The 50 biggest sharia fund managers

Sharia-compliant investing has been steadily on the rise in recent years but suffered a setback in 2015, according to AsianInvestor’s list of the 50 biggest Islamic asset managers in this segment (see tables below*).

This came amid a tricky investment environment last year, most notably the flight from emerging-market assets, with global managers seeing outflows in Asia, for instance. Moreover, the oil price collapse over the past 18 months or so has had a particularly big impact on sentiment in the Middle East, one of the biggest pools of sharia-compliant assets.

Declining 12.2% to $84 billion, Islamic assets under management (including pooled funds and segregated accounts) ended last year a little below where they stood at the end of 2013.

The biggest contributor to the fall was a 16% drop in sharia public equity investments to $26.8 billion. Likewise, sukuk and sharia-compliant money-market AUM fell 4% to $23.4 billion after healthy growth in recent years.

A bright spot in 2015 was Islamic alternative assets posting a slight rise to $8.47 billion and accounting for 10.1% of total sharia AUM as of end-2015, up from 8.7% the year before. This is a trend that industry participants expect to continue, again in line with increasing demand for alternative investment across the board globally.

(Note: the overall AUM figures broken out for the different asset classes do not tally with the overall AUM total because not all firms were prepared to break out figures by asset class.)

Flighty retail investors were seen as the main reason for sharia asset outflows, particularly in the Middle East, where the oil price collapse – from $115 a barrel in June 2014 to below $30 at one point this year – has had a significant impact on sentiment. Other factors adding to investor uncertainty were intensifying conflict in the region and planned reforms in conservative Saudi Arabia by the new ruling regime.

Institutions were less inclined to panic and in any case some have strategic, mandated allocations to Islamic investments. Indeed, industry participants point to a number of developments that bode well for institutional – and retail – investment in sharia strategies.

Furthermore, sharia products may have greater appeal in light of the major financial crises that have occurred in recent years. Islamic funds effectively act as stabilisers in portfolio construction since they tend to provide a cushion in the event of a crisis, said Ahmad Najib Nazlan, chief executive of Maybank Islamic Asset Management in Kuala Lumpur.

He explained that there were three basic conditions of Islamic finance that may prevent the two main causes of financial crises – excessive leverage and formation of speculative bubbles in credit markets. Under sharia law, transactions have to be based on real rather than notional assets. The seller must be in possession of the physical asset and the transaction must be genuine, with full intention to give and take delivery.

Sharia interpretation
However, there remain issues around different scholars’ interpretation of sharia, which could hold back the development of Islamic funds and particularly the cross-fertilisation of strategies between the Middle East and east Asia, the two biggest pools of Islamic assets. The sharia screening criteria used in the Middle East is generally more stringent than that in Malaysia.

While both Middle Eastern and east Asian approaches allow companies with a high cash ratio to be considered sharia-compliant, different financial ratios are used.

In Malaysia, the ratio is calculated relative to the total asset value of the company, whereas in the Middle East it is based on market capitalisation. This means companies with a higher level of debt can be deemed sharia-compliant in Malaysia. It also means that a company’s sharia-compliant status may vary in the Middle East depending on stock price movements.

Moreover, in Malaysia, sharia-compliant borrowings and cash deposits are excluded from cash and debt ratio calculations, whereas in Middle East they are not.

Meanwhile, in respect of sukuk, investors in the Middle East generally require them to be secured by assets, but this is not the case in Malaysia.

*Tables compiled by Bernice Cornforth. The full feature appears in the latest (March 2016) issue of AsianInvestor.