Islamic Retail Asset Management
This article was first published in Islamic Finance News dated the 22nd December 2020
We live in times where consumers are increasingly aware of their choices and demand that values and purpose are embedded into products that they consume. In financial context, today’s generation seem less driven by the narrow definition of investing to generate returns and consider social and environmental impact of the companies they invest in to be an important part of investment decision-making.
Millennials view their investments as a way to express their social and environment values (US Trust survey on wealthy millennials). The structural shift that the investment industry is undergoing has profound implications for the Islamic asset management. Consequently, purpose driven investment solutions that promote responsible behaviour – an inherent part of Islamic finance, could soon find itself in the mainstream.
Sharia-compliant investments abide by Islamic tenets against usury and uncertainty. It forbids irresponsible profiteering at the expense of others, shuns businesses that harms environment and damages our society. For instance, interest or excessive interest that leads to slavery is prohibited in Islamic finance. It also prohibits investments where the payout is uncertain such as gambling or speculation. Investment in businesses such as those that deal with weapons/arms manufacturing, alcohol and brewing, tobacco, or pork-related products are avoided. Islamic principles thus strives to create a sustainable and socially responsible financial system that largely appeals to the millennial investing attitude.
As younger demographic cohorts, push values-based investing to the forefront ‘Islamic funds’ along with ‘Environmental, Social, and Governance (ESG) investing’ have emerged as the fastest growing segments within the financial industry.
However, not all is rosy and the industry is faced with multiple challenges. Islamic assets remain concentrated, with the markets of Iran, Malaysia and Saudi Arabia accounting for more than three-fourths of the total assets. There is a prevailing notion among investors that screening for businesses that adhere to Islamic principles would lead to additional layer of costs in terms of research and certification.
2020 – A review
Sharia-compliant funds outperform conventional peers
Global funds, as measured by their benchmark indices performance, recouped most of their losses and entered positive territory in Q3, 2020. However, across region sharia-compliant benchmarks have outperformed their conventional peers. For instance, performance of Dow Jones Islamic Market (DJIM) World Index stood at 14.3% (YTD, as of Q3 2020) while its conventional peer gained 0.9% for the same period.
Table: Market performance up to Q3, 2020
Source: S&P Dow Jones Indices; Index performance based on total returns in USD
The outperformance of sharia-compliant funds could be explained by differing sector allocations. Islamic funds lack exposure to conventional banking, and entertainment industry (alcohol, gambling, tobacco, and cinema) – businesses that took a big hit due to the lockdowns. Information Technology sector, driven by FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks that contributed to most of the positive performance has an overweight allocation in Sharia indices compared with the conventional peers. While financials that performed poorly among various sectors remains underweight in sharia index.
On the product side, we witnessed the launch of first actively managed sharia-compliant Exchange Traded Fund (ETF) – the Almalia Sanlam Active Sharia Global Equity ETF in September 2020. The ETF currently listed in London market has Royal Bank of Canada as the lead market maker. Introduction of actively managed sharia-compliant ETF would provide more choice to investors.
Despite the strong performance, scalability of business has remained a sore point for Islamic asset management. In the upcoming year, the robust outperformance of sharia funds could perpetuate fresh inflows and entice new set of investors – not limited to those seeking sharia-compliant. The trend could be evident among retail investors who typically act by buying into the best performing funds. The opportunity could be capitalized by retail Islamic asset managers, aided by appropriate marketing efforts to attain economies of scale that is most sought after in the fund management business.
Presently, ETFs remain a small proportion – amounting to less than 10% of overall AuM in the Islamic fund landscape. Considering a flurry of sukuk issuance, both from sovereign and corporates especially in the GCC region, establishing ETF vehicles for sukuk could make it easier for retail participation. ETF segment offers immense potential for growth and we could see further products.
To conclude, potential opportunities are plenty for Islamic retail asset management in terms of product development and widening investor base. Favorable tail winds in the form of strong outperformance and enhanced focus on socially responsible investing has thrusted Islamic asset management into limelight. The industry should thwart the existing challenges and position itself favorably and scale up.