Leading Qatari investment bank, QInvest expects an increase in investor appetite for Shariah compliant funds. However in spite of this optimistic view, Islamic funds and the asset management industry is still geographically confined in certain parts of the world. Speaking to Dr Ataf Ahmad, head of asset management at QInvest, NABILAH ANNUAR investigates the conundrum facing the Islamic funds sector.
The overall Islamic industry is estimated to have reached US$2 trillion. Less than 4% of this amount vested in investment funds. A well accepted fact, Shariah compliant funds are dominated by GCC and Malaysian providers, as well as a very limited number coming from more established financial centres. As the sector is dominated by groups based in emerging markets, this is reflected both in the investment choices available to clients and the infrastructure supporting the industry. Some of the biggest global sectors such the global pension fund industry have a very small component in Islamic assets, despite Muslims making up a sizeable component of the global population.
The question is, after years of progress, why is the Islamic funds industry still small? According to Ahmad, factors such as heavy emerging markets focus, regulations, sub-standard infrastructure, and quality of investment managers are among the reasons for the small market share. “The heavy emerging markets focus, which ends up delivering highly volatile performance, is not appealing to many retail investors. Sub-standard infrastructure and set-ups also do not appeal to professional investors. Regulatory challenges are also existent as a lot of funds are domiciled in countries where the legislation is unclear and it is difficult to sell cross-border. One of the biggest challenges is the actual quality of the investment managers and their skillset, which often lags behind conventional managers. Finally a major challenge is the lack of a globally accepted common definition of ‘Shariah compliant’,” vented Ahmad.
Another predicament highlighted is the dearth of talent. Top tier professionals are rarely drawn to Islamic asset management and this poses a problem for the industry as a whole. Ahmad pointed out: “More works needs to be done in promoting the sector as one which has the highest standards and is a compelling career choice for people from all backgrounds, and that this is not a niche only for Muslims. More could and should be done to highlight the strong overlap with environmental, social and governance (ESG) factors and show that the appeal is to a much wider potential audience.”
There is an increase in non-Shariah investors across a range of products and investments in the industry. The types of non-Muslim investors looking at Shariah products can be broken down into two groups: (1) investors that are attracted to the ethical and social characteristics of the assets Shariah funds invest in, those which view ESG factors as an important investment criterion; (2) investors who look to Islamic funds to diversify their portfolios away from certain assets that are more prominent within conventional funds and are seen as being more susceptible to economic volatility. In terms of investor appetite, retail clients are usually drawn to brands that they recognize or to products that are recommended by the sales teams. “The important thing to remember is that a well-managed Islamic fund can perform just as well and if not, actually better than a conventional peer,” affirmed Ahmad.