Tuesday, May 26, 2009

Sukuk funds, Ernst & Young report on Islamic funds

Two sukuk funds were launched in the last few days. The funds, the Qatar Investment Bank-European Finance House Global Sukuk Plus Fund and the Tharawat Investment House Sukuk Fund. Sukuk funds have been fairly rare until now but provide an interesting development for the industry. Both firms noted that the sukuk market was experiencing some disruption and creating sukuk funds to invest in outstanding and new sukuk issues provide a good opportunity. The one challenge for the sukuk funds will be to find enough sukuk to invest in, especially if they attract significant investments. The sukuk secondary market is very illiquid and sukuk issuance has tumbled since its peak in 2007. The sukuk markets will see growing issuance as the conditions in credit markets and the economy improve, but whether the funds will be able to subscribe to enough of these sukuk will be interesting to follow.

Ernst & Young released their Islamic Funds & Investment Report 2009 which contained several different pieces of information from the S&P report:
  • "Shari'a sensitive investable assets in 2008 in the GCC and Asia touched US$736 billion as compared to US$267 billion in 2007 (in computing the total asset size this year, the report included Awqaf and Endowments, Takaful operators in Malaysia, SWFs in the MENA region and Asia, and it also includes the markets of Pakistan and South East Asia - all of which where not included in last year's figures)"
  • "The largest concentration of Islamic funds remains in the Middle East and equity funds lead the field for choice of asset type. 19% and 23% of Islamic funds are domiciled in Saudi Arabia and Malaysia respectively."
  • "Islamic indices have performed poorly worldwide - we see the average return from Islamic equity funds fall to minus 39% in 2008 as compared to a 23% return in 2007. In the first quarter of 2009, the average return stood at minus 3.7%. Average Islamic fixed income fund return dropped from 3% in 2007 to 1% in 2008 and Q1 2009."
  • "Sukuk issuance has slowed as spreads widen - sukuks worth US$15.5 billion were issued in 2008 as compared to US$47.1 billion in 2007."
  • "Omar Bitar, Managing Partner, Middle East Advisory Services at Ernst & Young Middle East, said, 'Two-thirds of all players manage less than US$100 million each in Islamic assets - the global competitive landscape is fragmented and a shakeout appears likely.'"
  • "[Head of the Islamic Finance Services Group] Sameer [Abdi] said, 'The business risks landscape for Islamic asset management has changed substantially since 2008. Revisions of expected returns have caused some investors to withdraw capital and previously robust business models have struggled to cope with extreme market events. The economic downturn, a reduction in investor risk appetite and unclear valuations will be the most pressing business risks in 2009.'"
Other News
  • A Malaysian perspective on the Standard & Poor's Islamic Finance Outlook.
  • Kuwait Finance House-Bahrain is no longer in talks to acquire a 40% stake in Bahrain Islamic Bank from The Investment Dar.
  • The Investment Dar will meet with creditors to update them on its restructuring plans sometime in June.
  • Humayon Dar, head of BMB Islamic described the impact of the crisis on Islamic financial institutions very accurately: ""Clearly Islamic finance, along with the rest of the financial industry, has suffered from the downturn, but the effect came later and resulted in less of a slowdown because Islamic institutions were not exposed to any of the toxic assets which caused the slump. Islamic equity funds have clearly suffered because of the credit crunch which has seen all equities fall, but they have lost less than conventional financial funds." The chief economist at NCB Capital describes the evolution of the sukuk market well: "Initially sukuk wanted to mimic the conventional bond markets, but that is how new markets get started. Now they can move to where they have their own identity."
  • US-based Thomas Weisel announced a partnership with Ideal Ratings to begin offering Islamic funds and separate accounts for helping investors invest in the small- and mid-cap sector in the US.

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