Islamic funds fail to build scale: E&Y

Most Islamic fund managers are struggling to build scale amid a decline in average fees which have dropped by almost 25 per cent over the past few years, according to a study by Ernst & Young.

"Almost 70 per cent of Islamic fund managers are struggling to build scale and have under $75 million (Dh275m) in assets under management (AUM), while 55 per cent have less than $50m AUM. On the other hand, average fee charged by Islamic fund managers have dropped by almost 25 per cent since 2006, and is expected to continue at this level for the foreseeable future," said the study released yesterday.

"Profitability remains under tremendous pressure especially for smaller fund managers. Clearly, shake-outs and consolidations are the way ahead and will be in the best interest of the industry's long term prospects," Ashar Nazim, Director at E&Y Islamic Financial Services team in Bahrain, said:

Stronger players that have critical AUM volume and are flexible enough to adapt to investors' evolving financial needs stand to capture a more dominant market share. Most leading Islamic fund managers are re-focusing on understanding their investors' appetite post-crises.

"Rebuilding investors' trust is of paramount importance and has moved up the priority list for fund managers," added Ashar. Several investor segments are showing early signs of recovery, also reflected by choice of riskier asset classes. Allocation to cash and money market products decreased in 2009 and there is a clear preference for larger, more established brands in the market.

"The fact that the Shariah sensitive wealth pool is still showing strong growth, the opportunity is really for the fund managers who can quickly adapt their strategies to address clients' requirements who are smarter and more demanding than what we saw earlier in the decade," added Ashar.

It said global Islamic fund assets stagnated at $52.3 billion in 2009, remaining at almost the same level as the $51.4bn posted in 2008.

In contrast, the global conventional mutual fund AUM exhibited signs of recovery from their lows of $19 trillion in 2008, reaching $22trn in 2009, said the Ernst & Young study.

Sameer Abdi, Middle East Head of Ernst & Young's Islamic Financial Services Group, said: "This trend is reflective of a distinct shift in investors' preferences, and requires Islamic fund managers to adapt their strategies and operating models accordingly to meet the new levels of expectations."

Only 29 new Islamic funds were launched in 2009, almost offsetting the 27 Islamic funds that were liquidated during the same period. New Islamic funds launched were at their highest number ever at 173 in 2007. Since then, this number has declined dramatically.

The overall Islamic asset management industry, which includes funds and Islamic investment accounts, touched $292bn or 31.1 per cent of the total industry assets. This also underlines the predominance of investor deposits with banks, said Abdi.

Nazim said: "Shariah-compliant investable wealth pool grew by 20 per cent to reach $480bn in 2009. In 2008, this was $400bn. The GCC remains the single biggest contributor to this growing wealth pool.

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