Worldwide Shariah assets total an estimated $900 billion to $1 trillion, which is three times the size of China's mutual fund asset base. This market is projected to expand to $4 trillion to $5 trillion by 2015, according to figures released by Cerull.
The good news for asset managers is that this money currently has few places to go. However, Cerulli cautions that despite this heft, this marketplace doesn't always make sense for managers.
In some markets with large Muslim populations, the demand for investment products based on Islamic law, or Shariah, exceed supply. In India, for example, about 50 per cent of the 160 million Muslims were found to be excluded from the financial sector. Indeed, outside of Malaysia and Saudi Arabia, it can be difficult to find mutual funds and other investment approaches that stay within Shariah's requirements of low leverage, no uncertainty, no interest-bearing assets, no derivatives, and no prohibited sectors such as gambling and alcohol.
According to Cerulli's data, Shariah mutual funds worldwide only have $42.3 billion assets under management (AUM) as of March 2011. About $15.4 billion is domiciled in Saudi Arabia and $8.1 billion in Malaysia. Other markets have even smaller AUM.
Being in a marketplace where demand is greater than supply doesn't always mean that it is a commercially viable proposition.
Cerulli identifies five factors that are critical for success in the Shariah fund management industry.
Scale: The potential is there, but varying interpretations of Shariah have fragmented this market into local niches, making it difficult to target.
Marketing: The way a Shariah-compliant fund is presented determines its palatability to various potential investors.
Track record: A fund manager vying for assets must have a track record. The best place to start earning that track record is in Malaysia. There are well-designed tax and regulatory structures to help the industry grow, and the Malaysian government has seed money for Shariah asset managers.
Products, services, and distribution: Considering that the largest pool of potential investors are Islamic foundations and insurance companies, Cerulli sees this industry as needing more conservative products and superior service.
Performance that is comparable to conventional investment approaches.