Islamic Funds & Investments Report 2011 Achieving Growth in Challenging Times Dear Finance & Investment Leader, It is with great pleasure that we present to you the 5th annual edition of the Ernst & Young Islamic Funds and Investments Report (IFIR 2011), a ground-breaking original research project developed in collaboration with leading global professional services organization, Ernst & Young. Given the recent growth and momentum achieved by the global Islamic funds and investments industry in the post-crisis landscape, it is essential today more than ever that the strong foundations prepared for the industry are now utilized to build critical mass and international scale for the industry. The Ernst & Young Islamic Funds and Investments Report has over the past 5 years, established itself as critical reference resource for the key decision makers in the global Shari’ah compliant funds and investments industry. Exclusively launched on-site at a special plenary session of the 7th Annual World Islamic Funds and Financial Markets Conference (WIFFMC 2011), IFIR 2011, with a principal focus on “achieving growth in challenging times”, will analyze the key trends shaping the industry and will map out future strategic directions that the industry leaders will have to adopt to probe the emerging landscape of opportunities. We would like to express our sincere gratitude to Ernst & Young and their Islamic Financial Services Group for investing their considerable talent and resources in developing the Ernst & Young Islamic Funds and Investments Report. We hope that the analysis in this year’s Report will provide practical, constructive and valuable insights which will be useful in your own strategic planning activities and will assist your organization in its quest for success as the global Islamic funds and investments industry enters the next phase of growth. To know more on how your organization can play a part in this initiative in the future, please e-mail sophie@megaevents.net Yours sincerely, David McLean Managing Director The World Islamic Funds & Financial Markets Conference A MEGA Brand MEGA Brands: Shaping the Future of the Global Islamic Finance Industry Since 1993 P.O. Box 72045, Dubai, UAE | t. +9714 343 1200 | f+971 4 343 6003 MEGA Brands. MEGA Clients. Market Leaders. www.megaevents.net Islamic Funds and Investments 2011 Achieving growth in challenging times The contents of the Islamic Funds and Investments Report 2011 are based on a combination of quantitative data and qualitative comments and hence provide a subjective assessment of the current market. All quantitative comments are based on published information wherever possible. Where published reliable data was not available, qualitative comments were made which may or may not reflect the true state of affairs. Information has been assimilated from secondary sources, including published country, industry and institutional information, and primary sources, in the form of interviews with industry executives. We are not expressing any assurance on the accuracy or completeness of the information obtained. Although this report has been documented based on our understanding of Islamic financing activities to include only such activities that are deemed Shari’a compliant, no Shari’a opinion whatsoever has been taken on this report. Hence, the contents of this report, in terms of the activities to be carried out, might not necessarily be consistent with Shari’a in all cases, and the opinion of a Shari’a scholar(s) should be taken before any further steps are made to implement suggestions made in the report. Whilst every care has been taken in the preparation of this report, no responsibility is taken by Ernst & Young as to the accuracy or completeness of the data used or consequent conclusions based on that data, due to the respective uncertainties associated with any assumptions that have been made. No part of this document may be republished, distributed, retransmitted, cited or quoted to anyone without prior written permission from Ernst & Young. Disclaimer ISLAMIC FUNDS & INVESTMENTS REPORT 2011: ACHIEVING GROWTH IN CHALLENGING TIMES 2 Contents 1. Setting the scene 6 2. Products and asset classes 12 3. Current state of the Islamic fund industry 19 4. The future risk environment 26 5. Conclusion 27 6. Appendix 1: Q&A with Islamic fund managers 28 7. Appendix 2: Islamic fund characteristics 33 8. Appendix 3: Jurisdiction overview 35 9. Team and references 43 3 Executive Brief Ernst & Young’s Islamic Funds and Investments Report 2011 Dear Investment Executive Islamic funds industry grew to US$58 billion in 2010, achieving a 7.6% growth. The Islamic fund universe comprises of some 100 fund managers. Favored asset classes continue to be equities, commodities, Sukuk and alternatives. For Sukuk assets specially, 2010 was a record year with US$50 billion of total issuance. As the industry continues to realign itself, there were 23 new Islamic funds launched during the year while 46 funds were liquidated. The growth is a welcome trend given the industry’s flat performance in recent years. It was primarily driven by market performance, and only marginally from new net money raised by fund managers. The recovery was also tested by the evolving geo-political situation across MENA. Secondly, there remain serious concerns on the increasing likelihood of sovereign debt crisis in Europe and a double dip recession in the US. Both these factors will continue to influence conventional and Islamic asset management industry going into 2012. The addressable universe for Islamic fund managers is in excess of US$500 billion, and still growing by at least 10-15% annually. In the GCC, liquid wealth with Shari’a sensitive investors will add more than US$70b to this pool by 2013. Our award winning Islamic Financial Services team explored the emerging trends with leading Islamic fund managers and their ability to assist clients in managing this wealth. It appears that the top three priorities for the industry are: ► Origination and structuring – limited availability of quality Shari’a compliant assets means fewer products to invest in. Trust in the brand and track record are important factors, and will favor established and larger players. ► Distribution model – access (possibly through alliances) to affluent investors and institutional clients like Waqf, family businesses, takaful operators etc. is central to future growth. ► Achieving scale – given the 30% fee compression over recent years. A re-look at the revenue and cost strategy, operating model and most importantly the risk infrastructure, will help set the tone for sustainable growth. Looking ahead, the challenging times are by no means over. I hope you will find these market insights useful for your businesses. Ashar M. Nazim Islamic Financial Services Leader Ernst & Young ISLAMIC FUNDS & INVESTMENTS REPORT 2011: ACHIEVING GROWTH IN CHALLENGING TIMES 4 1. Islamic funds industry benefited from performing markets in 2010 but global economic uncertainty risks recovery in the future Islamic funds’ assets under management grew 7.6% to US$58 billion in 2010 but the performance will be difficult to repeat this year 2. Sukuk, commodities and capital protected funds did well in 2010; bringing new money into high risk equities will remain a challenge Investors remain cautious about investing in plain vanilla equity funds; recent decline in market prices has increased flow into money market funds 3. Achieving scale is even more critical to ensure long term sustainability Over 70% of fund managers fall below estimated break-even AuM level of US$100 million; big will get bigger as the going gets tougher to win investors’ trust 4. Global economic scenario, investors’ risk aversion and political aftermath of the “Arab Spring” are the top three risks in Fund Managers’ minds Leading fund managers rate the economic situation in Europe and the US as the single biggest concern on future market performance as no region or market will remain immune in case of a double dip recession Key messages 5 Source: National Mutual Funds Association, Ernst & Young analysis Global Mutual Fund Industry Note: The data is for 45 countries Global mutual funds AuM reached US$25.6 trillion in 1Q2011, 35% higher than the low touched in 2008 Dot-com Crisis Worldwide Total Net Assets of Mutual Funds (LHS) Worldwide Number of Mutual Funds (RHS) Estimated AuM (US$t) Number of Funds (‘000) Financial Crisis 11.3 14.0 16.2 17.8 21.8 26.1 19.0 23.0 24.7 25.6 0 10 20 30 40 50 60 70 80 0 5 10 15 20 25 30 2002 2003 2004 2005 2006 2007 2008 2009 2010 Q1 2011 ISLAMIC FUNDS & INVESTMENTS REPORT 2011: ACHIEVING GROWTH IN CHALLENGING TIMES 6 Source: Eurekahedge, Zawya, Ernst & Young analysis Global Islamic Fund Management Industry Number of Funds Estimated AuM (US$b) After three flat years, the global Islamic fund management industry expanded by 7.6% in 2010, reaching US$58 billion in AuM; 13% higher than 2008 Assets Under Management (LHS) Number of Funds (RHS) 34.1 39.5 48.7 51.4 53.9 58 0 100 200 300 400 500 600 700 800 900 0 10 20 30 40 50 60 70 2005 2006 2007 2008 2009 2010 7 This is largely due to market performance and only partially on account of new money flows; 23 new funds launched, 46 liquidated Global Islamic Funds - Annual Launches and Liquidations Source: Zawya, Eurekahedge, Ernst & Young analysis Number of Funds Number of Islamic funds launched Number of Islamic funds liquidated 78 29 46 19 27 23 0 10 20 30 40 50 60 70 80 90 2008 2009 2010 ISLAMIC FUNDS & INVESTMENTS REPORT 2011: ACHIEVING GROWTH IN CHALLENGING TIMES 8 [...]... sharing accounts ► Islamic funds represent only 5.6% of the total Islamic financial services industry Source: Central Banks’ Reports, Securities Commission Malaysia, DataMonitor, Eureka Hedge, Zawya, Ernst & Young analysis 10 ISLAMIC FUNDS & INVESTMENTS REPORT 2011: Achieving Growth in Challenging Times Islamic Funds 5.6% Key messages 1 Islamic funds industry benefited from performing markets in 2010... Eurekahedge, Zawya, Ernst & Young analysis 16 ISLAMIC FUNDS & INVESTMENTS REPORT 2011: Achieving Growth in Challenging Times Note: Data includes returns of 28 funds Property prices have stabilized in most markets or the sharp declines have been arrested; investors continue to remain cautious about investing in real estate Islamic Real Estate Funds - Average Returns Global REIT Index 250 % 20 200 Top Quartile... Monitor, Eurekahedge, Ernst & Young analysis 14 ISLAMIC FUNDS & INVESTMENTS REPORT 2011: Achieving Growth in Challenging Times Note: Data includes returns of 49 funds Global commodity prices continued to rise in 2010 albeit at a slower pace than in 2009; the surge in gold and silver prices accounts for more than 80% of the Islamic Commodity Funds performance Islamic Commodity Funds - Average Returns Merrill... improvement in regulatory environment; KSA is a case in point where appropriate regulatory response has helped the industry tremendously” - Fund Manager, Kuwait Source: Industry interviews 30 ISLAMIC FUNDS & INVESTMENTS REPORT 2011: Achieving Growth in Challenging Times Q&A with Islamic fund managers – Hear it from the horse’s mouth…(cont’d) Q: What are some of the key issues in the industry at present? Islamic. .. economic situation in Europe and the US as the single biggest concern on future market performance as no region or market will remain immune in case of a double dip recession 18 ISLAMIC FUNDS & INVESTMENTS REPORT 2011: Achieving Growth in Challenging Times Scale remains a key issue for the Islamic fund industry worldwide; only 30% of Islamic fund managers have more than US$100 million in AuM and top 10... in Challenging Times Conclusion • The gradual recovery in Islamic funds industry in 2010 will be seriously tested going forward by weakening global economic situation • Fixed income, commodity and money market funds are likely to be Islamic investors’ focus in an uncertain market • Islamic fund managers have to achieve scale or perish 27 Appendix 1: Q&A with Islamic fund managers 28 ISLAMIC FUNDS &. .. FUNDS & INVESTMENTS REPORT 2011: Achieving Growth in Challenging Times Q&A with Islamic fund managers – Hear it from the horse’s mouth… Q: What market changes do you foresee in the near future? In the next 2-5 years, we do not foresee a dramatic change in the GCC market, unless the institutional sector, sovereign wealth funds, pension funds, Takaful companies, etc come into the Islamic funds market in. .. Return ISLAMIC FUNDS & INVESTMENTS REPORT 2011: Achieving Growth in Challenging Times -41.8 -50 Note: Data includes returns of 254 funds Equity dominates the overall AuM which remains concentrated in traditional asset classes Assets Under Management of Islamic Funds by Categories (2010) 58 Figures in US$b 1.1 5.3 9% 5.7 10% 6.8 12% 7.8 13% 8.7 15% 22.6 Equity 2% 39% Commodities Other* Fixed Income... reduction in investors' risk appetite Operational flexibility 3 Valuations 4 Increased regulatory focus 4 Risk management enforcement 5 Cost management 5 Decline in investors’ trust 6 Global economic downturn 6 Business model redundancy Investors’ risk aversion Political concerns in the region Decline in investors’ trust 3 Global economic downturn 1 2 1 ISLAMIC FUNDS & INVESTMENTS REPORT 2011: Achieving Growth. .. Trust Global Generali Group Aviva Wells Fargo Franklin Templeton MetLife AuM US$b 0 500 Source: Towers Watson 20 ISLAMIC FUNDS & INVESTMENTS REPORT 2011: Achieving Growth in Challenging Times 1000 1500 2000 2500 3000 3500 4000 A 30% compression in management fee since 2007 has added to Islamic fund managers’ worries in an already tough market; achieving an optimum AuM size and efficiency of operations . Islamic Funds & Investments Report 2011 Achieving Growth in Challenging Times Dear Finance & Investment Leader, It is. Funds and Investments 2011 Achieving growth in challenging times The contents of the Islamic Funds and Investments Report 2011 are based on a combination