The demand for Shariah-compliant funds is growing. But does the dominance of equity funds over other types of funds indicate a growing asset allocation gap?
The objective of asset management is risk-constrained return maximisation. Since asset returns are ordinarily less than perfectly correlated, the risk to the returns of a group of assets taken together is less than the sum of the risks of individual assets taken in isolation. This is good news for investors with well-diversified portfolios and a major incentive to invest in funds.
In all honesty, funds come into being from a desire of their sponsors to earn fee income. Given the enormous collective amount of investible wealth held around the world by individuals seeking Islamic investment opportunities, financial institutions, both conventional and Islamic, are clamoring to offer ever more attractive funds to their clients. A large number of these are real estate funds. A seemingly even larger number of these are equity funds, and to be specific, long-only equity funds, which, as the name suggests, entails holding only long positions in each underlying equity.
