Assets in Shariah-compliant funds fall

Mutual funds and discretionary assets that comply with Shariah, or Islamic law, fell to $65 billion at the end of the third quarter, a figure well below the hundreds of billions of dollars typically associated with the market, according to research from Cerulli Associates Inc.

This drop in Islamic-oriented investment assets has occurred despite a doubling in the number of Shariah-compliant mutual funds in the last three years, according to the report from Boston-based Cerulli.

A factor that prevents Shariah investments from increasing their market share is that they are offered by domestic managers in Saudi Arabia and other Middle Eastern nations, and not by international managers.

Many large international managers have yet to launch a Shariah-compliant mutual fund because of concerns regarding costs, potential nonalignment with Islamic standards, and a lack of third-party distribution.

“Assets in discretionary Shariah-compliant portfolios will continue to lag the retail market unless and until some large institutions, in particular the Middle East-based sovereign wealth funds, decide to invest in accordance with Shariah principles,” Shiv Taneja, managing director of Cerulli’s international research practice, said in a statement.

Assets in Shariah-compliant funds increased by 8% year-over-year as of September but will likely end 2008 close to or below their 2007 level, due to the global market turmoil, according to the report.

However, once global market conditions stabilize, Cerulli estimates that Shariah funds will continue to expand at an annual rate of above 10% due to a large number of Islamic bank deposits, new asset classes and increased regulatory support from Middle Eastern governments.