reserves and government funds. While this is not an immediate problem, it would require swift action today in order to avoid a budgetary crunch in the long run.

Diverting 20% of GCC pension assets to Islamic asset mangers could mean a sector-boosting US$36 billion; that’s more than half of the current AUM.

if gcc pension assets are assumed at a base of us$180 billion, a mere 20% shift from these funds into Sharia-compliant funds could mean a sector-boosting us$36 billion would be added. The figure could be far higher if pension schemes from other majority-Muslim countries, such as Malaysia, indonesia, Pakistan, Turkey, etc., are taken into account. in a recent reuters report consultants Ernst & Young estimated that such a shift across state-owned pensions in core islamic markets could add between us$160 billion to us$190 billion to the sector.

But, if supply is in abundance, it is demand mechanisms that need to be put in place to access these funds. Pakistan developed its vPs scheme back in 2005, which today holds us$32.4 million in islamic pension funds or 61% of all vPs assets. in Malaysia regulators hope that over the next ten years, auM in the Prs industry will grow to 30.9 billion ringgit.

if the latter were done across the gcc countries, and a portion directed toward islamic asset management, the outcome could completely reshape the sector. a much-discussed initiative in the uaE has been the establishment of a pension scheme for expatriates, although no timeline and no concrete steps have been announced.

A key obstacle holding back the growth of the pension sector is the applied investment restrictions that result in pension assets being directed into local equities and fixed income products.

one argument supporting this initiative is to keep funds from leaving the country’s financial system, since many expats work to send some of their money back home or invest in their home markets. (This has been estimated to be as high as 40% of income.) Bahrain has also taken the initiative to improve returns on its pension assets by establishing a company (osool) for the sole purpose of managing its pension assets.

a key obstacle holding back the growth of the pension sector is the applied investment restrictions that result in pension assets being directed into local equities and fixed income products. While this safeguards assets, it also has the potential to constrain returns and may result in a budgetary deficit, further aggravated by demographic trends.

in 2012 Qatar’s pension and social insurance authority invested Qar1.6 billion into a real estate company. While social security institutions are some of the biggest investors in local equities, they can also contribute to the asset management sector and facilitate their growth and development.

Turkey is also on the forefront with its new pension reform, encouraging pension contributions with a 25% state contribution. The reform went into effect on january 1, 2013. The new law encourages contributions by granting a 10% tax deduction of gross income. For 2012 pension policy sales increased 27%. after introducing the new reform, pension contributions increased 271% (june 2013 compared to first quarter 2012).

Today, Turkey’s pension assets make up 43% of the total fund sector auM. This directive, along with recent changes to its fund law saw a 4.2% growth in fund assets, according to reuters. at present there are 17 pension companies in the market, with four big market players (garanti, anadolu, Yapı Kredi, and avivasa) that make up a combined 66% market share of participants and over two-thirds of auM. With Turkey’s young population, there is an exponential opportunity for growth in both asset managers and participants.

The dynamics of pension schemes in the GCC are “pay as you go,” placing a large strain on reserves in case of any shortcomings.

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A recent pension reform in Turkey resulted in a 271% increase in pension contributors.

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Takaful assets are another form of institutional investment that could contribute to the Islamic asset management sector.

While such plans represent a first tier of pension planning, there is another offering that could be applied to private companies to form a second-tier contribution. in most gcc countries companies are required to give their departing employees a lump sum known as end-of-service benefits. These are usually paid through available working-capital funds. given the above, managing a fund to cater to end-of-service benefits can again contribute to the fund management sector in much the same way.

another group of institutional investors in the region that is relatively untapped are insurance companies. currently, life and social insurance is overshadowed by motor vehicle and health insurance, mainly for cultural reasons. However, with the rise of the islamic insurance (takaful)

industry, more and more individuals and families are opting for insurance and protection. again, these represent long-term funds that need to be managed in an optimal fashion or will risk diluting takaful asset pools.

Pension, insurance, and further endowments all form part of an extended family of institutional investments, well beyond sovereign wealth funds and family offices. They can contribute significantly to the asset management sector as and when a portion of their assets are directed into asset management channels. The questions are whether there is sufficient commitment at the policymaker level and whether a country is willing to lead the region with a realistic timeframe for those plans.

Pension funds in developed markets make up 27% of fund investments, contributing to all asset classes.

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Private pension funds under the voluntary Pension system (vPs) rules issued in 2005 were first introduced in Pakistan in 2007. The size of pension funds remained stagnant during the initial years, mainly because of adverse market conditions, lack of awareness about the product, and fiscal inconsistencies in the treatment of retirement schemes. However, since 2010 pension funds have shown significant growth because of positive changes in the tax regime, favorable market conditions, launch of new pension funds, and an increase in the number of participants (investors), according to the securities and Exchange commission of Pakistan (sEcP).

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caSe STuDy:

pakiSTan’S VolunTary penSion SySTeM

By Mr. Muhammad afzal, director, rEiTs, Pension and Private Equity Wing, securities & Exchange commission of Pakistan

poSiTion aS oF july 2013

total assets of pension fund industry rs.5,580 million

net assets rs.5,355 million

total number of pension funds 13

shariah-compliant pension funds 7

conventional pension funds 6

number of pension fund managers 7

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13 Since 2010 pension funds have shown significant growth because of positive changes in the tax regimes, favorable market conditions, and the launch of new pension funds.

Pension funds have invested 53% in government securities, 35% in equity securities, and 8% in bank balances.

The size of Shariah-compliant pension funds reached rs.3,404 million (61% of the total) against that of conventional pension funds, which stood at rs.2,176 million (39% of the total).

The Shariah-compliant funds and conventional pension funds started business at the same time, although the former have shown considerable growth over the years and now account for over 60% of the total pension fund assets. This growth has taken place in spite of the fact that some lucrative sectors of the economy do not meet the eligibility and screening criteria for investment by islamic pension funds. Therefore, sectors including banking, insurance, tobacco, breweries, etc. do not qualify for investment by islamic funds. some profitable companies do not meet the eligibility criteria because of their highly leveraged positions.

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The popularity of Islamic pension funds can be attributed to demand from the general public for retirement products designed in accordance with Islamic precepts.

VolunTary penSion FunDS – GroWTh

chanGeS in Tax laW:The sEcP has been striving to bring parity in tax treatment for the conventional retirement schemes and the vPs. recently, the following changes were incorporated in the tax law:

• Persons retiring from vPs can withdraw up to 50% of their accumulated balance.

• Persons can avail themselves of a tax credit of up to 20% of their taxable income.

• The amount withdrawn in installments over a period of ten years as pension (monthly installment) from an income payment plan after retirement is exempt from income tax.

• Withdrawal of the balance transferred to a vPs account from a recognized provident fund will continue to be exempt from tax.

chanGeS in reGulaTory reGiMe:revision of the investment and allocation policy for pension funds–some of the recent changes introduced by the sEcP in the investment and allocation policies of pension funds are as follows:

• a Shariah-compliant money market subfund (of a pension fund) can invest in government ijarah sukuks having three years’ time to maturity.

• Per-party and per-sector exposure limits for conventional and Shariah-compliant pension funds have been synchronized.

• Pension funds have been allowed to invest in commodity futures contracts traded on the Pakistan Mercantile Exchange limited (PMEX) to encourage diversification and to expand the scope of choices available to investors.

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FunD ManaGer penSion launch DaTe auM july 2012 auM july 2013

hbl asset mgmt conventional dec-11 163.77 264.931

islamic dec-11 129.199 186.03

Js investments conventional jun-07 206.29 273

islamic jun-08 129.33 162.38

arif habib investments conventional jun-07 295.7 436.27

islamic nov-07 166.00 230.96

atlas asset mgmt conventional jul-07 175 388

islamic nov-07 197 376

al meezan investment mgmt

conventional n/a n/a n/a

islamic jun-07 868 1856

ubl Fund managers conventional May-12 296.57 616

islamic May-10 174.5 314

nbp Fullerton asset mgmt

conventional jul-13 0 96

islamic jul-13 0 94

FuTure planS The sEcP is confident that vPs has a vast potential for growth, given the right type of regulatory and fiscal policies are put in place. so far, the government has been quite supportive and has introduced gradual improvements in the fiscal regime, which have enabled the private pension funds to gain a foothold. The sEcP hopes that the government’s patronage will continue to popularize the culture of long-term savings through pension funds in order to serve the dual purpose of increasing savings rates and providing social security to senior citizens.

The government has been supportive and has introduced gradual improvements in the fiscal regime, which have enabled private pension funds to gain a foothold.

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ReuteRs / BaZuKi MuHaMMad

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sri Market provides access to over usd 3 Trillion of assets.

sri provides a natural crossover, complementing shariah Principals.

sri will help broaden the reach of islamic funds beyond localized markets.

sri facilitates the scale required to improve the efficiency of islamic funds.

Solution 2: Socially responsible investment (Sri)

ReuteRs / navEsH cHiTraKar

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solution 2: socially Responsible investment (sRi)


The poTenTial role oF Sri

The Sri inDuSTry iS WorTh oVer uS$33 Trillion; aTTracTinG eVen a SMall porTion oF iT coulD SiGniFicanTly aDDreSS The challenGe oF Scale FaceD by MoST iSlaMic FunD ManaGerS.

The sri industry is estimated to be a us$33-trillion industry.

sri is a growing industry, having grown over 500% since 1995.

sri principles provide a natural crossover to Shariah-compliant products.

according to The association of the luxembourg Fund industry, Shariah-compliant funds fall under responsible investment.

incorporating sri principles in islamic products offers a synergistic product to cater beyond regional markets.

sri will help broaden the reach of islamic funds beyond localized markets.

sri facilitates the scale required to improve the efficiency of islamic funds.

This year has seen two new Shariah-compliant funds incorporating sri parameters.

positioning islamic funds as Sri could be a key strategy for fund managers.

sri is a fast-growing subsector of the conventional funds industry, with a natural alignment to islamic funds, complementing Shariah principles.

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ri screened (best-in-class, engagement)

climate change and renewable energy funds Microfinance funds Engagement Faith-based funds

ri extended (filters) Environmental and ecological funds

social entrepreneurship and solidarity funds Sharia-compliant funds

as illustrated, Shariah-compliant funds are categorized under responsible investment. By incorporating sri principles and Shariah principles, islamic funds can be marketed to offshore markets.

carbon funds social impact–single impact area

sustainable forestry funds social impact–multiple impact area

sustainable forestry funds venture philanthropy

reSponSible inVeSTinG

eSG (social) eSG (governance) ethics (cross-Sectoral)eSG (environment)eSG (cross-Sectoral)

ALFI Responsible Investments categorization

positioning islamic funds as Sri could be a key strategy for fund managers.

sri is a fast-growing subsector of the conventional funds industry, with a natural alignment to islamic funds, complementing Shariah principles.

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Global Sri aSSeTS (2010)

Sri offers an opportunity for more sophisticated islamic fund products.

incorporating sri principles into shariah-compliant funds–crossover appeal?

a convergence of sri and islamic funds could boost appeal in Western markets and tap into a market that complements Sharia principles. according to the u.s. siF foundation, sri assets grew 486% since 1995, with sri funds having over us$3.7 trillion in auM in the u.s. alone.

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SRI assets grew an average of 22% since 2010.

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The European sustainable investment Forum’s (Eurosif) European sri study, 2012 shows that all responsible investment strategies surveyed outpaced the market, and four of the six have grown more than 35% per annum since 2009.

Today in the u.s. sri is estimated to be

us$33.3-trillionTotal sustainable auM in Europe now exceeds

us$15 trillion

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Ten Top european equiTy FunDS by neT aSSeTS: May 2013

rank Fund name investment manager sRi Focus country sRi assets

1 Pictet Water Pictet Equities Watter switzerland 2,362

2 coiF charities investment ccla investment asset Management ltd Mixed assets dynamic uK 1,320

3 sEB Ethical global Fund sEB asset Mangement Equities global sweden 1,087

4 cBF church of England investment ccla investment asset Management ltd Equities global uK 1,075

5 Black rock global Funds -new Energy Fund Black rock Equities renewable Energy / climate change

uK 1,023

6 Pioneer Funds – global Ecology Pioneer investment Management Equities Environmental / Ecological ireland 935

7 allianz valeurs durables allianz global investors France Equities Euroland France 723

8 F&c stewardship growth F&c asset Management Plc Equities united Kingdom uK 715

9 vanguard sri European stock The vanguard group inc. Equities Europe ireland 642

10 robecosaM sustainable Water Fund robecosaM sustainable aM Equities Water switzerland 638

Total Sri equity Funds Total 10,524

all Sri equity Funds auM 10,7164

More than one of every nine dollars under professional management in the u.S. is invested today according to Sri strategies.

sri has been gaining more traction over the years.

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caSe STuDy:

SeDco capiTal launcheS The FirST Shariah-coMplianT proDucT WiTh an eSG FilTer To caTer To Socially conSciouS inVeSTorSBy Hasan s. aljabri, cEo, sEdco capital

coMMon GrounDBoth Shariah and ethical investors are looking for profits; however, they also seek to invest responsibly and ethically to contribute to the development of the economies in which they operate. The development of the unPri by Kofi anan in 2006 created clear standards for the ethical industry. upon reviewing these standards, we realize that ethical and Shariah concepts are quite similar; both endorse responsible investing, both avoid sinful companies (alcohol, tobacco, companies that hurt the environment, gambling, firearms), Shariah avoids usury and excessive debt, and some sri avoid excessive debt. in addition, Shariah partners risk and reward, while sri has active management objectives. Both focus on sustainable economic development.

GiVen ThaT Shariah principleS Do coMply in SoMe SenSe WiTh eThical FinancinG, WhaT ShorTcoMinGS are you lookinG To oVercoMe by applyinG The Sri FilTer? Esg drives involvement in the companies in which we invest to fully embrace ethical and responsible investing. Shariah doesn’t require that. Here, the investor is involved in encouraging both

management and boards of the companies in which they invest to ensure their compliance with unPri.We continue to learn of the advantages of having our funds be Esg-compliant.

methodology and screening process:

The funds are screened for compliance with international conventions and guidelines on environment, human rights, and business ethics such as the un global compact, oEcd guidelines for Multinational Enterprises, iol core labor conventions, environmental conventions, and weapons-related conventions. noncompliance in this area is handled through a process of engagement and exclusion. The fund will incorporate proxy voting services according to best practices in corporate governance standards into the Esg program.

the fund strategy and how it differs from the average Shariah fund investment strategy: our strategy isn’t affected; we are savvy investors who invest to make a profit. all of our investments are Shariah-compliant and some are ethical. adding the Esg filters to our existing strategy still serves our objectives. once ethical investors invest in our funds, they will realize that our Shariah screens extensively reduce the risk profile of the portfolio.

asset allocation:similar to conventional investors, shariah and ethical investors follow sophisticated methodologies to optimize returns while keeping within their risk profile. our product diversification gives our clients and us the depth to invest across asset classes, sectors, and management styles globally, such as in real estate, private equity, listed equities, commodities (such as agriculture and timber), as well as in compliant fixed income assets.

Future funds that will break out of strictly Shariah principle screening:We see interesting opportunities in Europe that are attractively priced that will benefit from the future recovery in Europe. our focus is also on companies that have a large portion of their revenues coming from exports. We’re working on several real estate acquisitions in the u.s. and asia, particularly indonesia where we see interesting growth potential. We are also looking into income leasing products.

Having found very close similarities between the two belief systems, Sedco views SRI as a natural and successful venture.

haSan al-jabri – ceo SeDco capiTal

Hasan has been a major player in investment banking and corporate finance in the MEna region for over 27 years holding leading positions in two of the region’s most influential financial institutions; ncB group and saMBa. His achievements have driven these institutions to become leaders in corporate finance, corporate banking and investment management. Hasan has focused investments of sEdco capital both locally and internationally in different asset classes including private equity, public equity and global real-estate, all in compliance with shari’a guidelines, spear-heading the way into ethical investment solutions.

Hasan sits on the boards and is a founder of a diverse group of industries including finance (microfinance and mortgage), FMcg, building materials, catering, real estate development, iT & healthcare.

Hasan currently chairs the World’s Presidents organization chapter in saudi and is a Bsc graduate of the american university of Beirut and an Executive Management Program graduate of columbia university

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Top 10 european FirMS ManaGinG Sri FunDS by neT aSSeTS: May 2013

rank investment manager country sRi assets

1 nordea Fonder aB sweden 8,688

2 amundi asset Management France 3,460

3 storebrand Fondene as norway 2,850

4 Pictet switzerland 2,761

5 ccla investment Management ltd uK 2,396

6 robeco saM sustainable am switzerland 1,972

7 swedbank robur Kapitalforvaltining aB sweden 1,821

8 BnP Paribas asset Management France 1,552

9 F&c asset Management plc uK 1,527

10 natixis asset Management France 1,427

Total 10 Total Sri equity Funds 28,458

There are attractive investment opportunities in europe that are expected to benefit from the future recovery in europe.

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Passporting offers greater access to liquidity, while limiting multiple registrations.

Therefore, passporting reduces costs, while simultaneously delivering broader access.

Passporting has regulatory framework guidelines.

Passporting levels the playing field, enabling managers of smaller assets to achieve economies of scale.

Passporting opens opportunities for service providers, enriching the financial and economic state of the market.

Solution 3: passporting

ReuteRs / jason rEEd

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solution 3: passpoRtinG


The poTenTial role oF paSSporTinG

paSSporTinG STraTeGieS can be iMpleMenTeD by boTh larGe anD SMall FunD ManaGerS ThaT haVe hiGhly perForMinG FunDS buT are unable To aTTracT SuFFicienT

inVeSTMenT FroM inVeSTorS in Their local MarkeTS.

undertakings for collective investment in Transferable securities (uciTs) can help broaden marketability of islamic funds.

Passporting gives islamic funds access to a Shariah-compliant investor base enjoying higher disposable income and savings ratios.

uciTs have helped achieve scale in Europe: Eur6.5 trillion versus non-uciTs funds’ Eur2.7 trillion.

Passporting can help break the scale barrier holding back the islamic asset management sector.

The establishment of a gcc funds passport is a challenging step, but it could significantly improve the development of the islamic funds industry.

Promotional strategies are critical for the success of passporting islamic funds in Western markets.

While a gcc funds passport is a far reach for the near future, islamic fund managers should make use of uciTs channels to broaden their market base.

given the lack of Shariah-compliant products in Western and European markets, passporting islamic funds is a lucrative opportunity.

passporting is a strategy that effectively addresses the issue of scale, expanding the potential investor base while limiting registration and other operating expenses.

regulatory frameworks are key considerations (and often limitations) for fund managers considering passporting strategies.

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paSSporTinG iSlaMic FunDS: a paTh For GroWTh?

By Bishir shiblaq, Head of duba arendt & Medernach–avocats representative office and Florence stainier, Partner, investment Funds

choosing the domicile of an investment fund is not an easy task. a fund promoter has to consider many aspects, in particular the available vehicles, investment strategies, and the reputation of the domicile. one of the key concerns remains, however, the possibility to distribute the fund in multiple jurisdictions. investment funds in the Middle East, whether conventional or islamic, currently face distribution constraints, since there are no arrangements for mutual recognition in place that permit funds that have been authorized in one country to be distributed in another country without complying with the full range of the host country’s approval requirements.

instead of introducing measures to harmonize the legal frameworks, we have seen more regulation recently, in particular in the gcc countries, making cross-border distribution increasingly difficult. in the case of the uaE, for example, investment funds established in the dubai international Financial center (diFc) are considered to be foreign funds by the uaE securities and commodities authority (sca)–the federal regulator for the uaE.

according to Ernst &Young’s islamic Funds report, a distribution-model access is central to the future growth of the islamic funds industry, pointing out a key structural weakness. according to fund managers in the gcc, the islamic funds industry cannot grow substantially unless the institutional sector, sovereign wealth funds, pension funds, and takaful companies all invest in islamic funds. However, institutional investors require more transparency, and the islamic fund industry lacks a uniform legal framework, with the consequence that disclosure of crucial information such as fund size, types of assets held, investment policy, management objectives, and other matters remains voluntary. While some funds provide detailed information, others provide little more than their contact details and the types of financial products offered. investor protection remains a host-country matter. in order to ensure high investor protection and sustainable growth, it remains crucial to choose a reliable legal framework in a fund domicile that offers optimal distribution possibilities.

biShr Shiblaq

head of Representative office – arendt & medernach

Bishr shiblaq is the head of the dubai office of arendt & Medernach, where he advises MEna based clients on luxembourg regulatory matters.

He advises on the structuring and setting-up of investment structures and also specialises in banking and finance, in particular structured finance and islamic finance.

Florence STainier

partner – arendt & medernach

Florence stainier is a partner in the investment funds practice of arendt & Medernach where she specialises in legal and regulatory aspects of investment fund work, advising clients on the creation, structuring and marketing of investment funds with a particular focus on uciTs.

she has been a member of the Brussels Bar since 2001 and of the luxembourg Bar since 2004.

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aware of these distributional deficiencies, regulators in gcc countries–a substantial region for islamic funds, since it accounts for about 80% of global islamic assets–are at a very early stage of considering a gcc passport for investment funds.

GCC countries, accounting for about 80% of global Islamic assets, are at a very early stage of considering a GCC passport for investment funds.

The european paSSporT experienceThe gcc countries are seeking inspiration from the harmonization efforts of the European union (Eu). The idea of a European passport started with the single market for financial services established in the 1970s with the adoption of the first insurance directives and the Banking directive.

Thanks to their European passport, financial institutions that have been granted authorization to conduct their business by the supervisory authorities of an Eu member state may–following a formalized notification procedure–pursue their business in all other Eu member states without requiring further local authorization.

The concept of the Eu passport for investment funds was initiated over 25 years ago, with the establishment of the undertakings for the collective investment in Transferable securities (uciTs). The original uciTs directive was conceived and launched in 1985 and implemented first by luxembourg in 1988. it aimed to develop a unified regulatory framework for mutual funds across Europe, with the goal to facilitate the

distribution of funds domiciled in one member state across all other Eu member states and to offer investors in uciTs products a consistent level of protection and confidence. The uciTs passport marked the birth of the ”uciTs brand.”

Global SucceSS oF uciTS uciTs has been at the heart of the development of the European funds industry for the last two decades, with more than 35,000 funds representing nearly Eur6 trillion being distributed worldwide. according to statistics reported by the European Fund and asset Management association (EFaMa), luxembourg was able to leverage from the development of the uciTs brand and the introduction of the Eu passport; luxembourg is today the world’s cross-border distribution hub for investment funds with a market share of 75%.

Beyond Europe, recent trends have shown a clear and significant growth in the distribution of uciTs products in the international market. uciTs-managed assets represent 32.3% of worldwide investment fund assets, the second largest market share after u.s.-managed assets (which account for 49.2% of the worldwide total). asia, latin america, and the Middle East are the predominant markets where uciTs have wide distribution. in 2010 approximately 50% of all net sales into uciTs products originated from outside the Eu.

islamic fund managers are familiar with the uciTs framework, since uciTs are also often used to create shariah-compliant investment products, with luxembourg being the leading cross-border domicile for islamic funds. according to lipper 18% of all islamic funds created in 2012 were established in luxembourg.

With over EUR2.3 trillion of AUM, Luxembourg is the largest investment funds hub in Europe.

luxembourg was able to leverage from the development of the uciTs brand and the introduction of the Eu passport; luxembourg is today the world’s cross-border distribution hub for investment funds with a market share of 75%.

Beyond Europe, recent trends have shown a clear and significant growth in the distribution of uciTs products in the international market. uciTs-managed assets represent 32.3% of worldwide investment fund assets, the second largest market share after u.s.-managed assets (which account for 49.2% of the worldwide total). asia, latin america, and the Middle East are the predominant markets where uciTs have wide distribution. in 2010 approximately 50% of all net sales into uciTs products originated from outside the Eu.

islamic fund managers are familiar with the uciTs framework, since uciTs are also often used to create Shariah-compliant investment products, with luxembourg being the leading cross-border domicile for islamic funds. according to lipper 18% of all islamic funds created in 2012 were established in luxembourg.

The concept of the EU passport for investment funds was initiated over 25 years ago with the establishment of UCITS.

Recent trends have shown a clear and significant growth in the distribution of UCITS products in the international market, with UCITS worth EUR6.5 trillion, while non-UCITS net assets amount to EUR2.7 trillion.

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aiFMD paSSporT anD oTher iniTiaTiVeSThe concept of the European passport has been recently extended to cover any Eu and non-Eu fund manager that manages Eu-based alternative-investment funds (aiFs) or wishes to market Eu or non-Eu aiF to professional investors in the Eu. The alternative-investment Fund Managers directive (aiFMd) created a new label, the “aiF brand” comparable to the “uciTs brand.” However, the aiFMd does not regulate the funds’ investment policy and applies in principle to all types of funds that are not uciTs, in particular to hedge funds, private equity funds, real estate funds, and index-tracking funds.

authorized aiFM will be entitled to market Eu or non-Eu aiF in the Eu to professional investors via a single authorisation regime similar to the passport for the marketing of uciTs to retail investors. This new passport regime replaces local private placement regimes, which vary from one European country to another.

in addition to the entry into force of the aiFMd, two new pieces of European regulations become directly applicable throughout Europe and might be of particular interest to islamic fund managers. The first relates to venture capital investment funds, and the other relates to social entrepreneurship investment funds. European social entrepreneurship funds are aimed at creating a label for investment funds dedicated to investing in social enterprises (EusEF). This label permits the marketing of EusEF throughout Europe–on the basis of a passport–to institutional and professional investors as well as to high-net-worth individuals investing at least Eur100,000.

so far for 2013, net assets of uciTs stand at Eur6.488 trillion, while non-uciTs net assets amount to Eur2.744 trillion. With over Eur2.3 trillion of auM luxembourg is the largest investment funds hub in Europe.

The harmonized and regulated framework under the European passport allows the European funds industry to develop truly cross-border products, which offer investors greater choice, portability, and investor protection. investment fund assets in Europe have more than doubled in size over the last decade, establishing the European funds management industry as a strong and vital component of the European financial system.

The European passport may have also helped to accelerate the expansion of the islamic fund industry in Europe. islamic insurance providers registered in an Eu member state are able to offer their services to the whole European market, thus promoting the penetration of new markets.

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caSe STuDy:

The DeVelopMenT oF Shariah-coMplianT FunDS in luxeMbourG

By Pierre oberlé, Business development Manager-alFi

luxembourg has a long history in islamic finance. islamic finance first appeared in the grand duchy in 1978 with the arrival of the first islamic finance institution to set up in a Western country. Five years later the first Shariah-compliant insurance company in Europe was established in luxembourg, and in 2002 luxembourg’s was the first European stock exchange to list a sukuk. The pace has picked up sharply in the past few years, with 2012 and the first half of 2013 being an especially active period for the luxembourg islamic finance community. several new Shariah-compliant funds have been launched. luxembourg currently ranks no.5 worldwide and first in Europe in the number of Shariah-compliant domiciled funds at 41 funds with Eur4 billion of auM. This article looks at the main drivers behind the recent acceleration of the development of shariah-compliant fund activities in luxembourg.

FirST DriVer: uciTS anD iTS DiSTribuTion paSSporTluxembourg’s strengths in conventional investment funds make Shariah-compliant investment funds a natural next step. over the past 25 years the grand duchy has become the leading centre for global fund distribution and Europe’s number-one fund domicile in terms of assets. While luxembourg’s success in the funds industry is a result of its business model, it is above all the success story of a truly European idea: the uciTs framework, which was implemented in luxembourg 25 years ago.

UCITS stands for “Undertaking for Collective Investment in Transferable Securities” and is derived from a European Directive.

uciTs stands for “undertaking for collective investment in Transferable securities” and is derived from a European directive of december 20, 1985, which introduced a single Eu-wide regulatory regime for open-end funds investing in transferable securities such as shares or bonds. This directive aimed at ensuring high levels of investor protection; it regulated the organisation, management, and oversight of uciTs funds and set rules for diversification, liquidity, and risk management.

pierre oberlé

business development manager – alFi

Pierre oberlé is business development manager at alFi, the association representing the luxembourg investment fund industry. in his role, he takes care primarily of market intelligence, communication, promotion and training initiatives. He also contributes to the development of new activities, such as islamic Finance. Pierre is a regular speaker at conferences and seminars on the investment fund industry.

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one key aspect of uciTs is the “European passport,” which makes it easy for a fund domiciled in one Eu country to be sold to investors throughout all Eu member states. over the years uciTs has become a strong global brand, and these funds are also now well accepted in many non-European jurisdictions. Today, luxembourg-domiciled investment structures are distributed in more than 70 countries around the globe–outside Europe distribution reaches asia, latin america, and the Middle East.

luxembourg has also become the leading centre for global distribution of investment funds. By the end of 2010 70% of all funds sold in at least three countries were domiciled in the grand duchy, and its leadership in cross-border fund distribution has made a decisive contribution to its growth, attracting fund promoters from around the world. More recently, these have included promoters of Shariah-compliant funds–a natural development, since the uciTs structure is well suited to the principles of islamic finance. uciTs funds are designed primarily for retail investors, whose main concern is safety, and uciTs funds’ rigorous investment policies are consistent with Shariah’s prohibition of gharar (ambiguity or uncertainty). uciTs funds are therefore especially appropriate for Shariah-compliant fund promoters targeting retail or institutional investors worldwide.

Because UCITS funds are designed primarily for retail investors, their main concern is safety

The list of fund promoters with Shariah-compliant vehicles in luxembourg reveals prominent international names in conventional investment funds who have been quick to climb aboard. in most cases these promoters already had a conventional range domiciled in luxembourg and simply added a Shariah-compliant fund. More recently, players from the Middle East have also begun setting up funds in the grand duchy, as well as asian asset manager ciMB. These promoters usually already

operate funds for domestic investors in their home countries but have difficulty selling them abroad. For these Middle Eastern firms luxembourg’s international reach has definite appeal. While this is still a recent trend, it is set to intensify in the coming months with a number of projects now in the pipeline.

although uciTs is the preferred structure for islamic fund promoters targeting retail or institutional investors in different countries, specialised investment funds (siFs) and other structures may be more appropriate, depending on the promoter’s investment strategy and targeted investor base.

an example of a Middle Eastern firm using the siF structure is jeddah-based sedco capital, which successfully launched its first siF in spring 2012.

When siFs were introduced in 2007 they paved the way for a new generation of regulated alternative-investment funds targeting an international qualified investor base. More than 1,500 siFs have been launched since this option was created, and they are often used for Shariah-compliant real estate and private equity funds.

SeconD DriVer: reGulaTeD european alTernaTiVe-inVeSTMenT FunDS anD clienT DeManD For TranSparencyThe second driver is the demand for transparency and increased investor protection that resulted from the financial crisis. The trend in the financial sector is now toward high-quality regulation. This is what an increasing number of investors expect and what Europe has to offer. indeed, a trend for relocating off-shore funds on-shore has been observed over the past three years, and well-established European domiciles such as luxembourg have been among the beneficiaries of such fund migrations.

a consequence of the financial crisis is that regulators and policymakers all over the world have taken action to enforce greater transparency, better client information, and ultimately better protection. The g20 has decided that there should be

no unregulated managers or products in the marketplace. The united states answered with the dodd-Frank act, and Europe’s answer was a new directive called the alternative-investment Fund Managers directive, better known under its acronym: aiFMd. The directive was approved by the European Parliament on november 11, 2010, and was published in the official journal of the European union on july 1, 2011, after 26 months of intense debate and negotiations between the European commission, the European council of Ministers, and the European Parliament. Member states had a period of two years to incorporate it into national law.

The scope of the directive is wide. it is applicable to all managers of non-uciTs collective investment schemes “which raise capital from a number of investors with a view to investing it in accordance with a defined investment strategy for the benefit of those investors.” Managers of non-uciTs Shariah-compliant funds will therefore also be covered by the directive. indeed, this directive is designed to regulate all managers involved in activities that are not compliant with uciTs rules, such as real estate, private equity, and hedge funds. a large number of Shariah-compliant funds invest in real estate or private equity, so this directive will have a direct impact on them. luxembourg, with the siF, has an appropriate vehicle for Shariah-compliant real estate and private equity funds.

A consequence of the financial crisis is that regulators have taken action to enforce greater transparency, better client information, and ultimately better protection.

The directive will be applicable to aiFM established in the Eu but also outside the Eu, if they manage or distribute funds to professional investors within the Eu. non-European Shariah-compliant fund managers targeting or looking to target a European client base should therefore be aware of the potential impact the aiFMd will have on their strategy.

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currently, alternative-investment funds are regulated at the national level, and managers willing to market their funds in the Eu have to face up to 27 different authorisation regimes. The aiFMd will put an end to this by setting up a single authorisation regime. once authorised, the Eu managers will be entitled to market the Eu aiF that they manage to professional investors, using the simplified regulator-to-regulator notification mechanism established under the uciTs directive. just like uciTs, these funds also will be granted a European passport, and this passport will at a later stage be available to non-European managers and funds that comply with comparable regulation. This directive clearly offers new opportunities for Shariah-compliant fund promoters.

ThirD DriVer: DeVelopMenTS aT The inSTiTuTional leVelislamic finance has also benefited from initiatives taken by luxembourg’s government, which is strongly committed to helping the sector grow. in early 2008 the government set up a task force to identify obstacles to the development of islamic finance and to suggest ways to promote its growth.

alFi, the representative body of luxembourg’s fund industry, simultaneously launched a dedicated working group that conducted research into assets eligible for Shariah-compliant uciTs funds. The group’s report concluded that luxembourg was able to offer a range of vehicles (such as uciTs and siFs) that are appropriate for Shariah-compliant investment, meeting the specific needs of both investors and promoters without additional legislation.

in a note published in May 2011 the Commission de Surveillance du Secteur Financier (cssF), the grand duchy’s financial regulator, took the same view, concluding that no specific legislation was required for Shariah-compliant investment funds, since luxembourg’s current law contains no obstacles to it. The cssF also noted that the role of the Shariah Board would have to be described in each fund’s prospectus.

Taxation was the only area in which special action has been taken. in january 2010 luxembourg’s direct tax authority published a circular on islamic finance, clarifying the tax treatment of murabaha contracts and sukuk transactions, and in june 2010 a circular from the indirect tax authority clarified treatment of murabaha and ijara contracts.

Islamic finance has also benefited from initiatives taken by Luxembourg’s government, which is strongly committed to helping the sector grow.

administration of islamic funds raises another essential question. administrators are naturally required to understand how Shariah-compliant funds work, but their systems must also be adapted to accommodate them. Shariah law bans usury and short selling and prohibits investment in forbidden goods and services; complying with these requirements means a different way of administering the funds. For example, in a long-only Shariah fund the administrator provides oversight on the fund manager by monitoring and checking for Shariah compliance: if an improper trade is made (e.g., the shares of a company engaged in haram business are traded), the administrator cancels the trade, with any losses covered by the manager and any gains donated to charity. also, because a Shariah-compliant fund cannot earn interest on its investments, standard cash management services often cannot be used, since cash held by Shariah funds must be kept separate from cash held by all other funds. Most commonly used fund accounting platforms cannot provide Shariah-compliant fund accounting, forcing service providers to develop their own reporting methods to comply with Shariah rules.

in july 2008 alFi launched a working group to identify potential operational challenges linked to servicing Shariah-compliant funds, find solutions, and recommend standard

practice for local players. in the course of the work the group’s members built a shared understanding of the operational challenges faced by Shariah-compliant funds and their service providers.

This work was the basis of what would become the “alFi collection of best practices for setting-up and administering Shariah-compliant funds in luxembourg” published in december 2012. These guidelines provide in-depth information and guidance on the legal framework; the fund set-up process; and administration, custody, and depository bank services for islamic funds in luxembourg. it also gives a high-level indication of whether islamic finance instruments are compatible with luxembourg uciTs laws; it should enable service providers who are already active in this field to align themselves with greater consistency and provide guidance to new entrants as to all the areas that need to be considered. indeed, over the years most service providers in luxembourg have set up dedicated teams looking at Shariah funds. This collection of best practices will further contribute to establish luxembourg as the centre of reference for servicing Shariah-compliant funds, whether they are domiciled there or elsewhere.

Most commonly used fund accounting platforms cannot provide Shariah-compliant fund accounting, forcing service providers to develop their own reporting methods to comply with Shariah rules.

Today, islamic finance is still a niche activity in luxembourg, but this is clearly only the beginning of the story. Key figures in both the public and private sector see Shariah-compliant funds as a promising opportunity for growth; the infrastructure is in place and many new projects are in the pipeline.

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There is high demand for Shariah-compliant products in Western markets.

Western and European investors enjoy higher disposable income ratios.

institutional investors in Western and European markets make up most of the asset management sector, offering scale potential.

niche Solution:Targeting Muslim investors in Western Markets

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niche solution: taRGetinG muslims in westeRn maRkets


TarGeTinG MuSliM inVeSTorS in WeSTern counTrieS

The DearTh oF Shariah-coMplianT inVeSTMenT opporTuniTieS MakeS iSlaMic FunDS an aTTracTiVe propoSiTion For MuSliM inVeSTorS in WeSTern counTrieS.

There is a lack of supply of efficient Shariah-compliant products in these markets.

Western and European investors enjoy higher disposable income ratios.

There is high demand for Shariah-compliant products in Western markets.

institutional investors in Western and European markets make up most of the asset management sector, offering scale.

setting an early track record in Muslim minority markets can be very lucrative for islamic asset managers.

joint efforts between conventional and islamic asset managers can offer a synergistic benefit.

increased competition in Western markets will help in the development and sophistication of islamic funds.

Funds are a far more popular investment choice in Western and European markets.

Targeting retail Muslim investors in Western countries could be a valid proposition for fund managers who have the required sophistication and reach.

There is greater savings, disposable income, and investment sophistication among the Muslim population in Western countries, compared to many Muslim countries.

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reThinkinG The Four p’S – iSlaMic MuTual FunD DiSTribuTion in The uniTeD STaTeS

By joshua Brockwell, investment communications director, azzad asset Management

Traditional marketing wisdom says that any effort to connect with a target audience must address the four P’s: product, price, promotion, and place. This particularly applies to mutual fund sales and distribution. But what about niche markets such as Muslim consumers in the united states? although still applicable, the four P’s need to be looked at from a different perspective in order to apply to such a diverse, multi-ethnic target audience. This piece aims to shed light on mutual fund distribution to an american Muslim niche market, while offering some general pointers for sales and marketing professionals at islamic financial services firms.

MarkeT analySiSThe american Muslim investor market is notoriously difficult to quantify. numerous studies and reports have been issued, each offering different indications of magnitude, but no authoritative numbers exist. government census findings do not report religious affiliation, and private studies yield sometimes conflicting findings. generally speaking, however, it can be said with a relative degree of confidence that incomes in Muslim households in the united states tend to skew higher than the national average, despite the fact that many of those homes consist of a single income (usually from the husband/father). The total number of u.s. Muslims is roughly six million.

Increased demands on the time and mindshare of American Muslim consumers have incentivized them to select convenient financial solutions.

recent studies analyzing the american Muslim experience show:

• approximately 35% of american Muslims are converts or children of converts.

• approximately 40% are age 30 or younger.

• Two-thirds of Muslim families make more than us$50,000 a year.

• a quarter of Muslim families make more than us$100,000 a year.

additional research indicates that the american Muslim demographic has approximately us$200 billion in spending power. This information paints a picture of an untapped, undervalued, and potentially powerful values-conscious consumer base.

increased demands on the time and mindshare of american Muslim consumers have incentivized them to select convenient financial solutions. This creates both challenges and opportunities for islamic financial services firms, which can leverage the four P’s to differentiate themselves from the competition.


gloBal islaMic assET ManagEMEnT rEPorT 83

joShua brockWell

investment communications director – azzad asset management, inc.

joshua Brockwell is the director of investment communications at azzad asset Management, inc., an islamically compliant and socially responsible investment firm based in Falls church, virginia. in this role, he manages client-facing communications for the azzad Funds and the azzad Ethical Wrap Program, a turnkey wealth management solution for high net worth investors. He has more than a decade of experience in the financial services field, including positions with T. rowe Price associates, inc. and the boutique cooperative mutual fund company, Homestead Funds

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proDucTa major consideration regarding product design is that any islamic mutual fund should purport to address the specific investing goals of a community. For those instances in which needs are not met, innovation has to occur. For instance, islamic financial firms sought to address the niche need for interest-free fixed income investing by introducing azzad wise capital Fund in 2010. This type of fund offers a lower-risk/steadier-return profile necessary to round out an investor’s asset allocation strategy.

regardless of niche market, there are of course universal standards for product marketing. among those is crafting a narrative that resonates with the target audience. islamic asset management firms should create a story around their investment process that highlights the opportunities in their specialized asset class and differentiates them from the competition. also, it is typically a good idea to enhance the narrative by discussing sector strategy and top holdings, not to mention recent decisions that have made money for clients.

When mutual fund companies are devising a distribution strategy for islamic financial products in the u.s., it is also important that they expect an occasional cultural aversion to pooled investments such as mutual funds. This is peculiar to certain immigrant communities, some of whom may be more accustomed to putting their money in banks or owning real estate. This is at worst a minor annoyance from a distribution perspective, since most acculturated investors, especially second-generation children of immigrants, will have no such aversion.

When mutual fund companies are devising a distribution strategy for Islamic financial products in the U.S., it is also important for them to expect an occasional cultural aversion to pooled investments.

priceconventional wisdom says that people want what they cannot have. The american Muslim investor is no exception. sometimes high pricing can have the counterintuitive effect of increasing demand in the eyes of a target audience. as with any more-affluent demographic, exclusivity can create desirability. similarly, image is an important factor for distribution.

of course, pricing should not be just a function of how much a person is willing to pay. no-load mutual fund pricing is largely arrived at using conventional measures. as an industry rule, however, it is important to set competitive pricing, but lower-than-average pricing – although nice to have from a shareholder perspective – can actually harm distribution. some managers follow a low-costs-at-any-cost approach, but paradoxically, many funds with lower-than-average expenses do not sell. What appears to matter most is how a mutual fund compares overall to other successfully sold funds. Everything is relative in the fund-pricing space.

People want what they cannot have; Muslim investors covet exclusivity.

place last but certainly not least is finding the right distribution channels that make sense for a boutique or niche fund. an essential first step for smaller funds with limited distribution, irrespective of fund strategy, is getting up and running on the big four platforms: schwab, Td ameritrade, Fidelity, and Pershing. secondarily, establishing relationships with advisor firm research teams to get and stay on their radar is key. These steps are important because registered investment advisors are sometimes better equipped to penetrate hard-to-access Muslim markets and often know their client needs best. They can buy a fund on behalf of their clients, allowing islamic financial services firms to effectively do more with the same resources.

once a fund or fund family is available on the “big four” platforms, it is time for outreach. With the shift in emphasis away from set-piece campaigns to consumer interaction, sales and marketing departments have come to realize the need for more “boots on the ground,” or personnel. This is putting into reverse a 20-year trend in financial services as a whole of favoring “working spend” (what consumers see) over “non-working spend” (overhead). This dovetails with the immediate concern islamic mutual funds can face regarding lack of brand recognition in the american Muslim community. For many firms putting a team of qualified educators out in the field at strategically important locations – mosques, community centers, and local businesses – can be a useful approach.

Once a fund or fund family is available on the “big four” platforms, it is time for outreach.

concluSiondeveloping the american Muslim demographic into a savvy investor class is not a wild dream. in many respects it has already happened. The challenge for islamic financial services firms is to educate and motivate these individuals to give islamic-based solutions a second, or in some cases a first, look. That is where the strategies outlined above come into play. Healthy growth depends a great deal on creating a solid brand that conveys a dedication to customer service and results. commitment to the Four P’s can help american Muslim investors trust and respect islamic financial services firms and their unique expertise.

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acknoWleDGMenT anD copyriGhT

as the saying goes, “no one person can whistle a symphony. it takes an orchestra to play it”. This applies to the global islamic asset Management report. The report is a product of the expertise and knowledge of several individuals who have worked together to produce what we believe will be a critical catalyst to the growth and development of the global islamic asset management space. We would also like to thank all the participants who took part in our survey to add the final piece to the puzzle with real time, on-the-ground insights.

We would also like to thank our external experts, Pierre oberlé, Florence stainier, Bishr shiblaq , joshua Brockwell, Hassan al-jabri, and Muhammad afzal who have contributed to the report.

in addition, we would also like to thank lipper iM for the continued support and providing us with the data and tools to formulate the conclusions conveyed in the report.

We are grateful to Thomson reuters Management, particularly Basil Moftah, and russell Haworth for their continued support and the foresight to invest heavily in the development of the islamic financial services industry.

Many thanks again, and we look forward to next year’s global islamic asset Management report.

sincerely,

Sayd Farook

global Head islamic capital Markets

[email protected] [email protected]

auThorKarim arafaMustafa adilsayd Farookdetlef glow

eDiTor Barb F. durland

conTribuTorBernardo vizcaino

exTernal conTribuTorSPierre oberléFlorence stainierBishr shiblaq joshua BrockwellHassan al-jabriMuhammad afzal

disclaimer

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