Shariah-Compliant Fund Growth May Be Overstated: Cerulli

January 7, 2009 ( - Current assets in Shariah-compliant investments may be more modest than cited by many regulators and industry players, according to a new analysis.

The Cerulli report, Shariah Investing: Market Sizing and Analysis, estimates that at the end of third-quarter 2008, total mutual funds and discretionary assets under management hit $65 billion – a figure that the report’s authors note is “…well below the hundreds of billions often associated with this market.”

Shariah-compliant investments generally undergo sector and accounting-based screens that exclude businesses that offer products and services which are considered unacceptable or non-compliant according to Shariah-law, such as advertising and media, alcohol, financials, gambling, pork, pornography, tobacco, and the trading of gold and silver as cash on a deferred basis.

According to a press release, Cerulli Associates notes that although the number of Shariah-compliant mutual funds has doubled in the last three years, these are offered mainly by domestic managers.   Saudi Arabia is currently the largest domestic market for Shariah investments, but Malaysia has the largest number of registered mutual funds.   Cerulli combined data from private and public sources with proprietary surveys of international and domestic Shariah managers to arrive at its estimate.

Concerns Remain

The report notes that the majority of large international managers are yet to launch a Shariah-compliant mutual fund due to several concerns, including:

  • costs,
  • the discrepancy in Shariah standards, and
  • the lack of third-party distribution

Cerulli notes that a growing number manage discretionary mandates for high-net-worth individuals and family offices.  “Nevertheless, assets in discretionary Shariah-compliant portfolios will continue to lag the retail market unless and until some large institutions, in particular the Middle East-based sovereign wealth funds, decide to invest in accordance with Shariah principles. To do so, these institutions must be convinced that performance will not be compromised,” states Shiv Taneja, Managing Director and head of Cerulli’s international research practice, in the release.

Various Islamic indices suggest that Shariah equity investments have performed on par with their conventional counterparts, but have not escaped the recent market turmoil, while sukuk (bond) products are still rare due to the illiquidity and scarcity of the underlying securities, according to Cerulli.  

“As a result, assets in Shariah-compliant funds, despite having increased by 8% year over year as of September 2008, will likely end the year close to or below the 2007 level,” Cerulli says.   However, Cerulli expects that once markets stabilize, this industry can continue to expand at above 10% per annum, driven by the large amount of Islamic bank deposits, new products and asset classes, and increased regulatory support from governments, such as that introduced to great effect in Malaysia.