Focus on emerging markets – Sharia-compliant funds offer safe-haven

The continuing negative prospects for the eurozone and mixed macroeconomic indicators for emerging markets will fuel growth in shariah-compliant funds, as investors turn to Islamic finance to diversify their exposures.

As the Islamic world marks the start of Ramadan, Western investors are increasingly turning their eye to various financial products and services run in line with its religious precepts.

At the same time, European asset management expertise is being made available to the Islamic world, by Dutch house Robeco, to advise on a $600m fund addressing food security in the Muslim world.

European managers have had looked East as their home industry has suffered significant redemptions, while Middle Eastern counterparts have enjoyed new monies.

Standard Chartered notes Islamic financial products have grown by 30% over the past two years. Winners have included Saudi Arabia’s Sedco Capital, which attracted €480m to three newly-launched shariah-compliant funds.

And while the outlook for the mainstream industry looks uncertain at best  Ernst & Young forecasts Islamic finance will increase by 33% between 2010 and the end of this year.

Sedco is not the only manager of Islamic finance products increasing its engagement with Western market allocators.

At the beginning of July, Oasis Crescent, one of the world’s largest sharia asset managers, opened an office in London and launched six funds, including portfolios focused on equities, property, income, and life-staging asset allocation, balanced funds.

The South African company has £2.5bn assets under management and estimates the potential UK markets for Islamic products is between £120bn and £160bn.

Closer to home, in May la Française AM launched into the French market the first sharia compliant OPCI (collective real estate vehicles with simplified investment rules with leverage). Leverage for the deal came partly from using a Murabaha, a Sharia-compliant loan structured in such a way to avoid interest payments.

Standard Chartered recently increased its efforts on shariah-compliant private banking. Standard Chartered’s wealth management has two offices in the United Arab Emirates, and it expects 20% to 25% of its assets to be Islamic in origin over the next three years.

Index providers have also been actively helping investors in shariah-compliant products gauge their chosen manager’s performance.

At the end of June, S&P Indices launched the S&P/OIC COMCEC 50 Shariah Index, measuring the performance of 50 leading shariah-compliant companies from the member states of the Organisation of Islamic Cooperation.

“The S&P/OIC COMCEC 50 Shariah Index…encapsulates in one index the performance of shariah-compliant stocks from Islamic countries located throughout the world,” said Alka Banerjee, vice-president at global equity and strategy indices from S&P Indices.

The index consists of the largest 50 stocks from the eligible universe, selected in accordance with shariah compliance screens. The index covers all 19 countries and territories whose exchanges are members of the Organisation of Islamic Cooperation Exchanges.

Amid this appetite for products and launches of active and passive vehicles for the Shariah-compliant investment community, one Western manager has traveled to the region, to win business directly.

Rotterdam-headquartered Robeco is to advise on management of the Shariah-compliant Food & Agribusiness fund, launched recently by Farid Masood, director of the asset management division of the Islamic Corporation for the Development of the Private Sector.

The fund will “promote strategic investment flows and expertise into the food and agricultural sector in Islamic countries [and] address growing food security concerns by capitalizing on the region’s largely under-exploited potential for increased food production and supply.”

It will invest in various strategic and commercially-sustainable initiatives across the food and agriculture value chain. It will be open to Islamic, and other investors, and have a term of 10 years with a commitment period of five years.

The ICD’s job is to “support the economic development of its member countries through provision of finance to private sector projects in accordance with the principles of the Shari’a law.” It has done so, so far, by financing over 200 projects with more than $2bn.

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