Shariah mutual fund AUM in Southeast Asia have expanded steadily, recording a compound annual growth rate of 12.4% from 2016 to 2020, according to Cerulli Associates.
The segment’s market share is now more than 20% of Southeast Asia’s total mutual fund AUM, and the Boston-based research and consulting firm with offices in Singapore and London believes it should increase as the industry matures.
“Shariah funds will be an important part of retail investors’ portfolios in 2021,” said Ken Yap, managing director, Asia, in Cerulli’s Singapore office.
However, sustaining the development of the region’s Shariah fund management industry faces challenges. On the retail side, a key limitation is the historically lower performance of Shariah-compliant funds compared with conventional funds, as well as limited product variety, according to Yap.
In Malaysia, products are mainly Malaysian, Asian, and global equities. It is similar in Indonesia, except there is a strong preference for foreign-invested Shariah funds.
Nevertheless, Malaysia has seen some product innovation, with several managers starting to combine Shariah and ESG principles in one product.
For example, Public Mutual launched its equity fund Public e-Islamic Sustainable Millennial Fund in 2019. Last January, UOB Asset Management launched the United-i Asia ESG Income Fund, an ESG fund that complies with Shariah principles.
Indonesia partnership potential
Although it is still too early to tell how effective this approach is as a product and marketing strategy, these funds have opened a window for foreign fund managers to bring in their ESG and sustainability research and investment capabilities, according to Yap.
For instance, they could work with local players to offer feeder funds with a global focus.
Meanwhile, Indonesia’s retail Shariah market is becoming more lively, because of demand for foreign-invested funds. Shariah funds can invest up to 100% of their assets offshore, but conventional funds are still subject to a 15% limit.
“The lack of options to invest offshore through conventional retail funds has made foreign-invested Shariah products—particularly those denominated in the US dollar—an increasingly popular option,” said Yap.
Several Indonesia-based fund houses plan to launch new offshore equity funds in 2021, according to Cerulli, and to gain meaningful offshore exposure, some managers have been offering Shariah-compliant foreign-invested funds.
In particulate, there is an opportunity for foreign firms to partner with Indonesian managers that are looking to create China equity funds, and last year saw the launch of two such products, following China’s economic recovery from the pandemic.
However, working with Malaysian fund houses tends to be easier because there are more ways to get into the market—such as through wholesale and master-feeder funds, according to Cerulli.
Overall, “there remains a lot of work to be done in the region, including educating retail investors, to increase interest in these funds. This requires showing that these products can deliver in terms of performance,” said Yap.
