Ernst & Young launches the 1st edition of the Islamic Funds & Investments Report in 2007

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Executive Summary for the Ernst & Young Islamic Funds and Investments Report 2007

Methodology

The aim of the Ernst & Young Islamic Funds and Investments Report 2007 is to identify key trends in the regional Islamic funds industry and the implications of these for industry players. The methodology incorporated has been a combination of desk-based analyses and interviews with experts at leading players in the Islamic wealth management industry.

Regional Investors

Economic growth in the region has been strong thanks to sustained high oil prices. This has influenced the expansion of liquidity as measured by money supply and has also allowed GDP to grow by a CAGR of 19% to over USD 703 billion in 2006. More importantly for the Islamic wealth management industry, this economic growth has trickled down to the individual demand segments.

The number of GCC wealthy individuals (with liquid wealth in excess of USD 50,000) is expected to increase to over 387 thousand in 2007 from 311 thousand in 2003. Additionally, analysis indicates that the total liquid wealth held by them is expected to grow to USD 80 billion in 2007 from USD 61 billion in 2003. The potential Shari¡¦a sensitive portion of this wealth is significant but Islamic players will need to proactively target those individuals that value service quality more than Shari¡¦a compliance.

Furthermore, there is a strong institutional demand segment in the GCC with the three largest investment authorities holding investments in excess of USD 600 billion. The takaful industry, in particular, presents a growing focus for Islamic investment opportunities. In 2006, it is estimated that there were USD 3 billion in global takaful premiums, 36% of which was based in the Middle East.

The investment trends for both wealthy individuals and institutions indicate a shift away from conservative portfolios and towards larger allocations in alternative investment asset classes. Furthermore, the Islamic funds industry in the region can capture a strong growth potential to meet this demand as current penetration levels of funds indicate room for expansion.

Investment Asset Classes

Regional equity markets are slowly on the path to recovery having lost 38% of total market capitalizations between 2005 and 2006. However, there remains a lack of depth in regional equity markets with approximately 624 companies listed and 73% of market caps concentrated in the top 10. This is driving the demand for new stock listings and approximately USD 18.3 billion dollars worth of IPO capital is to be raised in 2007 compared to USD 6.67 billion in 2006.

For the fixed income asset class, the growth in sukuk presents clear prospects to provide investment opportunities. The sukuk industry has grown by annual growth rate of 232% since 2002 and is expected to reach USD 27.3 billion in 2007. Corporate issues accounted for 95% of the total volume of issues in 2006 providing greater investment and diversification opportunities.

The real estate sectors will remain a strong investment asset class due to its natural fit with Shari¡¦a compliance. Thanks to regional diversification initiatives by governments, the real estate sectors contributed to an approximately 9% of regional GDP in 2006 having grown by an estimated 17% since 2002. This has resulted in larger average real estate fund sizes in recent years.

Private equity has recently become an asset class in strong demand due to the volatilities in public markets. Total private equity funds raised grew by approximately 105% since 2000 to over USD 9.8 billion in 2006. Although private equity investments in companies have been limited, the MENA region has been very popular for fund raising activity and the industry is expected to grow due to strong market drivers.

In the future, institutional hedge fund inflows from the Middle East are expected to display strong growth due to investor demand. Currently, Middle Eastern institutional investments in hedge funds represent 8% of global investments. By 2010, total Middle Eastern institutional investments in hedge funds are expected to grow to USD 101 billion representing 14% of the global institutional segment.

Supply of Funds and Implications for a New Entrant

The universe of Islamic funds has grown to approximately 400 in 2006. However, the individual funds remain relatively small in size. Also, the supply of Islamic funds is concentrated on equities with substantial gaps across other asset classes such as sukuk and sector specific funds.

Islamic wealth management players will need to develop holistic business models that leverage intricate client relationships and implement efficient operational frameworks. This is increasingly important due to the fact that multinationals have entered the market to alter the competitive dynamics in the region. A broad set of critical success factors will need to be acquired by Islamic players across the value chain for wealth management and these include:

Product development expertise;
High quality client relationships;
Operational efficiency;
Competitiveness with multinationals;
Marketing and distribution networks; and
Retention of quality human resources