The market for Shariah-compliant funds in the UK and the rest of Europe is small and, arguably, underserved, according to the latest issue of The Cerulli Edge - European Monthly Product Trends Edition.
“One reason the number of funds remains limited is the lack of a clear definition of ‘Islamic finance’,” says Fabrizio Zumbo, associate director, European asset management research at Cerulli Associates, a global research and consulting firm.
Shariah prohibits investment in certain industries, including alcohol and brewing, tobacco, weapons and armaments, and pork-based products. However, it becomes more complicated when additional principles come into play.
Islamic financial products lack standardization, although the Islamic Financial Services Board and the Accounting and Auditing Organisation for Islamic Financial Institutions are focused on improving this.
At the end of 2018, the global market for Shariah-compliant funds was worth US$90 billion, with much of the demand coming from the Middle East and Southeast Asia. The total assets under management (AUM) of Europe-domiciled funds stood at nearly 3.8 billion euros (US$4.2 billion) across 51 vehicles, Morningstar data shows. The bulk of Europe’s Shariah-compliant funds are Luxembourg-domiciled, with some located in Ireland or the Channel Islands.
“The growth of the Shariah-compliant market in Europe and globally has been relatively slow over the past decade compared to that of the conventional fund market,” says Zumbo. “Just 37 Shariah-compliant funds were launched between 2010 and 2016 and 14 between 2000 and 2009. Net fund flows have also been relatively low, with changes in total AUM being driven more by expanding valuations than new inflows.”
Noting the overlaps between themed investing and Shariah-compliant investing, Zumbo believes that the latter may benefit from the growing popularity of thematic funds in various European countries.
“Those seeking to invest responsibly or thematically are asking more questions of advisors and fund managers in a bid to ensure that their investments reflect their values and beliefs. And managers are poised to meet this increase in the demand by launching new funds; this is beginning to happen in the Islamic finance industry too. The green sukuk industry, for example, has attracted increasing interest from both Islamic and non-Islamic investors.”
Bond funds have been the best performers in the European market so far in 2019, representing nine of the top 10 funds in terms of net new flows year-to-date (YTD), notes Cerulli. As a whole, bond funds posted 21.7 billion euros in April and 61.4 billion euros YTD. The top bond fund sectors are diverse, with emerging and developed market bond fund sectors performing well. Property is the only other asset class to record net inflows in 2019, with 3.1 billion euros YTD.
Europe’s cross-border market suffered net outflows of 3.8 billion euros in April, following net inflows of 1.8 billion euros the previous month, says Cerulli. Equity, money market, and mixed-asset funds were the worst performers, with 10.1 billion euros, 6.4 billion euros, and 1.7 billion euros of net outflows respectively. Active funds accounted for 94.5% of the cross-border market assets at the end of April. Bond funds posted 15.3 billion euros of net inflows during the month.