Malaysian Islamic mutual fund assets nearly doubled to $24bn as of the end of May 2017 from $16.4bn at the end of 2014. Currently, Malaysia accounts for 94% of Southeast Asian Islamic mutual fund assets of around $25.6bn, according to the study.
The country is followed by Indonesia, which only had $1.12bn in Islamic mutual fund assets, despite being home to the largest Muslim population in the world.
Globally, Islamic mutual fund assets were around $56.1bn at the end of 2016, with Saudi Arabia and Malaysia accounting for 67% of the total assets.
Elsewhere in the region, Islamic finance barely exists or is not an area of priority. In Singapore, which has Islamic mutual fund assets of around $204.4m, Shariah investments exist alongside broader product suites offered by private banks, wealth managers and some independent financial advisors, according to the study.
In Thailand and the Philippines, a few managers offer Shariah products and there is little investor demand for them.
In Hong Kong, there are only two SFC-authorised Malaysian Islamic funds, according to SFC records. They are Public Mutual’s Public Ittikal Fund and RHB Asset Management’s Islamic Regional Balanced Fund.
The SAR launched its first Islamic bond or “sukuk” in 2014, when it raised $1bn. The government launched the second offering in 2015 and attracted $2bn in orders, mainly from private banks and fund managers in the Middle East and Asia. The latest sukuk launch was in February, which attracted orders that amounted to 1.72 times the original issuance size of $1bn.
Shariah-compliant funds follow basic Islamic principles. For example, no stocks may derive income from gambling, alcohol, tobacco, pork products, adult entertainment or military equipment. The principles also restrict the use of some mainstream financial instruments such as debt-financing, charging interest or the use of derivatives.
Institutionally-driven
The most popular Shariah-compliant funds in Malaysia are money market funds, Rui Ming Tay, Singapore-based senior analyst at Cerulli Associates, told FSA.
“Besides available for retail investors, these funds are also targeted at corporates to help them manage liquidity on a short-term basis,” he said.
However, demand in Malaysia has been driven by institutional investors, especially pension funds and government or quasi-government bodies, according to Malaysian asset managers surveyed by Cerulli
This is not surprising given that pension funds, such as the Employees Provident Fund and the Kumpulan Wang Persaraan (KWAP), are known to grant Shariah mandates to third-party managers, the report said. In fact, KWAP is aiming to make its portfolio 100% Shariah-compliant from the current 55%, although it has not given a specific timeline.
On the flipside, asset managers believe that being Shariah-compliant is not a driving factor for other investors, especially for the mass affluent and high-net-worth investors, according to the report.
“High-net-worth individuals tend to seek returns over adherence to religious principles when investing,” Tay said. “They do not really mind whether the fund is Shariah-compliant or not, as long as it can deliver performance.”
Opportunities for foreign managers?
Foreign managers without a local presence in Malaysia may find limited opportunities in the institutional space, according to the study. In Malaysia, fund houses managing existing mandates are generally Islamic managers, not just conventional firms using Islamic screening filters for investment research and decisions.
Foreign managers in Malaysia targeting institutional Shariah mandates have set up Islamic counterparts in the country. These managers include Aberdeen Asset Management, Amundi Asset Management, BNP Paribas Asset Management, Eastspring Investments, Franklin Templeton, Nomura Asset Management and Threadneedle Investments, according to the report.
The retail investor base may have opportunities, but it will be challenging to raise assets by establishing a local presence from scratch, the report said.
“It will be more feasible for global fund houses to work with local managers through master-feeder arrangements,” the report said. Local fund houses in Malaysia are known to partner with boutique firms, such as Crescent Wealth, Oasis Crescent Capital and Arabesque Asset Management, among others.
Tay noted, however, that like the HNW segment, returns are more important than religious principles for retail investors, so there is no differentiation between Shariah and conventional funds.
In Malaysia, Shariah fund assets account for 21% of the country’s total mutual fund assets of $114bn, Tay added.
The three-year performance of the Public Ittikal Fund versus its benchmark, the FTSE Bursa Malaysia EMAS Index, and the RHB Islamic Regional Balanced Fund versus its sector.
