Tr global-islamic-asset-mgmt-report-2014

Reuters / srdjan Zivulovic

Global Islamic Asset Management
Report 2014

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Contents
Forward 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

GLOBAL ISLAMIC ASSET MANAGEMENT REPORT

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Reuters / Paul Yeung

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Foreword
Sayd Farook
Global 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.

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.

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
Detlef Glow
Head 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.

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.

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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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Executive Summary

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.

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.

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.

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.

.

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.

Performance and track record are the most important investment consideration
for investors
Contrary 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.


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Executive Summary

Fund launches are expected to decline in 2014, with focus remaining on Southeast Asia and the GCC
Southeast 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$36 billion of AUM, doubling the size of the industry
We estimate pension assets in the GCC to be over US$ 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.

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Global Islamic Asset Management Report

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Executive Summary

The Socially Responsible Investment industry, worth over US$33 trillion, offers a natural crossover appeal
to sharia principles and should be targeted by fund managers
Socially 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 base
Passporting 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.

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 industry.


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Reuters / Arnd Wiegmann

Overview
Islamic 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.

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overview

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

In the numbers

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

Number of Islamic funds

1,065
US$56 Billion
Total Islamic Asset
Management 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.

4.7
Percentage of Global Islamic
Assets

GLOBAL ISLAMIC FUNDS

Global Islamic Funds

GLOBAL
FINANCIAL
CRISIS

Number of funds

1000

400

ARAB
SPRING

70

EURO-ZONE
CRISIS
971

1065

60

57

878

56

795

800
600

DUBAI
FINANCIAL
CRISIS

702

645

576

50

47

46

40

37

30

28

26

200

20

0
-200

-9

2007

2008

-19

2009

-35

2010

-48

-64

2011

2012
Dead Funds

14

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AUM USD Billions

1200

-87

-24

2013 (Sep)

No. of Funds

10
0

AUM


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overview

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

In the numbers

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

Number of Islamic Mutual Funds

786
US$46 Billion
Global Islamic Mutual Funds AUM

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.

94
Fund Launches

22

Global Islamic Mutual Funds (2007 – Sep 2013)

Global Islamic Mutual Funds (2007 – September 2013)

Fund Closures

900
84

Number of funds

700

DUBAI
FINANCIAL
CRISIS

ARAB
SPRING
77

94
786

90
80

687
617

600

397

60

62

451

400

70

541

59

500

300

EURO-ZONE
CRISIS

50

54

53

338

40

200

30

100

84

0
-100

2007

-6

59
2008

-18

53
2009

-28

77
2010

62

-43

2011
AUM


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AUM USD Billions

800

GLOBAL
FINANCIAL
CRISIS

100

-45
No of funds

54
2012

94

-38

-22
2013 (Sep)

Dead

20
10
0

Funds Launched

15

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overview

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.

Gulf and Asian funds tied in the last year, with 15 fund launches each
Assets Under Management Versus Number of Funds (September 2013)
Assets Under Management Versus Number of Funds (September 2013)
12

300
263

250

8

200
163

150

6
111

100

4

62

53

68
53
33

2
0

50

26

21

19

12

12

12

Kuwait

South Africa

Canada

Egypt

UK

United Arab
Emirates

11

0
Malaysia

Saudi Arabia

Luxembourg

Pakistan

Indonesia

Ireland

Jersey

AUM (USD Billions)

India

Other

No. of Funds

16

300
250

12

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10

No of Funds

USD Billion

10


300
250

300
250

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overview

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.

Islamic Funds – Domiciles

DOMICILE

Other 68

NO. OF FUNDS

AUM (US$ MILLION)

Malaysia

62

2,364

53

2,157

53

1,742

33

1,286

26

705

21

663

19

248

12

248

United Arab Emirates
Saudi Arabia 163

Pakistan

UK

Pakistan 62

3,401

Canada
Indonesia 53

111

South Africa

Ireland 53

Luxembourg

Kuwait

Jersey 33

6,056

Jersey

Kuwait 26

163

Ireland

South Africa 21

10,164

Indonesia

Malaysia 263

263

Saudi Arabia

India 11
United Arab Emirates 12
UK 12
Egypt 12
Canada 19

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

Luxembourg 111

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overview

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.
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.

Launched Funds – Geographical Focus (2010)

Launched Funds – Geographical Focus (2013)
Asia Paciﬁc – 4%

Other – 14%

Asia – 3%

MENA – 5%
Asia Paciﬁc – 4%

Malaysia – 29%

Global – 21%

Saudi Arabia–5%

USA– 3%
India – 6%

MENA – 3%
Kuwait – 4%

GMM –6%

GGC – 5%
Indonesia – 18%

GGC – 6%
Indonesia – 6%
Global – 13%
Pakistan – 7%
Pakistan – 8%
Saudi Arabia –13%

18

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Middle East– 7%

Malaysia –12%


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overview

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 sukukspecific 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.

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

Islamic Mutual Funds – Asset Type Breakdown (2010 – 2013)
25
20

AUM USD Billion

20

18
16

15

16

15

14

10
4

5

4

2

1
0

2010

2011

2012

2013
Bond


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20

17

Equity

Money Market
19

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overview

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.

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.

Global Islamic Funds – Asset Type (2010)

Global Islamic Funds – Asset Type (2013)
Real Estate – 2% Other – 1%
Commodity – 3%

Other – 6%

Bond – 12%

Money Market – 12%

Money Market –12%

Bond – 15%

Equity – 54%

Equity – 54%

Mixed Assets – 16%
Mixed Assets – 16%


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overview

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)

Sukuk Average Performance (2007-September 2013)

% Cumulative Performance

15%

10%

5%

0%

-5%

-10%

2007

2008

2009

2010

2011
LIBOR USD 3 Months


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2012
LIBOR USD 6 Months

Sep-13
Sukuk Average

21

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overview

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) 2013)
Money Market Funds Average Performance (2007–September
8%

% cumulative performance

7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%

2007

2008

2009

2010
Money Market Average

22

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2011

2012
LIBOR USD 3 Months

Sep-13
LIBOR USD 6 Months


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overview

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.

EquityEquity Average Performance (2007-September 2013)
Average Performance (2007-September 2013)
50%

% Cumulative Performance

40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%

2007

2008

2009

2010

2011
Equity Average


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2012
S&P 500 Shariah TR

Sep-13
S&P 500 TR

23

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overview

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
Global Islamic Fund Market Breakdown
200
686

175

700
600

566

125

500

100

400

75

AUM (Million)

150

No of funds

RETAIL FUNDS
$59 billion – 80%

800

300

50

200

54
43

25
0

96

37
25

6

Pension Funds

0

Insurance Funds

Private Equity Funds
AUM (USD Million)

24

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100

INSTITUTIONAL FUNDS – 20%

ETFs
No. of Funds


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Reuters / Thomas Mukoya

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Reuters / PETER ANDREWS

Investor Preferences
The 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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GLOBAL ISLAMIC ASSET MANAGEMENT SURVEY
Investors/traders
Of 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 sampling
The global Islamic asset management survey was distributed to asset managers (issuers), promoters, investors, and traders.

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

Demographics of Survey Participants

Demographics of Survey Participants

50%

Response Percentage

43.5%
40%

30%
21.0%
20%
12.9%
10%

6.5%

6.5%

6.5%
3.2%

0%
Middle East &
North Africa

28

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Europe & Central Asia

Southeast Asia

North America

South Asia

Sub-Saharan Africa

East Asia & Paciﬁc

Location


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Investors mainly invest in mutual funds as a means of diversifying their investment portfolios.
Performance is the second most important factor motivating investors.

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

Why Do You Invest In Mutual Funds

Respondant percentage

50%

40%

35.14%
27.73%

30%

20%
11.65%
7.74%

10%

10.45%
7.3%

0%
Diversiﬁcation


9660766_V8.indd 29

Performance

To conform with asset
allocation strategy

Preferable form
of investment

Hedging

Risk aversion

29

19/11/2013 15:54


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.
Breakdown of Investors

How Much of Your Portfolio Is Invested in Mutual Funds

Breakdown of Investors

100%
8.9%

90%
83

80%
70%

6.7%

67 67

Percentage

6.7%

60%
50%
40%

11.1%

33

0 to 15 %

30%

15 to 30 %

20%

66.8%

17

45% to 60%

13

0

0%

10

8

10%

0 to 15 %

0

15 to 30 %

0

3

0

30% to 45 %

Retail

30

9660766_V8.indd 30

0

45% to 60%
Financial

30% to 45 %

60% and above

0

60% and above
Corporate


19/11/2013 15:54


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.

Kindly grade the below parameters for importance when considering
investment in a fund (1 to 8; 1 being most important)
Performance of fund investments

19%

Current events in financial markets

16%

Personal experience with mutual funds

15%

Fund company

15%

Opinion of professional financial advisers

11%

Stock market fluctuations

10%

Media coverage about Fund Company

7%

Friends and family

7%

0%

5%

10%

15%

20%

25%

Percentage

9660766_V8.indd 31

31

19/11/2013 15:54


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.

Investor Preference

What is the minimum track record you require before
investing in a fund?

Investor Preference
40%

37.5

6%

35%
9%

% of Respondants

30%
3%

25

25%

3%

20%

59%

15.6

15.6

15%
No track record
19%

10%

1 year
3 years

6.3

5 years

5%

7 years

0

0

10 years

0%
No preference

32

9660766_V8.indd 32

$0 – $10 Million

$10 Million –
$50 Million

$50 Million –
$100 Million

$100 Million –
$500 Million

$500 Billion –
$1 Billion

$1 Billion +


19/11/2013 15:54


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.

Investor Preference – Asset Type
Investor Preference – Asset Type
200
180

Frequency of Responses

160
140
120
100
80
60
40
20
0
Equity Funds

9660766_V8.indd 33

Sukuk Funds

Money Market Funds

Real Estate Funds

Mixed Asset Funds
33

19/11/2013 15:54

9660766_V8.indd 34

19/11/2013 15:54

Market Outlook
Market 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

Market Outlook

GLOBAL ISLAMIC ASSET MANAGEMENT SURVEY – Market Outlook
Population and sampling

Asset managers/promoters

Issuers/promoters

The global Islamic asset management survey was distributed
to asset managers (issuers), promoters, investors, and traders.

In 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.

A 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.

Which of the following bestbest describes your company/organization?
Which of the following describes your company/organization?
90%

Response Percentage

80%
70%
60%
50%
40%
30%
20%
10%
0%

Financial

Corporate

Retail

Company/Organisation type

36

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.

How would you define the state of Islamic funds in the past five years (efficiency and return perspective)?
70%
61.1%
60%

30%
Response Count – 14

Response Percentage

55%
50%

50%
45%

40%

40%
33.3%
28%

30%
21%
20%

10%

5.6%

Below expectations
0%

0%
Better than Anticipated

As Anticipated

Below Expectations

30%

As anticipated
Better than anticipated

Response Options
Investor / Trader


9660766_V8.indd 37

Issuer

Promoter

37

19/11/2013 15:54

Market Outlook

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?

40%

Do you see this improving or deteriorating in the
next 12 months?

38.5%

13% No change

35%

Response Percentage

30.8%

30%

28.2%

12% Deteriorating

25%
20%
15%
10%
5%

2.6%
0.0%

0
Development

Infancy

Growth

Maturity

76% Improving

Saturation

Development Stage of Product Range

38

9660766_V8.indd 38


19/11/2013 15:54

Market Outlook

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.

Do You Plan Any Fund Launches in the Next
12 Months?

Projected Fund Issuance 2014 – Asset Type

70%
62.8%
60%

30%
20%
10%

50%
40%

37.2%

Percentage of division

40%

Response Percentage

Response Percentage

60%
50%

45%

62.8%

37.2%

30%
20%

50%
43.75%
45%
40%

35%
30%
25%
20%
15%
10%

43.75%

37.50%

35%

37.50%
33.33%

33.33%

30%
25%
20%
14.58%

15%

14.58%
10.42%

10%

10%
5%

0%

Percentage of division

50%

40%

70%

0%
Yes

Yes

No

No

Plans launches in the next 12 months
Plans of fund of fund launches in the next 12 months

0%

10.42%
8.33%

8.33%

5%
0%

Sukuk

Sukuk Other

Other Equity

Equity Market Market
Money Real Estate
Real Estate Asset
Mixed Asset
Money
Mixed

Asset
Asset Type Type

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

9660766_V8.indd 39

39

19/11/2013 15:54

Market Outlook

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.

Geographical Focus of Projected Fund Launches in 2014
30

No. of Projected Fund Launches

25
25

20
14

15

13

12

10

8
4

5

0

Asia

Middle East

Europe

GCC

Americas

Africa

Geographical Area
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
40

9660766_V8.indd 40


19/11/2013 15:54

9660766_V8.indd 41

19/11/2013 15:54

9660766_V8.indd 42

19/11/2013 15:54

Reuters / Benoit Tessier

The Key Challenge
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.

9660766_V8.indd 43

19/11/2013 15:54

The Key Challenge

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.
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
400
350

346

No. of Funds

300
250

230

200
150
100

72

80

50M - 99 M

> 100 M

50
0
< 10 M

10M - 49 M

Fund Scale
44

9660766_V8.indd 44

No. of Funds

19/11/2013 15:54

The Key Challenge

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.

THE LARGEST TEN ISLAMIC FUNDS REPRESENT 44% OF TOTAL FUND AUM
Stricter 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


9660766_V8.indd 45

45

19/11/2013 15:54

The Key Challenge

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.
Shariah-Compliant Funds Industry

Conventional Funds Industry

Islamic Banks
Pension Funds
Takaful Companies
Other Institutions

Banks 3%
Pension Funds 27%
Insurance Companies 42%
Other Institutions 28%

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%

Long term goal would be to
attract conventional funds

• 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.
RETAIL FUNDS 80%
INSTITUTIONAL FUNDS 70%

RETAIL FUNDS 30%
INSTITUTIONAL FUNDS 20%

46

9660766_V8.indd 46


19/11/2013 15:54

The Key Challenge

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.

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.

Kindly grade the below parameters for importance when
considering investment in a fund

Minimum track record required to invest in a fund
6%
10%

Performance of fund investments
Current events in financial markets

3%

Personal experience with mutual funds

3%

Fund company
Opinion of professional financial advisers
Stock market fluctuations
Media coverage about Fund Company

59%
Friends and family

19%
0%

5%

10%

15%

No Track record
3 years
5 years

20%

7 years
1 year
0.0
0.2
0.4
0.6
0.8
1.0

10 years +


9660766_V8.indd 47

47

19/11/2013 15:54

The Key Challenge

SCALE IS THE KEY CHALLENGE FACING
THE ISLAMIC ASSET MANAGEMENT INDUSTRY

PENSION FUNDS

SOLUTIONS

• Access to vast liquidity
of sovereigns
• Access to institutional
investors
• Ease of government
reserves
• Collective pooling
• Improved payout ratio

48

9660766_V8.indd 48

SOCIALLY RESPONSIBLE
INVESTMENT

PASSPORTING

• Complements Shariah
principles

• Scale facilitation with
minimum change to
product structure

• Allows wider reach beyond
Shariah-compliant
investors

• Broader market reach

• Increase return efficiency

• Large market exceeding
US$3 trillion in assets
• Natural crossover


19/11/2013 15:55

Reuters

9660766_V8.indd 49

19/11/2013 15:55

9660766_V8.indd 50

19/11/2013 15:55

Reuters / Christian Hartmann

Solution 1: Pensions
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.

9660766_V8.indd 51

19/11/2013 15:55


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.

The Potential Role of Pension Funds
Pension fund assets are a critical tool to add scale to the Islamic asset
management sector.

GCC pension assets are a minor 5% at most of GDP.

We estimate GCC pension assets at US$180 billion.

Diverting 20% of GCC pension assets can contribute US$36 billion to
the Islamic asset management sector.

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

Investment restrictions are holding back the growth of pension assets.

In developed markets such as the U.K. and the Netherlands, pension
assets represent over 100% of GDP.

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

The entrance of pension fund assets could bring
up to US$36 billion of AUM, doubling the size of the industry.

52

9660766_V8.indd 52


19/11/2013 15:55


PENSION SCHEMES-THE SILVER LINING OF COLLECTIVE POOLING
Can Sharia-Compliant Pension Schemes give a much-needed boost
to the Islamic Asset Management sector?
By Karim Arafa–Funds Analyst–Thomson Reuters

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.
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.

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.

% GDP
(Local currency)

Australia

1,555

101%

Brazil

340

14%

Canada

1,483

84%

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

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

Total Assets 2012
(USD Billion)

France

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.

Country

16,851

108%

29,754

78%

Total

9660766_V8.indd 53

53

19/11/2013 15:55


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.

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.
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.

GCC Countries’ Demographics (2012)
GCC Countries' Demographics (2012)
40
23.68

35
30
Population (Million)

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.)

25
12.0768

20
15
10

4.77

5
1.11

0
Bahrain

0.4884

1.45
Qatar

2.87

2.5
0.5075

1.9229

0.825
Kuwait

Oman

2.8143

United Arab Emirates

Population (Million)

54

9660766_V8.indd 54

Saudi Arabia

Population < 25


19/11/2013 15:55


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


9660766_V8.indd 55

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.

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.

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.

55

19/11/2013 15:55


A recent pension reform in Turkey resulted in a 271% increase in pension contributors.
Turkish Pension Fund Assets and Contributors

TRL 20000

4

TRL 15000

3

TRL 10000

2

TRL 5000

1

0

0
16.10.2006

13.08.2007

31.05.2008

03.04.2009

19.02.2010

24.12.2010

14.10.2011
Fund Size (TRL mln)

56

9660766_V8.indd 56

27.07.2012

Contributors (Millions)

5

TR Million

TRL 25000

17.05.2013
No. of Contributors


19/11/2013 15:55


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.

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)

U.S.–PensionPension Funds’ Asset Allocation
U.S. – Funds’ Asset Allocation

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.
Japan–PensionPension Funds’ Asset Allocation
Japan – Funds’ Asset Allocation
80%

70%

70%

60%

60%

50%

50%

40%

40%

2002

9660766_V8.indd 57

2007

2012

2002

2007

Cash

Other

Fixed Income

Equities

Cash

Other

Fixed Income

Equities

Cash

Other

Fixed Income

Equities

Cash

Other

Fixed Income

Equities

Cash

0%

Other

0%

Fixed Income

10%

Equities

10%

Cash

20%

Other

20%

Fixed Income

30%

Equities

30%

2012
57

19/11/2013 15:55


CASE STUDY:

PAKISTAN’S VOLUNTARY PENSION SYSTEM
By Mr. Muhammad Afzal, Director, REITs, Pension and Private Equity Wing, Securities & Exchange Commission of Pakistan

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.
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).
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.

Position as of July 2013
Total assets of pension fund industry

Rs.5,580 million

Net assets

Rs.5,355 million

Shariah-compliant pension funds

7
6

Number of pension fund managers

9660766_V8.indd 58

13

Conventional pension funds

58

Total number of pension funds

7


19/11/2013 15:55


Voluntary Pension Funds – Growth
Voluntary Pension Funds

- Growth

6000

25

5,580

5000

20

4000
15

13

3000

2,776
9

2000

7
1,328

1000

9

10

11

1,575

5

880

0

0
2009

2010

2011

2012

Jul-13
Total Assets

No. of Funds

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

Changes in Regulatory Regime:

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:

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:

• 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.

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

• 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.

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

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

• 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.


9660766_V8.indd 59

59

19/11/2013 15:55


Future Plans

PENSION

HBL Asset Mgmt

60

9660766_V8.indd 60

264.931

Dec-11

129.199

186.03

Conventional

Jun-07

206.29

273

Jun-08

129.33

162.38

Conventional

Jun-07

295.7

436.27

Nov-07

166.00

230.96

Conventional

Jul-07

175

388

Nov-07

197

376

N/A

N/A

N/A

Jun-07

868

1856

Conventional

May-12

296.57

616

May-10

174.5

314

Conventional

Jul-13

0

96

Islamic

NBP Fullerton Asset
Mgmt

163.77

Islamic

UBL Fund Managers

Dec-11

Islamic

Al Meezan Investment
Mgmt

Conventional

Islamic

Atlas Asset Mgmt

AUM JULY 2013

Islamic

Arif Habib Investments

AUM JULY 2012

Islamic

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

FUND MANAGER

JS Investments

LAUNCH DATE

Islamic

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.

Jul-13

0

94

Conventional


19/11/2013 15:55

Reuters / Bazuki Muhammad

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19/11/2013 15:55

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19/11/2013 15:55

Reuters / Navesh Chitrakar

Solution 2: Socially Responsible Investment (SRI)
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.

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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.

The Potential Role of SRI
The SRI industry is estimated to be a US$33-trillion industry.

Incorporating SRI principles in Islamic products offers a synergistic
product to cater beyond regional markets.

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

SRI facilitates the scale required to improve the efficiency of Islamic
funds.

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

SRI will help broaden the reach of Islamic funds beyond localized
markets.

According to The Association of the Luxembourg Fund Industry, Shariahcompliant funds fall under responsible investment.

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

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.

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19/11/2013 15:55


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.

Responsible Investing

ESG (Cross-Sectoral)

Esg (Environment)

Esg (social)

RI screened
(best-in-class, engagement)

Climate change and
renewable energy funds

Microfinance funds

RI extended (filters)

Environmental and
ecological funds

Social entrepreneurship
and solidarity funds

Carbon funds

Social impact–single
impact area

Sustainable forestry funds

Social impact–multiple
impact area

Sustainable forestry funds

Esg (governance)

Ethics (Cross-Sectoral)

Venture philanthropy

Engagement

Faith-based 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.

ALFI Responsible Investments categorization

9660766_V8.indd 65

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19/11/2013 15:55


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.

Global SRI Assets (2010)

SRI assets grew an average of 22% since 2010.
global sri assets (2010)

US

Today in the U.S. SRI is estimated to be

US$33.3-trillion

Canada

Total sustainable AUM in Europe now exceeds

US$15 trillion

Australia
Asia
Europe
0

500

1000

1500

2000

2500

3000

3500

Europe
AUM (USD Bln)
Broad SRI
66

9660766_V8.indd 66

Asia

Australia

Canada

US

6.5

8.5

16

530

3007

5

0

60

0

T
he 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.

0

19/11/2013 15:55


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.

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

FC Stewardship Growth

FC 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
All SRI Equity Funds AUM


9660766_V8.indd 67

10,524
10,7164

67

19/11/2013 15:55


CASE STUDY:

Sedco Capital launches the first Shariah-compliant product with
an ESG filter to cater to socially conscious investors
By Hasan S. AlJabri, CEO, SEDCO Capital

Having found very close similarities between the two belief systems, Sedco views SRI as a natural and successful venture.
Common Ground
Both 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
68

9660766_V8.indd 68

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.

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


19/11/2013 15:55


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

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

FC Asset Management plc

UK

1,527

10

Natixis Asset Management

France

1,427

Total 10 Total SRI Equity Funds


9660766_V8.indd 69

28,458

69

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19/11/2013 15:55

Reuters / Jason Reed

Solution 3: Passporting
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.

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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.

The Potential Role of Passporting
Undertakings for Collective Investment in Transferable Securities (UCITS)
can help broaden marketability of Islamic funds.

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

UCITS have helped achieve scale in Europe: EUR6.5 trillion versus nonUCITS funds’ EUR2.7 trillion.

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.

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

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

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

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

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.
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19/11/2013 15:55


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.


9660766_V8.indd 73

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 hostcountry 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

Florence Stainier

Head of Representative Office –
Arendt Medernach

Partner – 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 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.

73

19/11/2013 15:55


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.
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.

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.”

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

Global success of UCITS

The European passport experience
The 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

74

9660766_V8.indd 74

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 crossborder 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 crossborder 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.


19/11/2013 15:55


AIFMD passport and other initiatives
The 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.

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.

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.


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Reuters / Kai Pfaffenbach

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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 Shariahcompliant 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.


9660766_V8.indd 77

First driver: UCITS and its distribution passport
Luxembourg’s strengths in conventional investment funds make Shariahcompliant 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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19/11/2013 15:55


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

78

9660766_V8.indd 78

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 transparency
The 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 highquality 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 AlternativeInvestment 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.

19/11/2013 15:55

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