MANAMA, (Reuters) – A lack of diversity in their investments could mean Islamic asset managers lose out to conventional firms, a report published this week said.
Accounting firm Ernst & Young said Muslim investors hold $1.6 trillion in assets of all kinds, a figure forecast to rise to $2.7 trillion by 2010.
Islamic funds, which invest in accordance with Islamic law, ignore important asset classes and in Saudi Arabia, one of the world’s two biggest markets for Islamic asset management, fund subscription has fallen since 2005, the report said.
“As demand for diversification grows, Islamic institutions will face the risk of losing significant market share to conventional institutions that can provide more comprehensive coverage,” Ernst & Young said in the report.
By the end of March there were more than 500 funds globally that comply with Islamic law, Ernst & Young said in its Islamic Funds and Investments report, launched at a two day Islamic banking conference that ended on Monday.
Some 153 Islamic funds were launched last year, and the figure is projected to rise to 1,000 funds by 2010, Ernst & Young said.
A key gap in the variety of investments offered by Islamic funds are fixed income assets, such as Islamic bonds. Only seven percent of Islamic funds target such assets, compared with 22 percent of conventional mutual funds.
Issuance of Islamic bonds, or sukuk, has been slowed by a global credit crunch triggered by defaults on U.S. home loans last year.
The secondary market for the instrument is small, as most sukuk buyers hold the asset to maturity, and bankers complain of a lack of market makers.
Other assets under-utilised by Islamic funds include commodities and Islamic Real Estate Investment Trusts (REITS).
Equities are the dominant asset class for Islamic funds, with allocation above that in conventional funds. In Saudi Arabia, a stock market crash in 2006 continues to weigh on investor sentiment.
“Saudi investor confidence remains low following stock market corrections in 2006,” Ernst & Young said.
Despite the lack of diversity in asset classes, Islamic funds have increasingly diversified the geographical reach of their investments, and last year 76 percent of them targeted regions outside the Middle East and Africa, Ernst & Young said.
Last week, Bahraini Islamic lender Ithmaar Bank was among a group of firms to launch a Latin America real estate fund, while fellow Bahraini lender Gulf Finance House has launched an energy fund in Kazakhstan.
Islamic law prohibits interest, and bans investment in certain business sectors, such as alcohol, pornography and gambling.