Research

2016 Overview: Key Trends in Islamic Funds

Introduction

The Islamic finance industry is a niche market predominantly serving the needs of the world’s Muslim population. Products marketed under the umbrella of Islamic finance comply with a different investment philosophy as opposed to traditional investment philosophy which the rest of the world are familiar with. Under a Shariah-compliant framework, transactions which are considered to be unethical under Islamic law are prohibited and instead, fund managers invest in products which are compliant with Islamic guidelines. Islamic financial products are accessible to all investors, some of whom choose to allocate into Islamic funds for purposes of portfolio diversification or their preference in investing in products which deemed as socially responsible. In recent years, Islamic finance has been catching on with traditional finance institutions as international banks have expanded into providing Islamic finance services. As the use of derivatives, options and futures are deemed to be speculative; Shariah-compliant products tend to exclude their use, thus making the structure of Islamic finance products different from those found in conventional finance. Though appearing to be esoteric, Islamic finance has been garnering the attention of the broader global investment community as attempts at harmonising the difference between conventional and Islamic finance offers both familiarity and stability to participants of Islamic finance.

2016 was a year of surprises in the markets, and for the world - the beginning of uncertain times which lie ahead. World politics took a rather dramatic populist shift during the year with Brexit and the US Presidential Elections. Within the world of Islamic finance, major Islamic markets were affected by global political events but found some support thanks to the oil price rally at the start of 2Q 2016. Despite market challenges brought on by political and economic events, Islamic funds ended 2016 in positive territory up 4.11% ahead of the Dow Jones Islamic World Index which grew 3.81% over the same period. Going into 2017, it remains to be seen how the Islamic finance industry will fare on the back of the unpredictability of America’s foreign policy.

Industry growth

Figure 1 shows the industry growth of Islamic funds since 2007 with its assets under management (AUM) currently standing at US$81.45 billion overseen by a total number of 889 funds. Indeed, the ebb and flow of the industry is not isolated from global events though the conservative approach of Islamic finance investing has worked in favour of the Islamic funds in some cases. The 2008 financial crisis which had its epicentre in speculative and highly-leveraged investments is one such instance where Islamic funds have managed to avoid the repercussions of the collapse of asset prices. The Eurekahedge Islamic Fund Index fell only 28.72% in 2008, compared to the MSCI World Index1 which plummeted 41.1%. Growth picked up again sharply in 2009, alongside rebounding equity markets as government stimulus measures kicked in to support the market, with total AUM climbing to US$66.36 billion. Similarly, the political turmoil that followed the Arab Spring demonstrations and the economic uncertainty caused by the Eurozone crisis in the 2011 to 2012 period proved to be just minor hiccups, with redemptions from jittery investors causing a dip in AUM but recovering in the subsequent months.

Figure 1: Global hedge fund industry map

  Industry growth over the years

Assets under management of Islamic funds have been on the decline since end of 2014, as seen in Figure 1 as global economic concerns and the decline in oil prices in 2015 have delivered a hard blow to the industry. GCC countries have had to dig deeper into their existing reserves in order to remedy fiscal deficits brought about by a substantial decline in oil prices and the challenging global macroeconomic environment weighed in on performance with the Eurekahedge Islamic Fund Index ending 2015 down 1.86%. The recovery in oil prices in 2016 have led to a turnaround in the performance of Islamic funds, with managers posting gains of 4.11% - and despite investor outflows totalling US$1.3 billion for the year, performance-driven gains of US$1.8 billion were recorded leading to a marginal net asset growth for the industry in 2016.

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Footnote
1 MSCI AC World Index All Core (Local)
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