The global Islamic fund assets stagnated at $52.3 billion in 2009, remaining at almost the same level as the $51.4 billion posted in 2008, according to a report by Ernst & Young (E&Y), one of the world's largest accounting firms.

In contrast, the global conventional mutual fund assets under management (AuM) exhibited signs of recovery from their lows of $19 trillion in 2008, reaching $22 trillion in 2009, the E&Y said in its fourth annual 'Islamic Funds & Investment Report' which was released on Saturday at the World Islamic Funds and Capital Markets Conference.

Sameer Abdi, Middle East head of Ernst & Young’s Islamic Financial Services Group (IFSG), pointed out that the trend was reflective of a distinct shift in investors’ preferences, and required Islamic fund managers to adapt their strategies and operating models accordingly to meet the new levels of expectations.

'The research reveals that 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,' he noted.

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

The silver lining for the industry is the continued strong growth in the overall Shari’a sensitive investable assets.

Ashar Nazim, director at IFSG in Bahrain said Shari’a compliant investable wealth pool grew by 20 per cent to reach $480 billion in 2009 from $400 billion the year before.

'The GCC remains the single biggest contributor to this growing wealth pool.  It clearly represents substantial untapped opportunities for local and international players who can understand and respond to their investors’ evolving needs,' he stated.

Commenting on the upward increase of this pool in Jordan, Mohammed Al-Karaki, partner at E&Y Jordan, said: 'There is an increased demand for Shariah-compliant funds, equity and Sukuk here in Jordan. Nonetheless many opportunities remain intact from the investment vehicles’ side which are still relatively new to the Jordanian market.'

'We believe that these opportunities will be exploited as investor confidence in the market grows and alternative asset classes including Shari’a compliant ETFs and hedge funds are launched,' he added.

E&Y’s report also revealed that almost 70 per cent of Islamic fund managers are struggling to build scale and have under $75 million in AuM, while 55 per cent have less than $50 million AuM.

On the other hand, average fee charged by Islamic fund managers have dropped by almost 25 per cent since 2006, and are expected to continue at this level for the foreseeable future, it added.

“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,” pointed out Ashar.

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.

According to him, 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,” Ashar added.

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.

As fund managers try to re-discover the investors’ preferences, they are focusing on enhancing the quality of their offering, moving away from transaction-only approach to comprehensive wealth management solutions.

There has been substantial investment in enhancing risk infrastructure, adopting flexible business models, segmented approach to accessing new customers as well as dramatic changes in fee and cost structures including more transparency and incentive based remuneration.  All this also feeds into building stronger brands, the report said.

“The fact that the Shari’a 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,”Ashar added.

Ernst & Young’s Islamic Funds & Investment Report builds on more than 400 unique insights from key players in all major financial markets.  A better understanding of these strategies can clearly help fund managers articulate new strategies for post-crises era.-TradeArabia News Service