Global islamic asset management report 2014

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Information about Global islamic asset management report 2014
Finance

Published on March 15, 2014

Author: EzzedineGHLAMALLAH

Source: slideshare.net

Global Islamic Asset Management Report 2014 Reuters / srdjan Zivulovic 9660766_V8.indd 1 19/11/2013 15:53

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3GLOBAL ISLAMIC ASSET MANAGEMENT REPORT Contents Forward 1......................................................................................................................................5 Forward 2.....................................................................................................................................7 Executive Summary.....................................................................................................................9 Overview..................................................................................................................................... 13 Investor Preferences...................................................................................................................27 Market Outlook......................................................................................................................... 35 The Key Challenge.................................................................................................................... 43 Solution 1: Pensions................................................................................................................... 51 Solution 2: Socially Responsible Investment (SRI)................................................................. 63 Solution 3: Passporting..............................................................................................................71 Niche Solution: Targeting Muslims in Western Markets.......................................................... 81 Acknowledgment and Copyright............................................................................................. 86 9660766_V8.indd 3 19/11/2013 15:53

Reuters / Paul Yeung 9660766_V8.indd 4 19/11/2013 15:53

  5GLOBAL ISLAMIC ASSET MANAGEMENT REPORT Foreword Thomson Reuters brings you the first global Islamic asset management report. This report provides a holistic look into the Islamic asset management sector. As the industry has picked up and more players take steps to develop more sophisticated products, the report delivers critical information on the dynamics of the Islamic asset management sector. With an objective to arm readers with on the ground information, the report is complemented by an asset management survey delivering insights, investor preferences and market outlook for 2014. The survey results will help investors, asset managers and regulators take informed decisions that could aid in the development and flourishing of the Islamic fund space in the years to come. Sayd Farook Global Head Islamic Capital Markets The Islamic asset management sector has come a long way from the first Islamic fund launch, over half a century ago. Islamic fund assets are estimated at USD 62 Billion, mainly comprised of Islamic mutual funds totalling USD 46 Billion. Despite the fact that Islamic mutual funds saw the highest fund launches and lowest liquidations this year, their assets under management have fallen. The lack of scale, stricter regulations, as well as stagnant markets have taken their toll on Islamic funds. Scale remains to be the biggest challenge for asset managers and will remain to be the case unless the retail investor dependence is overcome.. According to our research, attracting institutional investors is the most important objective for the survival of the industry. The conventional space enjoys a 70 percent contribution from the institutional sector while Islamic funds a mere only 20 percent of institutional money within their portfolios. With changing investor preference and behaviour, socially responsible investment has attracted the masses, providing an ideal opportunity for Islamic funds to enter the space. Socially responsible investment provides a natural crossover to Islamic funds with a market boasting over USD 33 Trillion in assets. In addition pension assets, a main driver for assets under management on the conventional front could also provide a wealth of fund flows to the sector. We would like to thank Basil Moftah, Managing Director, Middle East, Africa and Russia, and Russell Haworth, Managing Director, Middle East and North Africa, for their continued support and belief in the growth and value proposition of the Islamic finance industry. We would also like to thank Lipper for providing us with the wealth of data used to formulate our findings and analysis. With compliments Sayd Farook Global Head Islamic Capital Markets 9660766_V8.indd 5 19/11/2013 15:53

Reuters / Kai Pfaffenbach 9660766_V8.indd 6 19/11/2013 15:53

7GLOBAL ISLAMIC ASSET MANAGEMENT REPORT Foreword Lipper, in collaboration with Thomson Reuters, brings the first Global Islamic Asset Management Report. The report is complemented by an asset management survey delivering insights, preferences and expectations that will give readers insights into the trends in the Islamic fund space for years to come. Our findings reveal a mismatch of expectations between investors and asset managers with an indicative gap in communication and product promotion. The report aims to serve both fund managers and investors, as they take increasingly active roles to foster growth in the industry. The report provides positive evidence for 2013, suggesting a more resilient market, but Islamic asset managers still face traditional challenges of scale and distribution. For one, the market is highly concentrated with monochrome products. The three prominent markets; Saudi Arabia, Malaysia and Luxembourg house 70% of global Islamic funds. Funds across all asset classes seem to be ‘’one-size-fits-all’’ mass produced products, offering very little diversity among their rivals and below average premium to investors. Above all, promotional and distributional efforts are nonexistent. Detlef Glow Head of Lipper EMEA Research This report enables user to understand the current state of Islamic asset management, as firms size up opportunities and contemplate strategies to capitalize on market expansion and identifies lucrative opportunities that can develop the Islamic funds space. This could help break out of the existing fund concentration which has been dominated by the GCC and Southeast Asian markets. Fund setup has also changed, with a growing preference for funds being domiciled in offshore jurisdictions. This report takes a comprehensive look at the Islamic funds industry, combining quantitative tools to measure the sector as well as qualitative insights from upcoming initiatives that could shape the market in the future. The market is highly monopolized with the top ten funds amounting to almost half of total assets under management. It is clear as to why smaller asset managers given their indistinct products are unable to attract funds. Our survey has identified the critical steps that these smaller asset managers need to survive, based exclusively on investor feedback. We can all agree one major hindrance to growth of the Islamic asset management sector – and that is scale. The industry is heavily reliant on the retail sector – 80 percent to be exact with a minor 20 percent contribution from institutional investors. Attracting institutional investors is key to for the survival of the industry and can aid in improving other sectors such as the Takaful and pension sector. Creating products to suit the investment criteria and risk appetite will help attract institutional investors. Blending Islamic products with other branches such as socially responsible investment principals can help Islamic products break out of the regional concentration. In doing so provides access to a USD 33 Trillion market that has seen growth of over 500 percent since 1995. Passporting is another avenue available for Islamic asset managers to branch out and widen their investor base. While some fund managers have explored this avenue, many have failed due to the lack of distribution and promotion which is key in developed markets. This is an exciting time to be in the Islamic asset management space, with the industry at a pivotal moment in its development. Will asset managers continue to struggle with issues of scale and profitability? Or will they adopt an out of the box approach to dealing with these challenges? We feel that the industry will rise to the challenge and we will witness a period of strong growth over the next few years. With that, it gives me great pleasure to welcome you to the Islamic Asset Management Report – our analysis and insights into the Islamic asset management industry. With compliments Detlef Glow Head of Lipper EMEA Research 9660766_V8.indd 7 19/11/2013 15:53

Reuters / Jason Lee 9660766_V8.indd 8 19/11/2013 15:53

  9GLOBAL ISLAMIC ASSET MANAGEMENT REPORT Executive Summary 2013 could prove to be a seminal year for the Islamic fund industry. This year saw the highest number of fund launches and lowest number of closures; resulting in a doubling of the number of mutual funds since 2007. However, assets under management remained stagnant. The market for sharia-compliant funds has evolved significantly over the past decade. This year saw the launch of 94 new funds; the highest in the last three years. The number of liquidated funds this year was 22, the lowest for the last four years. In total the number of mutual funds topped 780 this year. . However, assets under management have not grown in proportion with the number of funds. Since 2007 AUM has increased 24%, but 2013 saw a dip of 1.7%. The increased number of funds but with marginal growth in AUM points to increasing competition among fund managers, and achieving scale remains the biggest challenge facing the industry. Geographically the sector remains concentrated within 3 dominant markets: Saudi Arabia, Malaysia and Luxembourg; these 3 domiciles alone hold over 71% of total Islamic funds. Investors remain conservative, allocating US$ 3.2 billion of fund flows to money market funds, making it the largest asset class this year. But asset managers are regaining confidence in emerging markets as we see less globally focused funds this year and more emerging market mandates. Sukuk funds remained popular, doubling in size over the last four years, and supporting the increased demand for Islamic fixed income products. Performance and track record are the most important investment consideration for investors Contrary to common belief, our survey indicates that investors rate performance and a minimum 3-year track record as key considerations when making investment decisions, with little consideration given to the overall size of the fund or asset type. Allocation of portfolios towards funds remains small, a mere maximum 15% of most investment portfolios. This helps to explain why Islamic funds are growing at a much slower rate compared to fixed income products. Investors also identified diversification as being the main purpose for investing in Islamic funds, with performance being a secondary consideration. In order to see higher growth rates, asset managers must change the perception of Islamic funds from simply being a tool for portfolio diversification to being a primary investment asset class. Executive Summary 9660766_V8.indd 9 19/11/2013 15:53

10 Global Islamic Asset Management Report Fund launches are expected to decline in 2014, with focus remaining on Southeast Asia and the GCC Southeast Asian funds represented the bulk of funds issued this year, with 42% of funds originating from Southeast Asian countries. There were 17 Indonesian funds launched this year, supporting increased government spending, sukuk and pilgrim funds. The GCC, on the other hand, made up 20% of fund issuances with 19 funds launched this year. But the region enjoyed the largest funds flows due to excess liquidity in the region. Based on our survey, we expect fewer fund launches next year with the majority being Southeast Asian funds with local/regional mandates. Achieving scale remains the critical challenge holding back the growth and development of the industry, with only 80 funds managing over US$ 100 million in assets The main reason for the lack of growth is the existing investor base of Islamic funds. The sector is dependent on retail investors, which make up 80%, with only 20% contribution from institutional investors. This is the direct inverse of the conventional sector where institutional investors make up 70% of the asset management sector with 30% coming from retail investors. Insurance companies and pension funds are the largest institutional investors in the conventional sector, contributing 29% and 19% respectively. Attracting institutional investors is critical for the survival, development and sophistication of the Islamic asset management industry. The entrance of pension fund assets could bring up to US$36 billion of AUM, doubling the size of the industry We estimate pension assets in the GCC to be over US$ 180 billion, 6% of GDP. This is significantly lower than the pension assets of developed markets which represent over 100% of GDP, with 27% percent being diverted to the asset management industry. There is significant room for the growth of pension assets in the GCC, and attracting 20% of existing assets could channel US$ 36 billion to the Islamic asset management sector – over half of the total current AUM. Pension reforms that were initiated in the last few years are now bearing fruit, opening up an opportunity for larger fund flows into the sector. Tangible steps in Turkey, Pakistan, and Malaysia to facilitate Islamic pension schemes are examples of countries involved in opening their markets. In the GCC, Bahrain has taken a step to modernize and improve its management of public pension assets by establishing a private company to manage sovereign assets, while other countries such as the UAE are exploring their options. Executive Summary 9660766_V8.indd 10 19/11/2013 15:53

 11GLOBAL ISLAMIC ASSET MANAGEMENT REPORT The Socially Responsible Investment industry, worth over US$33 trillion, offers a natural crossover appeal to sharia principles and should be targeted by fund managers Socially Responsible Investment (SRI) is in the spotlight; globally the industry has grown over 500% since 1995. SRI provides a natural crossover for sharia-compliant principles, creating a perfect opportunity to broaden the investor base of Islamic products. Adopting economic, social and governance (ESG) factors to Islamic funds can facilitate better uptake in Muslim minority markets as investment culture is becoming more and more conscious of environmental, social, humanitarian and corporate governance efforts. Islamic fund managers need to integrate sharia and ESG principles to deliver more sophisticated products that can cater to a broader investor base. Jeddah-based SEDCO Capital is a pioneer in this area, coming out with its first Islamic fund to incorporate an ESG filter. The performance of this fund could serve as a case study for other fund managers. Passporting is another avenue which Islamic mangers can utilize to broaden their investor base Passporting allows local asset managers region-wide access and exposure as well as a medium to enter Muslim minority markets. While cross border GCC fund mobility remains a relatively distant reality, using established passporting channels such as the EU’s UCITS, can provide opportunities for Islamic funds. Executive Summary The entrance of pension fund assets could bring up to US$36 billion of AUM , doubling the size of the industry. Attracting institutional investors is critical for the survival, development and sophistication of the Islamic asset management industry. 9660766_V8.indd 11 19/11/2013 15:53

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Overview Islamic funds’ (AUM) have significantly increased over the last five years, but remain a fraction of total Islamic finance assets. Malaysia, Saudi Arabia, and Luxembourg are recognized as the leading hubs for Islamic funds, collectively playing host to 71% of Islamic funds globally. Sukuk funds greatly outperformed the benchmarks after the 2008 financial crisis. However, performance suffered post-2012 and has yet to recover. Reuters / Arnd Wiegmann 9660766_V8.indd 13 19/11/2013 15:54

14 overview Global Islamic Asset Management Report Islamic funds’ assets under management (AUM) have significantly increased over the last five years, but they remain a fraction of total Islamic finance assets. Despite a 10% increase in funds, AUM has marginally declined since 2012, with managers of smaller funds exiting the sector. In the numbers 1,065 Number of Islamic funds US$56 Billion Total Islamic Asset Management Assets 4.7 Percentage of Global Islamic Assets Given that the Islamic funds industry is experiencing growth and development, we should be seeing higher growth numbers and a higher increase in fund numbers. On a positive note, key markets have taken an active role in passing regulations and safeguarding investors, which is proving to be effective with the refinement of the market. We see this year as a positive step back in hopes of a more promising year in 2014. Global Islamic Funds GLOBAL FINANCIAL CRISIS DUBAI FINANCIAL CRISIS ARAB SPRING EURO-ZONE CRISIS -9 -19 -35 -48 -64 -87 -24 0 10 20 30 40 50 60 70 -200 0 200 400 600 800 1000 1200 2007 2008 2009 2010 2011 2012 2013 (Sep) GLOBAL ISLAMIC FUNDS Dead Funds No. of Funds AUM 28 26 37 46 47 57 56 Numberoffunds AUMUSDBillions 576 645 702 795 878 971 1065 9660766_V8.indd 14 19/11/2013 15:54

15 overview GLOBAL ISLAMIC ASSET MANAGEMENT REPORT The number of Islamic mutual funds has more than doubled since 2007, with 786 active funds today. However, market refinement and declining performance has seen AUM fall, as witnessed in the overall Islamic asset management industry. Islamic funds have come to the fore in the last decade, but the sector still represents a fraction of the global industry. The financial crisis took a toll on performance – industry screens limited exposure to leveraged names, but volatility remained as managers retained their legacy geographical focus. The strategy has remained unchanged, despite rebounding markets. Managers have taken a passive approach to asset allocation and for the most part remain on the conservative end. Many of these funds are beta funds; few are ready to be alpha funds. In the numbers 786 Number of Islamic Mutual Funds US$46 Billion Global Islamic Mutual Funds AUM 94 Fund Launches 22 Fund Closures GLOBAL FINANCIAL CRISIS DUBAI FINANCIAL CRISIS ARAB SPRING EURO-ZONE CRISIS84 59 77 94 0 10 20 30 40 50 60 70 80 90 100 -100 0 100 200 300 400 500 600 700 800 900 2007 2008 2009 2010 2011 2012 2013 (Sep) Global Islamic Mutual Funds (2007 – Sep 2013) AUM No of funds Dead Funds Launched 53 62 54 Numberoffunds AUMUSDBillions 338 397 451 541 617 687 786 84 59 53 77 62 54 94 -6 -18 -28 -43 -45 -38 -22 Global Islamic Mutual Funds (2007 – September 2013) 9660766_V8.indd 15 19/11/2013 15:54

overview 16 Global Islamic Asset Management Report GCC witnessed the largest fund inflows in 2013, driven by the excess liquidity in the region. GCC institutions launched 19 funds during the year (20% of the total launches), compared to 39 Asian funds (42% of the total launches). GGC and Asian fund issuance increased over the last year. GCC fund launches increased to 19 funds this year, while Asian fund issuance more than doubled – 39 Asian funds YTD compared to 15 funds this time last year. On the other hand, the highest fund flows occurred in the GCC, supported by excess liquidity in the region. While AUM has declined, the exit of underperforming and/or unviable asset managers means the state of the market can improve with a refined pool of asset managers, a more efficient market, and higher product sophistication. 0 2 4 6 8 10 12 250 300 250 300 0 50 100 150 200 250 300 10 12 250 300 263 163 111 62 53 53 33 26 21 19 12 12 12 11 68 NoofFunds USDBillion Assets Under Management Versus Number of Funds (September 2013) AUM (USD Billions) No. of Funds OtherIndiaUnited Arab Emirates UKEgyptCanadaSouth AfricaKuwaitJerseyIrelandIndonesiaPakistanLuxembourgSaudi ArabiaMalaysia Assets Under Management Versus Number of Funds (September 2013) Gulf and Asian funds tied in the last year, with 15 fund launches each 9660766_V8.indd 16 19/11/2013 15:54

17 overview GLOBAL ISLAMIC ASSET MANAGEMENT REPORT Fund registration remains concentrated in a few jurisdictions, mainly because of the lack of active regulation in other developing markets. Malaysia, Saudi Arabia, and Luxembourg are recognized as the leading hubs for Islamic funds, collectively playing host to 71% of Islamic funds globally. These three markets remain the most active in developing and regulating their fund sector. A series of recent initiatives across several markets in the GCC and Asia has helped safeguard investors while ensuring appropriate expertise and adequate capital from fund managers to support their products.   DOMICILE NO. OF FUNDS AUM (US$ MILLION) Malaysia 263 10,164 Saudi Arabia 163 6,056 Luxembourg 111 3,401 Pakistan 62 2,364 Indonesia 53 2,157 Ireland 53 1,742 Jersey 33 1,286 Kuwait 26 705 South Africa 21 663 Canada 19 248 UK 12 248 United Arab Emirates 12 331 Other* 91 248 *Bahrain, Cayman Islands, Guernsey, Singapore, USA, Australia, India, Egypt, Qatar, Tunisia, Isle of Man, Mauritius, Morocco, France, Japan, Oman, Russia, Switzerland, Turkey Malaysia 263 Saudi Arabia 163 Luxembourg 111 Pakistan 62 Indonesia 53 Ireland 53 Jersey 33 Kuwait 26 South Africa 21 Canada 19 Egypt 12 UK 12 United Arab Emirates 12 India 11 Other 68 Islamic Funds – Domiciles 9660766_V8.indd 17 19/11/2013 15:54

overview Global Islamic Asset Management Report There has been increasing diversification in terms of geographic focus, with the share of Malaysia- and Saudi Arabia-focused funds declining significantly since 2010. Indonesia, with 18% of all funds focusing on opportunities in Indonesia launched in 2013 compared to just 6% in 2010, was the biggest winner. Launched Funds – Geographical Focus (2013) Malaysia – 29% Global – 13% Saudi Arabia –13% Pakistan – 8% Indonesia – 6% GGC – 5% Kuwait – 4% MENA – 3% USA– 3% Asia Pacific – 4% Other – 14% Malaysia –12% Global – 21% Saudi Arabia–5% Pakistan – 7% Indonesia – 18% GGC – 6% GMM –6% Middle East– 7% India – 6% Asia Pacific – 4% Asia – 3% MENA – 5% Launched Funds – Geographical Focus (2010) 18 Asset managers seem to be regaining confidence in markets that were previously perceived as problematic or unstable. The focus of funds, though, remains within global mandates. Indonesia witnessed the most significant growth in terms of fund launches, driven by new infrastructure, Sukuk, and Pilgrim Funds. With a planned increase in government spending, we forecast more Indonesian fund launches in 2014. 9660766_V8.indd 18 19/11/2013 15:54

19 overview GLOBAL ISLAMIC ASSET MANAGEMENT REPORT With an increased risk-aversion culture among investors, money market funds have taken the forefront and have overtaken equity funds this year for the first time. Sukuk funds have also taken the frontline with regard to fund flows, since they offer investors a safe investment haven. With the increased demand in sukuk, more and more sukuk- specific funds are being launched. The likelihood of more funds is linked to demand for the underlying assets as well as to supply in secondary markets. Islamic Mutual Funds – Asset Type Breakdown (2010 – 2013) FUND LAUNCHES AND ASSET TYPE BREAKDOWN (2009 –2013) Year No. of Funds Bond Equity Mixed Money Market Real Estate Other* 2013 ( Sep 31 ) 82 24 30 19 8 1 - 2012 54 9 23 9 6 3 4 2011 62 9 32 4 10 6 1 2010 77 19 34 12 7 4 1 2009 53 18 18 3 11 1 2 *Includes other funds, commodity funds, and Alternative Funds Source: Lipper 0 5 10 15 20 25 1 2 4 4 16 16 18 20 15 14 17 20 2010 2011 2012 2013 Bond Equity Money Market AUMUSDBillion 9660766_V8.indd 19 19/11/2013 15:54

overview Global Islamic Asset Management Report Asset allocation has remained unchanged over the last four years, with heavy concentration in certain asset classes. Despite the increase in Sukuk fund issuance, equity funds (51%) continue to dominate the Islamic fund universe. Global Islamic Funds – Asset Type (2013) Mixed Assets – 16% Equity – 54% Money Market –12% Other – 6% Bond – 12% Mixed Assets – 16% Equity – 54% Money Market – 12% Other – 1% Bond – 15% Real Estate – 2% Commodity – 3% Global Islamic Funds – Asset Type (2010) Equity funds continue to represent half of the funds universe (51%). While equity funds outweigh money market funds in the number of funds, money market funds are the biggest contributor to AUM this year. Sukuk funds gained a 3% share of the pie, amounting to 15% of funds. 9660766_V8.indd 20 19/11/2013 15:54

21 overview GLOBAL ISLAMIC ASSET MANAGEMENT REPORT Sukuk funds greatly outperformed the benchmarks after the 2008 financial crisis. However, performance suffered post-2012 and has yet to recover. Investor risk appetite is increasing; we see more investors relocating funds from sukuk to equities. Sukuk funds were able to recover after the financial crisis. Average performance produced alpha returns throughout 2009; then the political uprising affected performance. Despite the political situation, sukuk funds were resilient before taking a downward trend YTD. Sukuk issuance remains high, with 506 sukuk issues. However, the average issuance has dropped, and investors seem to have higher risk appetite. Our study shows a reallocation from sukuk to equities. Sukuk Average Performance (2007-September 2013) -10% -5% 0% 5% 10% 15% 2007 2008 2009 2010 2011 2012 Sep-13 Sukuk Average Performance (2007-September 2013) LIBOR USD 3 Months LIBOR USD 6 Months Sukuk Average %CumulativePerformance 9660766_V8.indd 21 19/11/2013 15:54

22 overview Global Islamic Asset Management Report Money market funds are the largest asset class within the Islamic fund sector, boasting AUM in excess of US$20 billion and net inflows of US$3.2 billion so far for 2013. The performance of money market funds remains volatile compared to benchmarks. Money market funds are the top pick for investors looking to offset volatility risk. Money market funds boast the highest net inflows (YTD) as well as for overall one-year inflows – US$3.2 billion. As shown below, Islamic money market funds were able to deliver alpha returns over the benchmarks; however, they seem to have slumped YTD. Money Market Funds Average Performance (2007–September 2013) -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 2007 2008 2009 2010 2011 2012 Sep-13 Money Market Funds Average Performance (2007–September 2013) Money Market Average LIBOR USD 3 Months LIBOR USD 6 Months %cumulativeperformance 9660766_V8.indd 22 19/11/2013 15:54

23 overview GLOBAL ISLAMIC ASSET MANAGEMENT REPORT Shariah-compliant equity funds were able to prevail after the 2008 financial crisis, proving that Sharia-compliant funds are competitive with conventional funds. The Arab Spring has put a dent in equity fund performance, with performance not yet recovered. Despite a quick recovery and after achieving alpha post-crisis, regional volatility has hit geographically concentrated portfolios in recent years. The latter has resulted in underperformance of some equity funds. Equity funds still represent half of the fund universe; they have accentuated their decline in AUM this year. Equity Average Performance (2007-September 2013) -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 2007 2008 2009 2010 2011 2012 Sep-13 Equity Average Performance (2007-September 2013) Equity Average S&P 500 Shariah TR S&P 500 TR %CumulativePerformance 9660766_V8.indd 23 19/11/2013 15:54

24 overview Global Islamic Asset Management Report Scale remains a critical factor holding back the Islamic asset management sector. Retail investors represent 80% of investors in the Islamic fund space. The growth of the institutional sector is critical to achieving the sought-after scale and profitability. The majority of Sharia-compliant funds target retail investors, but collective fund pooling requires institutional investors as well. The latter could help propel fund flows as and when the market finds a breakthrough. Funds have yet to fully use existing distribution channels and promotions to reach target customers. While the majority of Shariah-compliant funds target the retail investor, these investors tend to have a short-term trading mentality toward their fund holdings. Attracting institutional investors could bring in higher volumes but more importantly reduce the volatility of assets. This could help the sustainability of fund managers in the long run. Global Islamic Fund Market Breakdown 0 25 50 75 100 125 150 175 200 0 100 200 300 400 500 600 700 800 43 37 25 54 96 566 686 Pension Funds Insurance Funds Private Equity Funds ETFs AUM(Million) Global Islamic Fund Market Breakdown AUM (USD Million) No. of Funds Nooffunds 6 RETAIL FUNDS $59 billion – 80% INSTITUTIONAL FUNDS – 20% 9660766_V8.indd 24 19/11/2013 15:54

Reuters / Thomas Mukoya 9660766_V8.indd 25 19/11/2013 15:54

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Reuters / PETER ANDREWS Investor Preferences The global Islamic asset management survey was distributed to asset managers, promoters, investors, and traders. Diversification is the main purpose of Investing in funds. Majority of investors are only willing to invest a maximum of 15% in funds of total portfolio. 9660766_V8.indd 27 19/11/2013 15:54

28 Investor Preferences Global Islamic Asset Management Report Demographics of Survey Participants 0% 10% 20% 30% 40% 50% 43.5% 21.0% 12.9% 6.5% 6.5% 6.5% 3.2% Middle East & North Africa Europe & Central Asia Southeast Asia North America South Asia Sub-Saharan Africa East Asia & Pacific Demographics of Survey Participants Location ResponsePercentage GLOBAL ISLAMIC ASSET MANAGEMENT SURVEY Investors/traders Of the 150 approached, 27 investors and 13 traders participated in the survey. The respondents represent the market, with a margin of error of +/-11. Population and sampling The global Islamic asset management survey was distributed to asset managers (issuers), promoters, investors, and traders. Investors/traders Investors were also targeted, based on their involvement in Islamic funds and knowledge of asset managers as (1) investors or (2) professionals within the field. 9660766_V8.indd 28 19/11/2013 15:54

29 Investor Preferences GLOBAL ISLAMIC ASSET MANAGEMENT REPORT Lack of scale in the asset management sector is inevitable, unless the investor culture is changed. According to the results below, funds are seen as a secondary means of investment–an accessory to diversify portfolios rather than a primary form of investment. Performance comes as a secondary reason to invest in funds, which explains why primary investment fund flows do not end within the Islamic asset management sector. Why Do You Invest In Mutual Funds 0% 10% 20% 30% 40% 50% 35.14% 27.73% 11.65% 7.74% 7.3% 10.45% Why Do You Invest In Mutual Funds Diversification Performance To conform with asset allocation strategy Preferable form of investment Hedging Risk aversion Respondantpercentage Investors mainly invest in mutual funds as a means of diversifying their investment portfolios. Performance is the second most important factor motivating investors. 9660766_V8.indd 29 19/11/2013 15:54

30 Investor Preferences Global Islamic Asset Management Report 66.8% 11.1% 6.7% 6.7% 8.9% 0 to 15 % 15 to 30 % 30% to 45 % 45% to 60% 60% and above How Much of Your Portfolio Is Invested in Mutual FundsBreakdown of Investors 0% 10% 20% 30% 40% 50% 60% 70% 67 67 83 80% 90% 100% 0 to 15 % 15 to 30 % 30% to 45 % 45% to 60% 60% and above Breakdown of Investors Retail Financial Corporate 13 8 33 3 0 00 00 0 17 10 Percentage Portfolio allocation to Islamic funds ranges between 0% to 15% for the majority of investors. This trend is consistent among retail, financial, and corporate investors, with few willing to allocate a greater proportion to Islamic funds. 9660766_V8.indd 30 19/11/2013 15:54

31 Investor Preferences GLOBAL ISLAMIC ASSET MANAGEMENT REPORT Kindly grade the below parameters for importance when considering investment in a fund (1 to 8; 1 being most important) 0% 5% 10% 15% 20% 25% Friends and family Media coverage about Fund Company Stock market fluctuations Opinion of professional financial advisers Fund company Personal experience with mutual funds Current events in financial markets Performance of fund investments 19% 16% 15% 15% 11% 10% 7% 7% Percentage Fund performance is the most important consideration for investors when they are considering investment in a fund. Economic and financial factors are the next most important influence on investment decisions. 9660766_V8.indd 31 19/11/2013 15:54

32 Investor Preferences Global Islamic Asset Management Report 0% 5% 10% 15% 20% 25% 30% 35% 40% Investor Preference %ofRespondants 37.5 25 15.6 15.6 6.3 0 0 No preference $0 – $10 Million $10 Million – $50 Million $50 Million – $100 Million $100 Million – $500 Million $500 Billion – $1 Billion $1 Billion + No track record 1 year 3 years 5 years 7 years 10 years 59% 19% 3% 9% 6% 3% Investor Preference What is the minimum track record you require before investing in a fund? Investor preference indicates that fund size is not a key consideration when making investment decisions. Most investors prefer to invest with fund managers who have a minimum track record of three years. 9660766_V8.indd 32 19/11/2013 15:54

33 Investor Preferences GLOBAL ISLAMIC ASSET MANAGEMENT REPORT Investor Preference – Asset Type 0 20 40 60 80 100 120 140 160 180 200 Equity Funds Sukuk Funds Money Market Funds Real Estate Funds Mixed Asset Funds Investor Preference – Asset Type FrequencyofResponses Investors do not have a particular preference regarding fund assets. As indicated earlier, investors consider performance to be the main indicator for investment in funds. 9660766_V8.indd 33 19/11/2013 15:54

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Market Outlook Market opinion is divided, indicating distortion in the marketplace. There is great opportunity for sector growth and sophistication. 2014 may see lower fund issuance, Asia-focused funds will constitute the bulk of new funds in 2014. 9660766_V8.indd 35 19/11/2013 15:54

36 Market Outlook Global Islamic Asset Management Report Population and sampling The global Islamic asset management survey was distributed to asset managers (issuers), promoters, investors, and traders. Asset managers/promoters In determining asset managers and promoters, we contacted only those institutions that manage and/or invest in funds. A group of 50 institutions was targeted and extracted from Thomson Reuter’s data sources as well as from Lipper, a Thomson Reuters company. Issuers/promoters A total of 28 issuers and 9 promoters responded to the survey of the total of 50 institutions we approached. The 37 respondents participated in the survey, with a margin of error of +/- 11. GLOBAL ISLAMIC ASSET MANAGEMENT SURVEY – Market Outlook Which of the following best describes your company/organization? 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Financial Corporate Retail Which of the following best describes your company/organization? ResponsePercentage Company/Organisation type 9660766_V8.indd 36 19/11/2013 15:54

Market Outlook 37GLOBAL ISLAMIC ASSET MANAGEMENT REPORT Market opinion is divided, indicating distortion in the marketplace. Investors and promoters were happy with current market conditions. Issuers, however, anticipated better market uptake. 0% 10% 20% 30% 40% 50% 60% 70% 61.1% 55% 50% 5.6% 0% 21% 33.3% 45% 28% Better than Anticipated As Anticipated Below Expectations Investor / Trader Issuer Promoter ResponsePercentage Response Options 40% Response Count – 19 30% Response Count – 14 30% Response Count – 14 As anticipated Below expectations Better than anticipated How would you define the state of Islamic funds in the past five years (efficiency and return perspective)? 9660766_V8.indd 37 19/11/2013 15:54

38 Market Outlook Global Islamic Asset Management Report ResponsePercentage Development Stage of Product Range 0 5% 10% 15% 20% 25% 30% 35% 40% 38.5% 30.8% 28.2% 2.6% 0.0% Development Infancy Growth Maturity Saturation 76% Improving Response Count – 29 12% Deteriorating Response Count – 4 13% No change Response Count – 5 There is great opportunity for sector growth and sophistication. The Islamic fund sector is perceived to be in the early stages of development: infancy, growth, and development. What stage of development is your own product range? Do you see this improving or deteriorating in the next 12 months? 9660766_V8.indd 38 19/11/2013 15:54

0% 10% 20% 30% 40% 50% 60% 70% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 37.2% 62.8% Yes No Sukuk Other Equity Money Market Real Estate Mixed Asset Percentageofdivision Asset Type ResponsePercentage Plans of fund launches in the next 12 months 43.75% 37.50% 33.33% 14.58% 10.42% 8.33% 39 Market Outlook GLOBAL ISLAMIC ASSET MANAGEMENT REPORT Are you considering launching offshore funds? • Further analysis indicates that of the 37% with projected fund issuance, 50% of those funds will be local • Only 20% are forecasted to be registered offshore Do You Plan Any Fund Launches in the Next 12 Months? Projected Fund Issuance 2014 – Asset Type The year 2014 may see lower fund issuance, since 62% of the issuers do not plan to issue new funds. Sukuk and equity funds are expected to make up the bulk of issuance in the next 12 months. 0% 10% 20% 30% 40% 50% 60% 70% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 37.2% 62.8% Yes No Sukuk Other Equity Money Market Real Estate Mixed Asset Percentageofdivision Asset Type ResponsePercentage Plans of fund launches in the next 12 months 43.75% 37.50% 33.33% 14.58% 10.42% 8.33% 9660766_V8.indd 39 19/11/2013 15:54

40 Market Outlook Global Islamic Asset Management Report Geographical Focus of Projected Fund Launches in 2014 0 5 10 15 20 25 30 Asia Middle East Europe GCC Americas Africa No.ofProjectedFundLaunches Geographical Area 25 14 13 12 8 4 Are you considering launching offshore funds? • Further analysis indicates that of the 37% with projected fund issuance, 50% of those funds will be local • Only 20% are forecasted to be registered offshore Asia-focused funds will constitute the bulk of new funds launched in 2014. With offshore funds taking a backseat in 2014, we expect to see 2014 fund launches originate from Asian asset managers. 9660766_V8.indd 40 19/11/2013 15:54

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Scale is the key challenge facing the Islamic asset management industry, impacting both managers of large and smaller funds. The Islamic fund universe is dominated by a few large players. It is critical for large asset managers to attract institutional investors. In order to survive, smaller Asset managers must establish a three year track record and deliver competitive fund performance. The Key Challenge Reuters / Benoit Tessier 9660766_V8.indd 43 19/11/2013 15:54

44 The Key Challenge Global Islamic Asset Management Report Asset managers of larger funds still dominate the Sharia-compliant fund space; diversification is lacking, since the same types of structures and mandates are launched–creating a monochrome market. This causes market concentration of products, with flows remaining with established names and with little differentiation. This practice impairs the sustainability of managers of small funds, even though the market still seeks more sophisticated products and broader product ranges. Single product launches remain the modus operandi for most asset managers. Market Scale 0 50 100 150 200 250 300 350 400 < 10 M 10M - 49 M 50M - 99 M > 100 M No.ofFunds No. of Funds 346 230 72 80 Fund Scale Scale is the key challenge facing the Islamic asset management industry, impacting both managers of large and smaller funds. The lack of scale continues to keep pressure on the profitability of managers of larger funds, with the smaller players facing closure. 9660766_V8.indd 44 19/11/2013 15:54

45 The Key Challenge GLOBAL ISLAMIC ASSET MANAGEMENT REPORT THE LARGEST TEN ISLAMIC FUNDS REPRESENT 44% OF TOTAL FUND AUM Stricter fund regulations across active markets are causing smaller asset managers to exit the market. Unable to attract scale, smaller funds are forced to liquidate, since they are unable to break even. This confirms that the market is dominated by a few large asset managers. Despite what one would think, these managers of larger assets are not benefiting from economies of scale and are also striving to achieve the scale required to deliver competitive performance. Comparatively, the ten top funds in the conventional fund space represent a mere 5% of the global fund AUM. FUND FUND MANAGER AUM (USD Millions) ETFS Physical Gold ETFS Commodities Sec Ltd 4,968 AlAhli Saudi Riyal Trade NCB Capital CJSC 4,130 Al Rajhi Capital SAR Commodity Al-Rajhi Capital Co 3,152 International Trade Finance Fd (Sunbullah SAR) Samba Cap & Invest Mgmt 2,773 Amana Growth Fund Saturna Capital Corporation 2,136 AlAhli Diversified Saudi Riyal Trade NCB Capital CJSC 1,963 Amana Income Fund Saturna Capital Corporation 1,475 Public Ittikal Public Mutual Berhad 1,248 Public Islamic Dividend Public Mutual Berhad 1,185 CIMB Islamic DALI Equity Growth CIMB-Principal Asset Man 1,059 Total 24,000 The Islamic fund universe is dominated by a few large players. While larger players are able to benefit from limited economies of scale, smaller players are forced out of the market. 9660766_V8.indd 45 19/11/2013 15:54

46 The Key Challenge Global Islamic Asset Management Report In terms of investor types the Islamic funds industry is actually the inverse of the conventional funds Industry. On the conventional front 70% of the industry is represented by the institutional sector in the following percentages: • Pension funds – 27% • Insurance companies – 42% • Banks – 3 % • Other institutions – 28% The same concept needs to be applied to the Islamic funds industry. While the Takaful sector has yet to grow, access to pension assets, banks, and other institutions will undoubtedly aid in the growth of the Shariah funds industry. In order to achieve scale and improve profitability, managers of larger assets need to focus on attracting institutional investors. The industry needs to encourage pension funds, takaful operators, and banks to play a role as key investors, if it is to achieve profitability similar to the conventional funds industry. Islamic Banks Pension Funds Takaful Companies Other Institutions Shariah-Compliant Funds Industry Conventional Funds Industry RETAIL FUNDS 80% INSTITUTIONAL FUNDS 20% RETAIL FUNDS 30% INSTITUTIONAL FUNDS 70% Long term goal would be to attract conventional funds Banks 3% Pension Funds 27% Insurance Companies 42% Other Institutions 28% 9660766_V8.indd 46 19/11/2013 15:54

47 The Key Challenge GLOBAL ISLAMIC ASSET MANAGEMENT REPORT Kindly grade the below parameters for importance when considering investment in a fund Minimum track record required to invest in a fund Managers of smaller assets must take the next few years to build their reputation in the market. Fund managers need to limit tracking errors to prove their diligence. In our opinion this, in addition to obtaining a minimum track record of three years, will allow smaller asset managers to scale up with their larger competitors in the market. 0% 5% 10% 15% 20% 0.00.20.40.60.81.0 Friends and family Media coverage about Fund Company Stock market fluctuations Opinion of professional financial advisers Fund company Personal experience with mutual funds Current events in financial markets Performance of fund investments Managers of smaller funds are on the brink of extinction, and it is now a matter of survival. To prevail in the market managers of small assets need to focus on survival, and their building a three-year performance track record is the key investment consideration for investors. 59% 19% 3% 3% 10% 6% 3 years 5 years 1 year 10 years + No Track record 7 years 9660766_V8.indd 47 19/11/2013 15:54

48 The Key Challenge Global Islamic Asset Management Report SCALE IS THE KEY CHALLENGE FACING THE ISLAMIC ASSET MANAGEMENT INDUSTRY PENSION FUNDS • Access to vast liquidity of sovereigns • Access to institutional investors • Ease of government reserves • Collective pooling • Improved payout ratio PASSPORTING • Broader market reach • Scale facilitation with minimum change to product structure • Increase return efficiency SOCIALLY RESPONSIBLE INVESTMENT • Complements Shariah principles • Allows wider reach beyond Shariah-compliant investors • Large market exceeding US$3 trillion in assets • Natural crossover SOLUTIONS 9660766_V8.indd 48 19/11/2013 15:55

Reuters 9660766_V8.indd 49 19/11/2013 15:55

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A robust pension system is an indicator of a developed economy. Pension assets represent well over 100% of GDP in developed markets; GCC pension assets represent a mere 5% of GDP. Allocation of 20% of pension assets in the GCC to the fund sector can pump US$26 billion into the fund sector. Solution 1: Pensions Reuters / Christian Hartmann 9660766_V8.indd 51 19/11/2013 15:55

52 Solution 1: Pensions Global Islamic Asset Management Report The Potential Role of Pension Funds The entrance of pension fund assets could bring up to US$36 billion of AUM, doubling the size of the industry. Pension fund assets are a critical tool to add scale to the Islamic asset management sector. Robust and efficient pension schemes are an indicator of developed economies and financial markets. We estimate GCC pension assets at US$180 billion. In developed markets such as the U.K. and the Netherlands, pension assets represent over 100% of GDP. GCC pension assets are a minor 5% at most of GDP. Investment restrictions are holding back the growth of pension assets. Diverting 20% of GCC pension assets can contribute US$36 billion to the Islamic asset management sector. Reforms in Turkey increased pension contributions over 271% YTD, while the voluntary pension system in Pakistan grew pension assets over 500% since 2008. Targeting pensions funds should be a key priority for the Islamic asset management industry. Pension funds play a key role in the conventional funds industry, and their entrance could resolve the issue of scale in the Islamic asset management space. 9660766_V8.indd 52 19/11/2013 15:55

53 Solution 1: Pensions GLOBAL ISLAMIC ASSET MANAGEMENT REPORT PENSION SCHEMES-THE SILVER LINING OF COLLECTIVE POOLING Can Sharia-Compliant Pension Schemes give a much-needed boost to the Islamic Asset Management sector? By Karim Arafa–Funds Analyst–Thomson Reuters Privately funded Islamic pension systems are now in full-swing in countries such as Pakistan, Turkey, and Malaysia, while products have also appeared in the U.K. and Australia. Evidence from the rest of the world is promising: ever since Chile introduced its privately managed pension scheme in 1981, over two dozen countries have followed suit. The decision marked a turning point for local asset managers in the South American country. The industry now has approximately US$40 billion in AUM across 500 mutual funds. This means Chile’s mutual fund industry by itself is close to two-thirds the size of the entire global Islamic funds industry, an impressive growth that is mostly due to asset flows from its private pension scheme. A number of studies and real-life examples prove that all developed and stable economies enjoy a well-established and systematic pension scheme. But the experience from early-adopting countries also shows that these efforts require time; in Pakistan, Turkey, and Malaysia the market might need to wait a few more years for their systems to mature. Pakistan introduced its Voluntary Pension Scheme (VPS) only in 2005, Turkey’s reforms to its private pensions have kicked in only this year, and Malaysia’s Private Retirement Scheme (PRS) is just one year old. It is perhaps from state-owned pensions that have existing (and substantial) AUM that Islamic fund managers could benefit the most. If these pensions would switch only a portion of their mandates into these fund managers, the flows could fast-track the sector. Country Total Assets 2012 (USD Billion) % GDP (Local currency) Australia 1,555 101% Brazil 340 14% Canada 1,483 84% France 168 7% Germany 498 15% Hong Kong 104 40% Ireland 113 55% Japan 3,721 62% Netherlands 1,199 156% South Africa 252 64% Switzerland 732 118% UK 2,736 112% US 16,851 108% Total 29,754 78% While sovereign wealth funds and family offices hold significant assets in the Gulf, these have barely found their way to local asset managers, much less to those that follow Islamic investment principles. But private and publicly funded pension schemes could be more responsive to client requirements and thus more likely to direct some of their cash to Islamic pension products and their fund managers. 9660766_V8.indd 53 19/11/2013 15:55

54 Solution 1: Pensions Global Islamic Asset Management Report Not all pension systems are created equal, but empirical evidence from the Asian development bank institute shows that the more developed and stable an economy is, the more developed and systematic its pension scheme will be. Another report by the City of London Corporation showed how pension systems and insurance companies were involved in shaping and sustaining the financial markets of developed markets. In the U.K., for instance, pension assets grew from 20% to 80% of GDP, and insurance assets grew from 20% to 100% of GDP from the 1980s to the 2009 period. (The largest pension markets are in the U.S., Japan, and the U.K. with 56.6%, 12.5%, and 9.2% of the total pension assets, respectively.) Some of these pensions have very generous payouts, but they are not exploiting investment options or outsourcing much of their mandates. This impacts their financial viability and similarly misses out on “recycling” those funds through local asset managers. Thus, pension assets represent a mere 3% to 6% of GDP in GCC countries versus developed economies such as Switzerland, the Netherlands, and the U.K., with 118%, 114%, and 112%, respectively. The question is whether policymakers have made any active decision to raise these figures to bring them in line with the developed or emerging-market economies. GCC pension assets are estimates to be US$180 billion; even a portion directed to the Islamic fund sector would have a major impact. The Islamic asset management space is held back mainly because of its inability to attract large funds (lack of scale). It would be sensible to divert pension fund assets or even a portion of them toward the sector, which might break the deadlock. A 2010 report by NCB covered the role of institutional investors in the Gulf region, identifying at least US$170 billion in AUM held by government pension funds in the GCC. Assuming a conservative growth rate of 2% per year, pension fund assets in the GCC could now stand at around US$180 billion or more. Pension assets in the GCC represent a minor 3%–6% of GDP, compared to more developed economies such as the U.K. and the Netherlands with 112% and 114%, respectively. GCC Countries’ Demographics (2012) Population < 25 0 5 10 15 20 25 30 35 40 Bahrain Qatar Kuwait Oman United Arab Emirates Saudi Arabia Population(Million) GCC Countries' Demographics (2012) Population (Million) 0.4884 0.5075 0.825 1.9229 2.8143 12.0768 1.11 1.45 2.5 2.87 4.77 23.68 9660766_V8.indd 54 19/11/2013 15:55

55 Solution 1: Pensions GLOBAL ISLAMIC ASSET MANAGEMENT REPORT For the moment the dynamics of pension schemes in the GCC are “pay as you go,” meaning that nationals who are currently in retirement are paid for by current workforce contributions. With some of the highest payout ratios at 80%, this will not be sustainable, given the current and future demographics of the region. The case for external asset managers, especially Islamic ones, is becoming more apparent every year. Presently, the region’s population is relatively young; roughly 50% of the population is under 25. It is estimated that 2.5 million people will join Saudi Arabia’s workforce by 2014. This implies that the workforce will grow at an accelerated pace over the next decade, piling pressure on pension payouts as workers eventually retire. If the region continues to implement the pay-as-you-go system, it will place a large strain on reserves and government funds. While this is not an immediate problem, it would require swift action today in order to avoid a budgetary crunch in the long run. Diverting 20% of GCC pension assets to Islamic asset mangers could mean a sector-boosting US$36 billion; that’s more than half of the current AUM. If GCC pension assets are assumed at a base of US$180 billion, a mere 20% shift from these funds into Sharia-compliant funds could mean a sector-boosting US$36 billion would be added. The figure could be far higher if pension schemes from other majority-Muslim countries, such as Malaysia, Indonesia, Pakistan, Turkey, etc., are taken into account. In a recent Reuters report consultants Ernst & Young estimated that such a shift across state-owned pensions in core Islamic markets could add between US$160 billion to US$190 billion to the sector. But, if supply is in abundance, it is demand mechanisms that need to be put in place to access these funds. Pakistan developed its VPS scheme back in 2005, which today holds US$32.4 million in Islamic pension funds or 61% of all VPS assets. In Malaysia regulators hope that over the next ten years, AUM in the PRS industry will grow to 30.9 billion ringgit. If the latter were done across the GCC countries, and a portion directed toward Islamic asset management, the outcome could completely reshape the sector. A much-discussed initiative in the UAE has been the establishment of a pension scheme for expatriates, although no timeline and no concrete steps have been announced. A key obstacle holding back the growth of the pension sector is the applied investment restrictions that result in pension assets being directed into local equities and fixed income products. One argument supporting this initiative is to keep funds from leaving the country’s financial system, since many expats work to send some of their money back home or invest in their home markets. (This has been estimated to be as high as 40% of income.) Bahrain has also taken the initiative to improve returns on its pension assets by establishing a company (Osool) for the sole purpose of managing its pension assets. A key obstacle holding back the growth of the pension sector is the applied investment restrictions that result in pension assets being directed into local equities and fixed income products. While this safeguards assets, it also has the potential to constrain returns and may result in a budgetary deficit, further aggravated by demographic trends. In 2012 Qatar’s pension and social insurance authority invested QAR1.6 billion into a real estate company. While social security institutions are some of the biggest investors in local equities, they can also contribute to the asset management sector and facilitate their growth and development. Turkey is also on the forefront with its new pension reform, encouraging pension contributions with a 25% state contribution. The reform went into effect on January 1, 2013. The new law encourages contributions by granting a 10% tax deduction of gross income. For 2012 pension policy sales increased 27%. After introducing the new reform, pension contributions increased 271% (June 2013 compared to first quarter 2012).  Today, Turkey’s pension assets make up 43% of the total fund sector AUM. This directive, along with recent changes to its fund law saw a 4.2% growth in fund assets, according to Reuters.  At present there are 17 pension companies in the market, with four big market players (Garanti, Anadolu, Yapı Kredi, and Avivasa) that make up a combined 66% market share of participants and over two-thirds of AUM. With Turkey’s young population, there is an exponential opportunity for growth in both asset managers and participants. The dynamics of pension schemes in the GCC are “pay as you go,” placing a large strain on reserves in case of any shortcomings. 9660766_V8.indd 55 19/11/2013 15:55

0 TRL 5000 TRL 10000 TRL 15000 TRL 20000 TRL 25000 0 1 2 3 4 5 TRMillion Contributors(Millions) 16.10.2006 13.08.2007 31.05.2008 03.04.2009 19.02.2010 24.12.2010 14.10.2011 27.07.2012 17.05.2013 Fund Size (TRL mln) No. of Contributors Turkish Pension Fund Assets and Contributors A recent pension reform in Turkey resulted in a 271% increase in pension contributors. 56 Solution 1: Pensions Global Islamic Asset Management Report 9660766_V8.indd 56 19/11/2013 15:55

57 Solution 1: Pensions GLOBAL ISLAMIC ASSET MANAGEMENT REPORT Takaful assets are another form of institutional investment that could contribute to the Islamic asset management sector. While such plans represent a first tier of pension planning, there is another offering that could be applied to private companies to form a second-tier contribution. In most GCC countries companies are required to give their departing employees a lump sum known as end-of-service benefits. These are usually paid through available working-capital funds. Given the above, managing a fund to cater to end-of-service benefits can again contribute to the fund management sector in much the same way. Another group of institutional investors in the region that is relatively untapped are insurance companies. Currently, life and social insurance is overshadowed by motor vehicle and health insurance, mainly for cultural reasons. However, with the rise of the Islamic insurance (takaful) industry, more and more individuals and families are opting for insurance and protection. Again, these represent long-term funds that need to be managed in an optimal fashion or will risk diluting takaful asset pools. Pension, insurance, and further endowments all form part of an extended family of institutional investments, well beyond sovereign wealth funds and family offices. They can contribute significantly to the asset management sector as and when a portion of their assets are directed into asset management channels. The questions are whether there is sufficient commitment at the policymaker level and whether a country is willing to lead the region with a realistic timeframe for those plans. Pension funds in developed markets make up 27% of fund investments, contributing to all asset classes. 0% 10% 20% 30% 40% 50% 60% 70% Equities FixedIncome Other Cash Equities FixedIncome Other Cash Equities FixedIncome Other Cash 2002 2007 2012 U.S. – Pension Funds’ Asset AllocationU.S.–Pension Funds’ Asset Allocation Japan–Pension Funds’ Asset Allocation Equities FixedIncome Other Cash Equities FixedIncome Other Cash Equities FixedIncome Other Cash 2002 2007 2012 Japan – Pension Funds’ Asset Allocation 0% 10% 20% 30% 40% 50% 60% 70% 80% 9660766_V8.indd 57 19/11/2013 15:55

Private pension funds under the Voluntary Pension System (VPS) rules issued in 2005 were first introduced in Pakistan in 2007. The size of pension funds remained stagnant during the initial years, mainly because of adverse market conditions, lack of awareness about the product, and fiscal inconsistencies in the treatment of retirement schemes. However, since 2010 pension funds have shown significant growth because of positive changes in the tax regime, favorable market conditions, launch of new pension funds, and an increase in the number of participants (investors), according to the Securities and Exchange Commission of Pakistan (SECP). 58 Solution 1: Pensions Global Islamic Asset Management Report CASE STUDY: PAKISTAN’S VOLUNTARY PENSION SYSTEM By Mr. Muhammad Afzal, Director, REITs, Pension and Private Equity Wing, Securities & Exchange Commission of Pakistan Position as of July 2013 Total assets of pension fund industry Rs.5,580 million Net assets Rs.5,355 million Total number of pension funds 13 Shariah-compliant pension funds 7 Conventional pension funds 6 Number of pension fund managers 7 Since 2010 pension funds have shown significant growth because of positive changes in the tax regimes, favorable market conditions, and the launch of new pension funds. Pension funds have invested 53% in government securities, 35% in equity securities, and 8% in bank balances. The size of Shariah-compliant pension funds reached Rs.3,404 million (61% of the total) against that of conventional pension funds, which stood at Rs.2,176 million (39% of the total). The Shariah-compliant funds and conventional pension funds started business at the same time, although the former have shown considerable growth over the years and now account for over 60% of the total pension fund assets. This growth has taken place in spite of the fact that some lucrative sectors of the economy do not meet the eligibility and screening criteria for investment by Islamic pension funds. Therefore, sectors including banking, insurance, tobacco, breweries, etc. do not qualify for investment by Islamic funds. Some profitable companies do not meet the eligibility criteria because of their highly leveraged positions. 9660766_V8.indd 58 19/11/2013 15:55

59 Solution 1: Pensions GLOBAL ISLAMIC ASSET MANAGEMENT REPORT 0 1000 2000 3000 4000 5000 6000 0 5 10 15 20 25 2009 2010 2011 2012 Jul-13 Voluntary Pension Funds - Growth Total Assets No. of Funds 880 1,328 1,575 2,776 5,580 7 9 9 11 13 The popularity of Islamic pension funds can be attributed to demand from the general public for retirement products designed in accordance with Islamic precepts. Voluntary Pension Funds – Growth Changes in Tax Law: The SECP has been striving to bring parity in tax treatment for the conventional retirement schemes and the VPS. Recently, the following changes were incorporated in the tax law: • Persons retiring from VPS can withdraw up to 50% of their accumulated balance. • Persons can avail themselves of a tax credit of up to 20% of their taxable income. • The amount withdrawn in installments over a period of ten years as pension (monthly installment) from an income payment plan after retirement is exempt from income tax. • Withdrawal of the balance transferred to a VPS account from a recognized provident fund will continue to be exempt from tax. Changes in Regulatory Regime: Revision of the investment and allocation policy for pension funds–Some of the recent changes introduced by the SECP in the investment and allocation policies of pension funds are as follows: • A Shariah-compliant money market subfund (of a pension fund) can invest in government ijarah sukuks having three years’ time to maturity. • Per-party and per-sector exposure limits for conventional and Shariah-compliant pension funds have been synchronized. • Pension funds have been allowed to invest in commodity futures contracts traded on the Pakistan Mercantile Exchange Limited (PMEX) to encourage diversification and to expand the scope of choices available to investors. 9660766_V8.indd 59 19/11/2013 15:55

60 Solution 1: Pensions Global Islamic Asset Management Report FUND MANAGER PENSION LAUNCH DATE AUM JULY 2012 AUM JULY 2013 HBL Asset Mgmt Conventional Dec-11 163.77 264.931 Islamic Dec-11 129.199 186.03 JS Investments Conventional Jun-07 206.29 273 Islamic Jun-08 129.33 162.38 Arif Habib Investments Conventional Jun-07 295.7 436.27 Islamic Nov-07 166.00 230.96 Atlas Asset Mgmt Conventional Jul-07 175 388 Islamic Nov-07 197 376 Al Meezan Investment Mgmt Conventional N/A N/A N/A Islamic Jun-07 868 1856 UBL Fund Managers Conventional May-12 296.57 616 Islamic May-10 174.5 314 NBP Fullerton Asset Mgmt Conventional Jul-13 0 96 Islamic Jul-13 0 94 Future Plans  The SECP is confident that VPS has a vast potential for growth, given the right type of regulatory and fiscal policies are put in place. So far, the government has been quite supportive and has introduced gradual improvements in the fiscal regime, which have enabled the private pension funds to gain a foothold. The SECP hopes that the government’s patronage will continue to popularize the culture of long-term savings through pension funds in order to serve the dual purpose of increasing savings rates and providing social security to senior citizens. The government has been supportive and has introduced gradual improvements in the fiscal regime, which have enabled private pension funds to gain a foothold. 9660766_V8.indd 60 19/11/2013 15:55

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SRI Market provides access to over USD 3 Trillion of assets. SRI provides a natural crossov

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