An US$11t Muslim wealth mountain calls to Asian fund managers

[KUALA LUMPUR] The race to tap an US$11.5 trillion pool of wealth held by Muslim individuals, institutions and governments is intensifying.

The asset management units of Malaysia's RHB Bank Bhd and Indonesia's PT Bank Mandiri plan new Islamic funds, expanding an industry that's lured global money managers from BNP Paribas SA to Schroder Investment Management Ltd in the past year.

While demand for investments that comply with the Koran's tenets is rising, about US$9.5 trillion of Islamic wealth still remains outside the Shariah finance industry, Malaysia International Islamic Financial Centre estimated in February.

"There will be positive growth as investors continue to look for steady and sustainable returns, but we do not anticipate a spike," said Raj Mohamad, managing director at Singapore-based consultancy Five Pillars Pte Ltd.

"Bearing in mind that Asia houses two-thirds of the Muslim population, Asian countries are most well-positioned to leverage from this demographic."

Islamic Funds RHB Group Asset Management will offer at least four Shariah-compliant vehicles in 2017 that will invest in private equity, property, sukuk and shares, managing director Eliza Ong said.

Jakarta-based PT Mandiri Manajemen Investasi will set up as many as four Islamic funds within the next year after establishing its first US dollar Shariah-compliant investment in August, said Mungki Ariwibowo Adil, head of product development and management.

RHB said it's ambitions extend beyond Malaysia, whereas Mandiri's new funds will target investors in Indonesia, the most-populous Muslim nation.

Shariah law forbids investments in shares of companies with excessive debt or which are involved in activities considered unethical such as gambling, prostitution, and alcohol or pork- related businesses.

Washington-based Pew Research Center estimates that Islam will remain the world's fastest-growing major religion over the next few decades.

RHB Group Asset, which oversees 54 billion ringgit (S$18 billion), will offer the new Islamic funds in Malaysia and may make some of them available in Brunei, Indonesia, Singapore and the Middle East, according to Ms Ong.

The investment plans are part of an effort to increase the portion of Islamic assets to a quarter of the company's assets under management by 2020 from 8 per cent now, she said.

"The intention is to build the Shariah capabilities out of Malaysia, but the ambition that we have for the Islamic business is that of a global one," Ms Ong said.

"If we're able to come up with innovative products in this space, from the traditional right up to alternative, there would be very interesting take-ups."

Shariah-compliant money managers are seeking more Islamic investments as the amount of sukuk issuance remains dwarfed by assets. Worldwide sales of debt complying with the religion's tenets climbed 18 per cent to US$27.2 billion for far this year, after reaching US$35.6 billion for the whole of 2015, according to data compiled by Bloomberg.

Issuance of ringgit-denominated corporate Islamic bonds increased 56 per cent in 2016 to 42.1 billion ringgit.

Islamic banking assets in Malaysia totaled 685.4 billion ringgit as of end-December while those in Indonesia reached 211.4 trillion rupiah (US$16 billion) in May, official data show.

Mandiri Manajemen's plan for more Shariah investment vehicles comes after the company's global Islamic stock fund drew US$10 million from institutional investors when it was set up on Aug 4, according to Mr Adil.

The Indonesian company, which oversees 35 trillion rupiah, aims to attract up to US$30 million from investors in the first year for the equities vehicle, which uses the Dow Jones Islamic Market World Index as a benchmark, he said.

"There's already demand from Indonesian investors to have Shariah-compliant products in their portfolio in order to diversify their holdings," Mr Adil said.

"With Shariah compliance as one of the parameters to construct the portfolio, we will be able to screen companies that are relatively stable since the Shariah parameter limits the company's leverage ratio."

The global Islamic asset management industry is forecast to grow to US$77 billion by 2019 from US$58 billion at the end of 2015, according to a Feb 26 report by the Malaysia International Islamic Financial Centre.

"The main challenge for Islamic asset management firms is always about how to obtain bigger funds from clients, mainly from the institutional investors," said Abas A Jalil, chief executive officer of Amanah Capital Group Ltd, a consultant in Kuala Lumpur.

"They have to compete with conventional firms, which mostly provide higher returns due to the availability of a wide range of assets for investments."

BLOOMBERG