Gulf-focused mutual funds that invest in Islamic bonds remain tiny compared to their fixed income siblings, but competition is heating up as the market widens and firms vie for a chunk of privately managed accounts.
Funds dedicated to sukuk are a rare breed, with only 20 currently marketed in the Gulf. But in the last two years Gulf sukuk funds have added $362 million in assets to reach a combined $874 million, according to Reuters calculations based on industry data.
This pales in comparison to the size of the sukuk market: global issuance is $96.5 billion year-to-date, with $20.2 billion coming from the Gulf alone, according to data from Zawya, a Thomson Reuters company.
The average size of a sukuk fund in the region is just $43 million, but collectively they serve as a measure of secondary market activity and a barometer for the larger and more lucrative business of private investment mandates.
“The majority of funds have yet to achieve critical mass in an industry that is still being established when compared to the conventional asset management industry,” said Jason Kabel, head of fixed income at Bank of London and the Middle East.
“As the market sees sukuk funds continue to perform well, in line with, and on occasion outperforming their conventional peers, we expect to see a significant rise over the next five years in segregated account mandates.”
BLME manages two sharia-compliant fixed income funds catering to Middle East investors which now have a combined $87.4 million in assets, up from about $67.7 million two years ago.
Asset growth remains a slow process, partly because the Islamic finance industry is relatively immature and investors such as Islamic insurance (takaful) companies have yet to reach full growth momentum themselves, said Kabel.
The largest six sukuk funds oriented to Gulf investors hold almost half of all the assets of such funds, according to Reuters calculations, but a long track record is not always necessary to attract investors.
Curiously, some of the oldest funds have struggled to build assets, with three sukuk funds launched as far back as 2008 still handling less than $9 million each. A fund from BNP Paribas launched in 2009 has seen little change in assets over the last two years, with less than $25 million currently.
Some Gulf firms have made headway: funds launched in 2012 by National Bank of Abu Dhabi, Rasmala Investment Bank and Al Hilal Bank now have a combined $157.2 million in assets.
Global asset managers are also waking up to the action; both HSBC and Franklin Templeton have sukuk funds of their own with over $50 million in assets each.
Others are feeling the competitive pinch, such as QIB UK, a Qatar Islamic Bank subsidiary, which at one point had the largest sukuk fund in the market. Its fund now has $45.8 million in assets, down from $213 million in June 2012.
QIB UK did not respond to a request for comment, but it no longer lists asset management or corporate finance as business lines on its website.
The asset management arm of Dubai-based Mashreq Bank has seen volatility in the size of its sukuk fund, which now has $42.4 million in assets, down from $74.4 million in May last year but above $26.6 million in mid-2012.
Conversely, the asset management arm of Emirates NBD has seen its sukuk fund almost triple in size in the last two years to reach $112 million, and the firm has seen a knock-on effect in its managed account business.
The firm now has $750 million in assets managed under Islamic principles, out of which $350 million is invested in sukuk and other sharia-compliant money market instruments.
“This is from almost zero five years ago,” said David Marshall, senior executive officer at Emirates NBD Asset Management.
“The appeal for regional debt is strong and sukuk is a sub-set. Correspondingly we have seen a pick-up in managed account business.”
This is driven by new sukuk investors but also by investors opting to outsource part of their existing portfolios, said Marshall, adding that the firm had been hired to run managed sukuk accounts by two investors in recent months.
New entrants are also making their mark. Jeddah-based Sedco Capital launched a sukuk fund in March last year which now has $132.6 million in assets, outgrowing established funds from Saudi Arabian peers Jadwa Investment and Saudi Hollandi .
In June, Saudi Arabia’s Al Rajhi Capital received regulatory approval for its first sukuk fund, while Riyadh-based Alkhair Capital launched its own sukuk fund in the same month.